<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration Numbers 33-81088
33-81088-01
33-81088-02
MARCUS CABLE OPERATING COMPANY, L.P.
MARCUS CABLE CAPITAL CORPORATION II
13 1/2% SENIOR SUBORDINATED GUARANTEED DISCOUNT NOTES DUE AUGUST 1, 2004
GUARANTEED BY MARCUS CABLE COMPANY, L.P.
The 13 1/2% Senior Subordinated Guaranteed Discount Notes due August
1, 2004 were issued by Marcus Cable Operating Company, L.P., a Delaware limited
partnership, and Marcus Cable Capital Corporation II, a Delaware corporation
and a wholly owned subsidiary of Marcus Cable Operating Company, L.P., on July
29, 1994. The 13 1/2% Notes are the joint and several obligations of the
Issuers and have been unconditionally guaranteed, on a senior basis, by Marcus
Cable Company, L.P. In serving as a co-issuer, Marcus Cable Capital Corporation
II is acting as an agent of Marcus Cable Operating Company, L.P. Marcus Cable
Capital Corporation II has nominal assets, does not conduct any operations and
does not provide additional security for the 13 1/2% Notes.
The original issue price to investors per $1,000 principal amount at
maturity of the 13 1/2% Notes was $520, which represents a yield to maturity of
13 1/2% (computed on a semi-annual bond-equivalent basis) calculated from July
29, 1994. See "Description of the 13 1/2% Notes" and "Certain Federal Income
Tax Considerations." The 13 1/2% Notes will not accrue cash interest until
August 1, 1999, and thereafter cash interest will accrue until maturity on the
13 1/2% Notes at a rate of 13 1/2% per annum. The 13 1/2% Notes bear original
issue discount ("OID"), and the holders of the 13 1/2% Notes (including cash
basis holders) are required to include such OID as interest income on a constant
yield to maturity basis, in advance of the receipt of the cash payments to which
such income is attributable. See "Certain Federal Income Tax Considerations".
Interest on the 13 1/2% Notes is payable on February 1, and August 1 of each
year, commencing February 1, 2000. The 13 1/2% Notes are redeemable at the
option of the Issuers, in whole or in part, at any time on or after August 1,
1999, at the redemption prices set forth herein, plus accrued interest to the
date of redemption. In the event that on or before August 1, 1997, Marcus Cable
Operating Company, L.P. or Marcus Cable Company, L.P. consummates a sale of any
of its Capital Stock pursuant to a registered public offering, resulting in net
proceeds to Marcus Cable Operating Company, L.P. of at least $25,000,000, the
Issuers may, at the option of Marcus Cable Operating Company, L.P., apply such
proceeds to redeem up to 25% of the 13 1/2% Notes then outstanding at a
Redemption Price of 110% of the Accreted Value thereof on the repurchase date.
In the event of a Change of Control, the Issuers are required to offer to
purchase the outstanding 13 1/2% Notes at a redemption price of 101% of the
Accreted Value thereof on any repurchase date prior to August 1, 1999 or 101% of
the principal amount thereof plus accrued interest to any repurchase date on or
after August 1, 1999. It is unlikely, however, that the Issuers will have
sufficient funds to purchase the 13 1/2% Notes upon the occurrence of a Change
of Control, unless funding is provided by additional debt issuance, additional
equity contributions or another external source. The 13 1/2% Notes are issuable
only in registered form in denominations of $1,000 and integral multiples
thereof.
The 13 1/2% Notes are unsecured obligations of the Issuers and are
subordinated in right of payment to all senior indebtedness of the Issuers
existing on or incurred after July 29, 1994. The claims of holders of the 13
1/2% Notes are subordinated to claims of the lenders under the Senior Credit
Facility. At February 28, 1997, Marcus Cable Operating Company, L.P. and its
subsidiaries had an aggregate of approximately $852,382,000 of outstanding debt
(primarily representing debt under the Senior Credit Facility) which was senior
to the 13 1/2% Notes and did not have any outstanding indebtedness ranking pari
passu with the 13 1/2% Notes. See "Description of the 13 1/2% Notes."
