<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition
period from to .
-------------------- --------------------
Commission File Number: 33-58996
SUMMIT
COMMUNICATIONS
GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0604618
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 Rockefeller Plaza, New York, NY 10019
(Address of principal executive offices) (ZIP code)
212-484-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
100 shares of common stock, par value $1 per share, were issued and outstanding
as of May 12, 1997.
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF TIME WARNER INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS
FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
<PAGE>
SUMMIT COMMUNICATIONS GROUP, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheet at March 31, 1997 and December 31, 1996.... 3
Consolidated statement of operations for the three months ended
March 31, 1997 and 1996............................................. 4
Consolidated statement of cash flows for the three months ended
March 31, 1997 and 1996............................................. 5
Consolidated statement of changes in shareholder's equity
for the three months ended March 31, 1997........................... 6
Notes to consolidated financial statements............................ 7
Item 2. Management's Discussion and Analysis of Results of Operations.. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 10
Item 6. Exhibits and Reports on Form 8-K............................... 10
2
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SUMMIT COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(thousands, except per share amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents................................ $104,497 $ 94,473
Receivables, less allowances of $207 and $218....... 2,968 2,699
Interest due from Time Warner....................... 2,980 2,594
Prepaid expenses.................................... 206 205
-------- --------
Total current assets................................ 110,651 99,971
Loans to Time Warner................................ 39,000 39,000
Property, plant and equipment, net.................. 60,048 58,733
Cable television franchises, net.................... 8,178 8,286
Other assets........................................ 1,093 1,070
-------- --------
Total assets........................................ $218,970 $207,060
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses............... $ 5,022 $ 3,588
Accrued interest expense............................ 6,860 3,186
Accrued income taxes payable to Time Warner......... 13,079 10,833
Other current liabilities........................... 447 745
-------- --------
Total current liabilities........................... 25,408 18,352
Long-term debt...................................... 140,000 140,000
Deferred income taxes............................... 8,980 9,001
Other liabilities................................... 2,189 1,452
SHAREHOLDER'S EQUITY
Common stock, $1 par value, 200 shares authorized,
100 shares issued and outstanding.................. -- --
Paid-in capital..................................... 1,189 1,189
Accumulated earnings................................ 41,204 37,066
-------- --------
Total shareholder's equity.......................... 42,393 38,255
-------- --------
Total liabilities and shareholder's equity.......... $218,970 $207,060
======== ========
</TABLE>
See accompanying notes.
3
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SUMMIT COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
(thousands)
<S> <C> <C>
Revenues.................................... $19,251 $17,666
------- -------
Costs and expenses:
Operating and programming (a).............. 6,136 5,710
Selling, general and administrative (a).... 2,245 2,208
Depreciation and amortization.............. 2,315 2,579
------- -------
Total costs and expenses................. 10,696 10,497
------- -------
Operating income............................ 8,555 7,169
Interest expense............................ (3,665) (3,714)
Interest income (b)......................... 2,031 2,827
------- -------
Income before income taxes.................. 6,921 6,282
Income tax provision........................ (2,783) (2,526)
------- -------
Net income.................................. $ 4,138 $ 3,756
======= =======
(a) Includes expenses resulting from
transactions with affiliates (Note 3)... $ 2,409 $ 1,726
======= =======
(b) Includes interest income from
affiliates (Note 3)..................... $ 625 $ 392
======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
SUMMIT COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- -------
(thousands)
<S> <C> <C>
OPERATIONS
Net income.......................................... $ 4,138 $ 3,756
Adjustments for noncash and nonoperating items:
Depreciation and amortization....................... 2,315 2,579
Deferred income tax benefit......................... (21) (1,219)
Changes in operating assets and liabilities......... 7,110 5,432
-------- --------
Cash provided by operations......................... 13,542 10,548
-------- --------
INVESTING ACTIVITIES
Capital expenditures................................ (3,513) (1,048)
Investments and acquisitions........................ (5) --
-------- --------
Cash used by investing activities................... (3,518) (1,048)
-------- --------
INCREASE IN CASH AND EQUIVALENTS.................... 10,024 9,500
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD......... 94,473 94,324
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD............... $104,497 $103,824
======== ========
Supplemental disclosures of cash flow information:
Interest paid....................................... $ 2 $ --
======== ========
Income taxes paid................................... $ -- $ 145
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
SUMMIT COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PAID-IN ACCUMULATED
CAPITAL EARNINGS TOTAL
------- -------- -----
(thousands)
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 $1,189 $37,066 $38,255
Net income.................... -- 4,138 4,138
------ ------- -------
BALANCE AT MARCH 31, 1997 $1,189 $41,204 $42,393
====== ======= =======
</TABLE>
See accompanying notes.
6
<PAGE>
SUMMIT COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Summit Communications Group, Inc. (the "Company") is an indirect, wholly owned
subsidiary of Time Warner Companies, Inc. ("Time Warner", formerly named Time
Warner Inc.). Effective October 1, 1996, Time Warner contributed all of the
Company's common stock to TWI Cable Inc., a direct, wholly owned subsidiary
("TWI Cable", formerly known as Cablevision Industries Corporation and
Subsidiaries), in connection with a reorganization of certain of its wholly
owned cable subsidiaries (the "TWI Cable Reorganization"). The Company owns and
operates cable television systems (the "Cable Systems") located in suburban
northwest Atlanta, Georgia and Winston-Salem, North Carolina respectively.
BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but in the opinion of
management, contain all adjustments (consisting of a normal recurring nature)
considered necessary to present fairly the financial position, results of
operations and cash flows for the periods presented in conformity with generally
accepted accounting principles applicable to interim periods. Certain
reclassifications have been made to the prior years' financial statements to
conform with the 1997 presentation. The accompanying financial statements
should be read in conjunction with the audited consolidated financial statements
of the Company for the year ended December 31, 1996.
