<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 June 30, 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 August 13, 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.
1
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SUMMIT COMMUNICATIONS GROUP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated balance sheet at June 30, 1997 and December 31, 1996............. 3
Consolidated statement of operations for the three and six months ended
June 30, 1997 and 1996...................................................... 4
Consolidated statement of cash flows for the six months ended
June 30, 1997 and 1996...................................................... 5
Consolidated statement of shareholder's equity
for the six months ended June 30, 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
</TABLE>
2
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SUMMIT COMMUNICATIONS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- --------
(thousands, except per share amounts)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents.......................................... $105,680 $ 94,473
Receivables, less allowances of $196 and $218................. 3,034 2,699
Interest due from Time Warner................................. 3,378 2,594
Prepaid expenses.............................................. 112 205
-------- --------
Total current assets.......................................... 112,204 99,971
Loans to Time Warner.......................................... 39,000 39,000
Property, plant and equipment, net............................ 61,555 58,733
Cable television franchises, net.............................. 8,069 8,286
Other assets.................................................. 514 1,070
-------- --------
Total assets.................................................. $221,342 $207,060
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses......................... $ 4,926 $ 3,588
Accrued interest expense...................................... 3,138 3,186
Accrued income taxes payable to Time Warner................... 15,411 10,833
Other current liabilities..................................... 1,099 745
-------- --------
Total current liabilities..................................... 24,574 18,352
Long-term debt................................................ 140,000 140,000
Deferred income taxes......................................... 8,940 9,001
Other liabilities............................................. 1,167 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.......................................... 45,472 37,066
-------- --------
Total shareholder's equity.................................... 46,661 38,255
-------- --------
Total liabilities and shareholder's equity.................... $221,342 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
(thousands)
<S> <C> <C> <C> <C>
Revenues............................................................. $ 19,600 $ 18,111 $ 38,851 $ 35,777
------- -------- -------- --------
Costs and expenses:
Operating and programming (a)...................................... 6,322 5,610 12,458 11,320
Selling, general and administrative (a)............................ 2,001 2,610 4,246 4,818
Depreciation and amortization...................................... 2,626 2,610 4,941 5,189
------- ------- -------- --------
Total costs and expenses......................................... 10,949 10,830 21,645 21,327
------- ------- -------- --------
Operating income..................................................... 8,651 7,281 17,206 14,450
Interest expense..................................................... (3,702) (3,711) (7,367) (7,425)
Interest income (b).................................................. 2,190 1,953 4,221 4,780
------- ------- -------- --------
Income before income taxes........................................... 7,139 5,523 14,060 11,805
Income tax provision................................................. (2,871) (2,220) (5,654) (4,746)
------- ------- -------- --------
Net income........................................................... $ 4,268 $ 3,303 8,406 $ 7,059
======= ======== ======== ========
(a)Includes expenses resulting from
transactions with affiliates (Note 3)........................... $ 2,076 $ 1,933 4,485 $ 3,659
======= ======== ======== ========
(b)Includes interest income from affiliates (Note 3) $ 648 $ 384 $ 1,273 $ 776
======= ======== ======== ========
</TABLE>
See accompanying notes.
4
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SUMMIT COMMUNICATIONS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- -------
(thousands)
<S> <C> <C>
OPERATIONS
Net income.................................................... $ 8,406 $ 7,059
Adjustments for noncash and nonoperating items:
Depreciation and amortization................................. 4,941 5,189
Changes in operating assets and liabilities................... 5,371 1,740
-------- --------
Cash provided by operations................................... 18,718 13,988
-------- --------
INVESTING ACTIVITIES
Capital expenditures.......................................... (7,502) (3,926)
Investments and acquisitions.................................. (9) --
-------- --------
Cash used by investing activities............................. (7,511) (3,926)
-------- --------
INCREASE IN CASH AND EQUIVALENTS.............................. 11,207 10,062
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD................... 94,473 94,324
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD......................... $105,680 $104,386
======== ========
Supplemental disclosures of cash flow information:
Interest paid................................................. $ 7,441 $ 7,479
======== ========
Income taxes paid............................................. $ 808 $ 1,294
======== ========
</TABLE>
See accompanying notes.