--------------------
SEE "RISK FACTORS", COMMENCING ON PAGE 13, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE 13
1/2% NOTES. THE 13 1/2% NOTES WERE ISSUED SOLELY BY THE ISSUERS AND HAVE BEEN
GUARANTEED SOLELY BY MARCUS CABLE COMPANY, L.P. NEITHER THE GENERAL PARTNER OF
MARCUS CABLE COMPANY, L.P. NOR THE LIMITED PARTNERS OF MARCUS CABLE OPERATING
COMPANY, L.P. AND MARCUS CABLE COMPANY, L.P., AMONG OTHERS, WILL BE LIABLE FOR
THE OBLIGATIONS OF THE ISSUERS UNDER THE 13 1/2% NOTES PURSUANT TO THE TERMS OF
THE INDENTURE GOVERNING THE 13 1/2% NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus has been prepared for and is to be used by Goldman,
Sachs & Co. in connection with offers and sales of the 13 1/2% Notes related to
market-making transactions at negotiated prices related to prevailing market
prices at the time of sale. The Issuers will not receive any of the proceeds
of such sales. Goldman, Sachs & Co. may act as a principal or agent in such
transactions. See "Plan of Distribution."
GOLDMAN, SACHS & CO.
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The date of this Prospectus is April 29, 1997.
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AVAILABLE INFORMATION
The Issuers have filed with the Securities and Exchange Commission
(the "SEC") a Registration Statement (of which this Prospectus is a part and
which term shall encompass any amendments thereto) on Form S-1, pursuant to the
Securities Act of 1933, as amended (the "Act"), with respect to the 13 1/2%
Notes offered hereby. As permitted by the rules and regulations of the SEC,
this Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information about the Issuers and the 13 1/2% Notes, reference is hereby made
to the Registration Statement and to such exhibits and schedules thereto.
Statements contained herein concerning the provisions of any documents filed as
an exhibit to the Registration Statement or otherwise filed with the SEC are
not necessarily complete, and in each instance reference is made to the copy of
such document so filed. Each such statement is qualified in its entirety by
such reference.
The Issuers are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
accordance therewith and with the Indenture governing the 13 1/2% Notes, the
Issuers file reports and other information with the SEC. In addition, under
the Indenture governing the 13 1/2% Notes, the Issuers are required to furnish
to the Trustee and to registered holders of the 13 1/2% Notes audited annual
consolidated financial statements, unaudited quarterly consolidated financial
reports and certain other reports. The Registration Statement, the exhibits
and schedules forming a part thereof and the reports and other information
filed by the Issuers with the SEC pursuant to the informational requirements of
the Exchange Act may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the SEC: New
York Regional Office, Seven World Trade Center, 13th Floor, New York, New York
10048, and Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material or any part
thereof may also be obtained from the Public Reference Section of the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC
maintains a World Wide Web site on the Internet that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the SEC. The address of this site on the Internet is
http://www.sec.gov.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. As used in this Prospectus, "MCC" refers to
Marcus Cable Company, L.P., a Delaware limited partnership, "Capital" refers to
Marcus Cable Capital Corporation, a Delaware corporation, "Capital II" refers
to Marcus Cable Capital Corporation II, a Delaware corporation, and "Capital
III" refers to Marcus Cable Capital Corporation III, a Delaware corporation.
"Operating" refers to Marcus Cable Operating Company, L.P., a Delaware limited
partnership that is the sole general partner or sole stockholder of each of the
Company's operating subsidiaries which own the Company's cable assets (the
"Operating Partnerships"). Capital II is a wholly owned subsidiary of
Operating. Operating and Capital II are collectively referred to as the
"Issuers." MCC is the sole general partner of Operating and the sole limited
partner of Operating is Marcus Cable Properties, L.P., a Delaware limited
partnership, which is also the sole general partner of MCC. Marcus Cable
Properties, L.P. is referred to as "Properties" or the "General Partner."
"Company" refers to MCC and its subsidiaries, unless the context otherwise
requires. See "Risk Factors" for a discussion of certain risks associated with
an investment in the 13 1/2% Notes.
THE COMPANY
At December 31, 1996, the Company owned or managed cable television
systems in 18 states, serving 1,267,520 basic customers. Since its formation in
1990, the Company has grown internally and through acquisitions, and is now the
ninth largest cable television operator in the United States. The Company's
customers were clustered as follows as of December 31, 1996.