2. LONG-TERM DEBT
Long-term indebtedness at March 31, 1997 consists of $140.0 million principal
amount of 10 1/2% Senior Subordinated Debentures due 2005 (the "Debentures").
The Debentures contain certain restrictive covenants, including limitations on
additional borrowings, mergers, acquisitions and restricted payments. At March
31, 1997 and December 31, 1996, $18.2 million and $10.5 million was available
for restricted payments, respectively.
3. RELATED PARTIES
In the normal course of conducting business, the Company had various
transactions with Time Warner and its affiliates, generally on terms resulting
from a negotiation between the affected units that in management's view results
in reasonable allocations.
On May 18, 1995, the Company loaned $24.0 million to Time Warner. Interest
income on the loan totaled $386,000 and $392,000 for the three months ended
March 31, 1997 and 1996, respectively. On December 20, 1996, the Company loaned
$15.0 million to TWI Cable. Interest income on this loan for the three months
ended March 31, 1997 totaled $240,000. These loans provide for interest at
LIBOR plus .875% per annum and are due on demand.
7
<PAGE>
SUMMIT COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Included in the Company's post merger operating expenses are charges for
programming and promotional services provided by Home Box Office, Turner
Broadcasting System, Inc. and other Time Warner affiliates. These charges
totaled $1.5 million and $852,000 for the three months ended March 31, 1997 and
1996, respectively. These charges are based upon customary rates and are in the
ordinary course of business. Accrued related party expenses for these
programming and promotional services are included in other current liabilities
at March 31, 1997 and December 31, 1996 and amounted to $713,000 and $1.3
million, respectively.
The Company has entered into a management service arrangement with Time Warner
Entertainment Company, L.P. ("TWE"), pursuant to which TWE is responsible for
the management and operation of the Company's cable systems. The management
fees paid to TWE by the Company are based on an allocation of the corporate
expenses of the cable division of TWE in proportion to the respective number of
subscribers of all cable systems managed by TWE's cable division. For the three
months ended March 31, 1997 and 1996, these fees totaled $890,000 and $874,000,
respectively.
Under the Company's tax sharing agreement with Time Warner, the accrued income
taxes payable to Time Warner amounted to $13.1 million and $10.8 million at
March 31, 1997 and December 31, 1996, respectively.
4. COMMITMENTS AND CONTINGENCIES
Pending legal proceedings are substantially limited to litigation incidental
to the businesses of the Company. In the opinion of counsel and management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial statements of the Company.
8
<PAGE>
SUMMIT COMMUNICATIONS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
OVERVIEW
Operating results for the Company for the three months ended March 31, 1997
and 1996 are as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues....................... $19.3 $17.7
EBITDA......................... 10.9 9.8
Depreciation and amortization.. 2.3 2.6
Operating income............... 8.6 7.2
Net income..................... 4.1 3.8
</TABLE>
As discussed more fully below, the improvement in net income in the first
quarter of 1997 as compared to the same period in 1996 principally resulted from
an increase in operating income primarily due to increased revenues.
Revenues increased to $19.3 million in the first quarter of 1997, compared to
$17.7 million for the same period in 1996. Operating income increased to $8.6
million in the first quarter, compared to $7.2 million for the same period in
1996. Revenues benefited from an aggregate increase in basic cable subscribers,
increases in regulated cable rates phased in during January 1997 as permitted
under Time Warner Cable's "social contract" with the Federal Communications
Commission and increases in pay-per-view and advertising revenues. Operating
income before depreciation and amortization ("EBITDA") and operating income
increased as a result of the revenue growth, partially offset by higher
operating and programming expense principally relating to higher programming
costs attributable to higher subscriber levels and inflationary rate increases.
Industry analysts generally consider EBITDA to be an important measure of
comparative operating performance for the cable industry, and when used in
comparison to debt levels or the coverage of interest expense, as a measure of
liquidity. However, EBITDA should be considered in addition to, not as a
substitute for, operating income, net income, cash flow and other measures of
financial performance and liquidity reported in accordance with generally
accepted accounting principles.
The relationship between income before income taxes and income tax expense of
the Company is affected by certain financial statement expenses that are not
deductible for income tax purposes.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There were no material legal proceedings instituted during the three month
period ended March 31, 1997. There were also no material developments in any of
the other existing legal proceedings which were previously reported in the
Company's Annual Report filed with the SEC on Form 10-K for the fiscal year
ended December 31, 1996.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
None.
(b) Reports on Form 8-K
-------------------
None.
10
<PAGE>
SUMMIT COMMUNICATIONS GROUP, INC
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT COMMUNICATIONS GROUP, INC.
(Registrant)
By: /s/RICHARD M. PETTY
-------------------
Name: Richard M. Petty
Title: Vice President and Controller
(Principal Accounting Officer)
Dated: May 12, 1997
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 104,497
<RECEIVABLES> 3,175
<ALLOWANCES> 207
<INVENTORY> 0
<CURRENT-ASSETS> 110,651
<PP&E> 135,107
<DEPRECIATION> 75,059
<TOTAL-ASSETS> 218,970
<CURRENT-LIABILITIES> 25,408
<BONDS> 140,000
0
0
<COMMON> 0
<OTHER-SE> 42,393
<TOTAL-LIABILITY-AND-EQUITY> 218,970
<SALES> 19,251
<TOTAL-REVENUES> 19,251
<CGS> 6,136
<TOTAL-COSTS> 6,136
<OTHER-EXPENSES> 2,315<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,665
<INCOME-PRETAX> 6,921
<INCOME-TAX> 2,783
<INCOME-CONTINUING> 4,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,138
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> Depreciation and amortization
</FN>
</TABLE>