5
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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............................................. -- 8,406 8,406
------- -------- --------
BALANCE AT JUNE 30, 1997............................... $ 1,189 $ 45,472 $ 46,661
======= ======== ==========
</TABLE>
See accompanying notes.
6
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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 June 30, 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 June 30, 1997 and December 31, 1996, $26.5 million and $10.5
million was available for restricted payments, respectively.
On July 30, 1997, the Company offered to purchase for cash all of its
outstanding Debentures. The purchase price to be paid for each validly tendered
Debenture in this offer will be a redemption price of $1,026.20 per $1,000
principal amount of Debentures, plus interest, discounted at the yield to
maturity on the 6.375% U.S. Treasury notes due April 30, 1999, plus a fixed
spread of 37.5 basis points. The purchase price is based on the redemption price
on April 15, 1999, the first date the Debentures can be redeemed at the option
of the Company, and includes a consent fee of $5.00 per $1,000 principal amount
of Debentures. The Debenture holders will also be required to consent to
amendements which will eliminate or modify most of the restrictive covenants
contained in the indenture governing the Debentures. The tender offer and
consent solicitation are conditioned on the receipt of consents from the holders
of a majority of the principal amount of the Debentures. This offer will expire
on August 26, 1997, unless extended by the Company.
7
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SUMMIT COMMUNICATIONS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 $784,000 and $776,000 for the six months ended June
30, 1997 and 1996, respectively. On December 20, 1996, the Company loaned $15.0
million to TWI Cable. Interest income on this loan for the six months ended June
30, 1997 totaled $489,000. These loans provide for interest at LIBOR plus .875%
per annum and are due on demand.
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 $3.1 million and $1.7 million for the six months ended June 30, 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 June 30, 1997 and December 31, 1996 and amounted to $529,000 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 six
months ended June 30, 1997 and 1996, these fees totaled $1.4 million and $1.9
million, respectively.
Under the Company's tax sharing agreement with Time Warner, the accrued
income taxes payable to Time Warner amounted to $15.4 million and $10.8 million
at June 30, 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
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SUMMIT COMMUNICATIONS GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS
OVERVIEW
Operating results for the Company for the three and six month periods ended
June 30, 1997 and 1996 are as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues....................... $19.6 18.1 $38.9 $35.8
Depreciation and amortization.. 2.6 2.6 4.9 5.2
Operating income............... 8.7 7.3 17.2 14.5
Net income..................... 4.3 3.3 8.4 7.1
</TABLE>
As discussed more fully below, the improvement in net income for the three
and six months ended June 30, 1997 as compared to the same periods in 1996
principally resulted from an increase in operating income primarily due to
increased revenues.
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 increased as a result of the revenue growth, partially offset by higher
operating and programming expenses principally relating to higher programming
costs attributable to higher subscriber levels and inflationary rate increases.
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 six month
period ended June 30, 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
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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: August 13, 1997
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 105,680
<RECEIVABLES> 3,230
<ALLOWANCES> 196
<INVENTORY> 0
<CURRENT-ASSETS> 112,204
<PP&E> 137,877
<DEPRECIATION> 76,322
<TOTAL-ASSETS> 221,342
<CURRENT-LIABILITIES> 24,574
<BONDS> 140,000
0
0
<COMMON> 0
<OTHER-SE> 46,661
<TOTAL-LIABILITY-AND-EQUITY> 221,342
<SALES> 38,851
<TOTAL-REVENUES> 38,851
<CGS> 12,458
<TOTAL-COSTS> 12,458
<OTHER-EXPENSES> 4,941<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,367
<INCOME-PRETAX> 14,060
<INCOME-TAX> 5,654
<INCOME-CONTINUING> 8,408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,406
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1> DEPRECIATION AND AMORTIZATION
</FN>
</TABLE>