<TABLE>
<CAPTION>
BASIC
CUSTOMERS
---------
<S> <C>
North Central Region (MN, WI) . . . . . . . . . . . . . 385,303
Southeast Region (AL, GA, NC, TN, KY, LA, MS). . . . . . 252,466
Southwest Region (TX, OK) . . . . . . . . . . . . . . . 187,761
East Region (DE, MD, VA, CT) . . . . . . . . . . . . . . 175,140(1)
Midwest Region (IN, IL) . . . . . . . . . . . . . . . . 139,138
West Region (CA) . . . . . . . . . . . . . . . . . . . . 127,712
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . 1,267,520
=========
</TABLE>
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(1) Includes 86,227 basic customers in a cable television system managed
by the Company. Such systems were sold on January 31, 1997. See
"Recent Developments -- Divestitures -- Maryland Cable Systems".
As of December 31, 1996, the cable television systems owned by the
Company (the " Systems") passed 1,863,299 homes and served 1,181,293 basic
customers who subscribed for 666,702 premium units. The President and Chief
Executive Officer of MCC is Jeffrey A. Marcus. Mr. Marcus has successfully
acquired, developed and managed cable television systems since 1979.
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RECENT DEVELOPMENTS
ACQUISITIONS
Harron Acquisition. On March 4, 1997, the Company entered into an
acquisition agreement with Harron Cablevision of Texas, Inc. ("Harron")
pursuant to which the Company will purchase from Harron substantially all of
the assets of cable television systems in Texas (the "Harron Acquisition").
The communities served by this system are located in and around the Company's
operations in Texas. The Harron Acquisition is subject to certain closing
conditions and is expected to close in the second quarter of 1997.
Frankfort Acquisition. On July 31, 1996, the Company purchased
certain cable television systems (the "Frankfort System") from Frankfort Cable
Communications, Inc. for an aggregate purchase price of approximately
$6,700,000 (the "Frankfort Acquisition"). The Frankfort System provides
service to customers in and around Frankfort, Indiana, located near the
Company's other operations in Indiana. As of the date of the acquisition,
the former Frankfort System served approximately 5,600 basic customers. The
purchase price for the Frankfort Acquisition represented, as of the date of the
acquisition, a price of approximately $1,200 per basic customer. See "Recent
Transactions -- Frankfort Acquisition."
Futurevision Acquisition. On July 8, 1996, the Company acquired
certain cable television systems (the "Futurevision System") from Futurevision
Cable Systems of Brookhaven for an aggregate purchase price of approximately
$2,600,000 (the "Futurevision Acquisition"). The communities served by the
Futurevision System are located in and around the Company's operations in
Mississippi. As of the date of the acquisition, the former Futurevision System
served approximately 2,500 basic customers. The purchase price for the
Futurevision Acquisition represented, as of the date of the acquisition, a
price of approximately $1,040 per basic customer. See "Recent Transactions --
Futurevision Acquisition."
Weatherford Acquisition. On January 11, 1996, the Company purchased
certain cable television systems (the "Weatherford System") from C & R Cable
Investments Corporation for an aggregate purchase price of approximately
$875,000 (the "Weatherford Acquisition"). The Weatherford System provides
service to customers contiguous to the Company's existing systems in
Weatherford, Texas. As of the date of the acquisition, the former
Weatherford System served approximately 700 basic customers. The purchase
price for the Weatherford Acquisition represented, as of the date of the
acquisition, a price of approximately $1,250 per basic customer. See "Recent
Transactions -- Weatherford Acquisition."
Sammons Acquisition. On November 1, 1995, the Company acquired certain
cable television systems (the "Sammons Systems") owned by Sammons
Communications, Inc. and certain of its subsidiaries ("Sammons") operating in
15 states for approximately $961,701,000 plus direct acquisition costs of
$31,187,000, and assumed liabilities of $4,524,000 (the "Sammons Acquisition").
As of the date of acquisition, the former Sammons Systems passed 1,038,609
homes and served 664,796 basic customers who subscribed for 345,353 premium
service units. The purchase price for the Sammons Acquisition represented, as
of the date of the acquisition, a price of approximately $1,453 per basic
customer. The basic customers of the Sammons Systems were clustered as follows
as of the date of the acquisition:
<TABLE>
<CAPTION>
BASIC
CUSTOMERS
---------
<S> <C>
Dallas/Ft. Worth . . . . . . . . . . . . . . 150,003
Indiana/Illinois . . . . . . . . . . . . . . 132,490
California . . . . . . . . . . . . . . . . . 123,978
Tennessee/Kentucky/North Carolina . . . . . . 93,069
Connecticut . . . . . . . . . . . . . . . . . 44,876
Mississippi . . . . . . . . . . . . . . . . . 42,800
Other . . . . . . . . . . . . . . . . . . . . 77,580
-------
664,796
=======
</TABLE>
See "Recent Transactions -- Sammons Acquisition."
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CALP Acquisition. The Company acquired the general partnership interest and
certain of the ordinary limited partnership interests in Cencom of Alabama,
L.P. ("CALP") in September 1994 and January 1995, respectively. On August 31,
1995, the Company acquired all remaining ordinary limited partnership interests
in CALP owned by affiliates of Goldman, Sachs & Co. ("Goldman Sachs") in
exchange for convertible preference units of MCC (the "Convertible Preference
Units") with a $15,000,000 distribution preference, and caused the redemption
and retirement for cash of the outstanding special limited partnership
interests (the "Special Limited Partnership Units") in CALP (16.3% of which
were owned by Mr. Marcus and affiliates of Goldman Sachs) and the repayment of
the outstanding bank debt of CALP for an aggregate consideration of
approximately $138,280,000 ("the CALP Acquisition"). On such date, CALP was
renamed Marcus Cable of Alabama, L.P. ("MCALP"). MCALP owns and operates cable
television systems (the "Alabama Systems") in areas surrounding Birmingham,
Alabama. As of the date of the acquisition, the Alabama Systems passed 122,301
homes and served 84,955 basic customers who subscribed for 37,726 premium
service units. The purchase price for the CALP Acquisition represented, as of
the date of the acquisition, a price of approximately $1,816 per basic
customer. See "Recent Transactions -- CALP Acquisition."
Crown Acquisition. Effective January 1, 1995, the Company completed the
acquisition from Crown Media, Inc. ("Crown") of certain cable television
systems (the "Crown Systems") in Wisconsin and Minnesota for an aggregate
purchase price of $331,717,000 in cash (the "Crown Acquisition"). The
communities served by the Crown Systems are adjacent to the Company's original
operations in Wisconsin, and those acquired in the Star Acquisition described
below (collectively, the "Wisconsin Systems"). At the date of the acquisition,
the former Crown Systems passed 294,032 homes and served 193,325 basic
customers who subscribed for 100,218 premium service units. The purchase price
for the Crown Systems represented, as of the date of acquisition, a price of
$1,716 per basic customer. Since acquisition, the former Crown Systems and
Star Systems have been combined. See "Recent Transactions -- Crown
Acquisition."
Star Acquisition. On July 29, 1994, the Company purchased from Star
Cablevision Group and affiliates (collectively, "Star") certain cable
television systems (the "Star Systems") located in Wisconsin and Minnesota for
an aggregate purchase price of $139,232,000. The communities served by the Star
Systems are adjacent to the Company's original operations in Wisconsin. At the
date of the acquisition, the former Star Systems passed 109,507 homes and
served 70,794 basic customers who subscribed for 48,703 premium service units.
The purchase price for the Star Systems represented, as of the date of the
acquisition, a price of $1,966 per basic customer. See "Recent Transactions --
Star Acquisition."
DIVESTITURES
Maryland Cable Systems. Effective January 31, 1997, the Maryland Cable
Partners, L.P. ("Maryland Cable") systems (the "Maryland Cable Systems") were
sold to Jones Communications of Maryland, Inc. Under the management agreement
between Operating and Maryland Cable (the "Maryland Cable Agreement"),
Operating was entitled to an incentive management fee if the Maryland Cable
Systems sold above certain threshold amounts. In conjunction with the sale,
Operating recognized an incentive management fee of $4,083,000 in January 1997.
Additional incentive management fees may be recognized upon finalization of the
purchase price adjustment, anticipated to occur during the second quarter of
1997 and upon dissolution of Maryland Cable, anticipated to occur during the
first quarter of 1998. There is no assurance that any of such fees will be
realized. Although Operating is no longer involved in the active management of
those cable television systems, Operating has entered into an agreement with
Maryland Cable to oversee the activities, if any, of Maryland Cable through the
liquidation of the partnership. Pursuant to such agreement, Operating will
earn a monthly fee ranging from $25,000 to $50,000. See "Recent Transactions
- -- Divestitures -- Maryland Cable Systems."
Moses Lake Disposition. On October 11, 1996, the Company completed the sale
of its cable television system serving approximately 12,700 customers in the
state of Washington (the "Moses Lake System") for a sales price of
approximately $21,000,000, less selling costs of $320,000 (the "Moses Lake
Disposition"). As of the date of sale, the Moses Lake System passed
approximately 15,200 homes and served approximately 12,800 basic customers who
subscribed for approximately 5,300 premium service units. The gross sales
price of the Moses Lake System represented, as of the date of sale, a price of
approximately $1,646 per basic customer. The sales price resulted in a gain on
the sale of approximately $6,442,000. See "Recent Transactions -- Divestitures
- -- Moses Lake Disposition."
San Angelo Divestiture. On June 30, 1995, the Company sold the assets of
certain cable television systems in west Texas (the "San Angelo Systems") to
Teleservice Corporation of America for approximately $65,037,000 in cash (net
of selling costs of $809,000) (the "San Angelo Divestiture"). As of the date
of sale, the San Angelo Systems passed 45,838 homes and served
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<PAGE> 6
32,515 basic customers who subscribed for 21,528 premium service units. The
gross sales price of the San Angelo Systems represented, as of the date of
sale, a price of approximately $2,025 per basic customer. The sales price
resulted in a gain on the sale of approximately $26,409,000. See "Recent
Transactions -- Divestitures -- San Angelo Divestiture."
BUSINESS STRATEGY
The Company's business strategy focuses on three principles: (i) forming
regional clusters of cable television systems through strategic acquisitions,
internal growth and divestitures of non-strategic assets, (ii) promoting
internal growth and enhanced operating and financial performance by
streamlining operations in newly clustered systems and applying innovative
marketing techniques and (iii) upgrading systems and employing state-of-the-art
technology to enhance existing service and to develop, on a cost-effective
basis, ancillary revenue streams. This strategy was first employed by expanding
the originally acquired cable television systems in Wisconsin through strategic
acquisitions and internal growth. Upon completing the Star and Crown
Acquisitions and successfully integrating their operations, the Company has
more than tripled in size to become the largest cable operator in Wisconsin.
The Company believes that its Wisconsin experience demonstrates the significant
benefits of regional clusters, including increased opportunities to develop
ancillary revenue streams and greater operating efficiencies, such as larger
volume discounts on programming, materials and supplies, lock box fees and
billing and data processing costs. Clustering also permits elimination of
duplicative positions and certain office and other locations.
Having established its Wisconsin cluster, the Company has broadened its
geographic focus. The Company, which is now the ninth largest cable television
operator in the United States, is employing a similar strategy of enhanced
regional clustering with the Sammons Systems and the Alabama Systems. Future
expansion efforts are expected to focus on acquiring systems in close proximity
to existing systems and clusters, in order to expand system clusters to permit
the operating efficiencies and economies of scale the Company has achieved in
the Wisconsin Systems. Opportunistic divestitures, in areas where the Company
does not perceive sufficient consolidation opportunities, will also be
considered.
Upon completion of an acquisition, the Company generally implements
extensive management, operational and organizational changes designed to
enhance operating cash flow and operating margins, while promoting superior
customer service and strong community relations. Since 1990, the Company has
successfully assimilated five separate management structures and has recognized
the benefits of consolidation through the elimination of duplicative positions
and excess office locations, the creation of regional customer service centers
and the centralization of signal distribution facilities and of corporate
support functions, including accounting, billing, marketing, technical and
administration services. Ancillary benefits of the Company's increased size
include reduced overall programming costs and increased discounts on equipment
purchases.
In addition to the above synergies, the Company selectively upgrades the
cable plant of acquired systems to allow for the offering of additional
programming and services. The Company then seeks to add customers and increase
revenue per customer by aggressively marketing innovative basic, tier and
premium cable service packages and by developing ancillary sources of revenue,
such as local spot advertising sales and pay-per-view programming. The Company
has been particularly successful in increasing revenues in acquired systems
through the introduction of multiple premium service packages that emphasize
customer value and enable the Company to take advantage of programming
agreements offering cost incentives based on premium service unit growth. The
Company's customer and revenue growth, in combination with economies of scale
and other operating efficiencies associated with regional clusters of systems,
has enabled the Company to increase operating cash flow and operating margins
of its existing systems. At the same time, the Company has a decentralized and
locally responsive management structure which provides significant management
experience and stability and allows the Company to respond more effectively to
the specific needs of the communities it serves.
Through the upgrade of its cable television plant, including the utilization
of addressable technology and fiber optic cable on a selective, cost-effective
basis, the Company seeks to position itself to benefit from the further
development of advertising, pay-per-view and home shopping services, as well as
anticipated future services such as video-on-demand and other interactive
applications. This advanced broadband platform has allowed the Company to enter
into arrangements to provide video and data transmission services to various
educational institutions and to pursue similar arrangements with utility
providers (e.g., load management and system monitoring). In addition to
expanding revenue opportunities, upgrading network architecture serves to
enhance picture quality and system reliability, reduce operating costs and
improve overall customer satisfaction. As of December 31, 1996, the average
channel capacity of the Systems was approximately 65 analog channels with
approximately 25% of its customers served by systems with 550 MHz or greater
bandwidth capacity, and approximately 76% of its customers were
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<PAGE> 7
served by systems that utilize addressable technology. The Company's current
plan contemplates that by the end of 1997, its systems will have (i) an average
capacity of approximately 78 analog channels with approximately 43% of its
customers being served by systems with 550 MHz or greater bandwidth capacity,
(ii) warehoused digital spectrum of up to 200 MHz in systems serving
approximately 28% of the Company's customers and (iii) systems that utilize
addressable technology serving approximately 83% of its customers.
In addition to allowing for increased channel offerings, the expanded
bandwidth of the upgraded systems creates the optimal medium for transmitting
vast amounts of information at high speed. Cable modem technology enables data
traffic to be carried at rates up to 100 times faster than current telephone
modems. Most current Internet users are accessing the network through narrow
band telephony technology. This telephony technology severely limits the types
of content and services that can be effectively utilized. The high speed
capabilities of cable modems eliminate the current data bottle necks and will
"free up" users. The Company currently is testing the capabilities of cable
modems and its Hybrid Fiber Coax ("HFC") network in one of its Dallas area
systems. This test is utilizing a 750 MHz system to provide high speed
Internet access to several customers. In addition to implementing the
technical and operational steps in deploying high speed data modems utilizing
HFC plant, the Company plans to explore various products and services that can
be offered utilizing the high speed data modems. It is anticipated that
commercial deployment of the service in this system will begin in late 1997
with expanding deployment in other systems in 1998. There is no assurance,
however, that such deployment will occur, and if it occurs, that it will be
successful.
THE ISSUERS
Operating was organized as a Delaware limited partnership in 1994.
Operating's sole general partner is MCC and Operating's sole limited partner is
Properties. MCC's sole general partner is Properties and MCC's limited
partners (the "Investors") consist primarily of institutional investors.
Properties' sole general partner is Marcus Cable Properties, Inc. ("MCPI"),
which is owned by Jeffrey A. Marcus and his wife, Nancy C. Marcus. Affiliates
of Goldman Sachs comprise the largest group of Investors. Capital II is a
Delaware corporation formed solely for the purpose of serving as a co-issuer of
the 13 1/2% Notes and is wholly owned by Operating. In serving as a co-issuer
of the 13 1/2% Notes, Capital II is acting as an agent of Operating. See
"Management," "Certain Relationships and Related Transactions," "Principal
Security Holders" and "Plan of Distribution."
THE OFFERING--13 1/2% SENIOR SUBORDINATED GUARANTEED DISCOUNT NOTES
<TABLE>
<S> <C>
SECURITIES OFFERED . . . . . . . . . . . $413,461,000 principal amount
($214,999,720 gross proceeds to
Operating) of 13 1/2% Senior
Subordinated Guaranteed Discount
Notes due August 1, 2004 (the
"13 1/2% Notes").
ISSUERS . . . . . . . . . . . . . . . . . The 13 1/2% Notes are the joint
and several obligations of
Operating and Capital II.
Capital II is acting as agent of
Operating, has nominal assets,
does not conduct any operations,
does not provide additional
security for the 13 1/2% Notes
and did not receive any of the
proceeds of the offering of the
13 1/2% Notes.
GUARANTOR . . . . . . . . . . . . . . . . Payment of the principal of and
interest on the 13 1/2% Notes has
been unconditionally guaranteed,
on a senior basis, by MCC.
ISSUE PRICE . . . . . . . . . . . . . . . $520 per $1,000
principal amount at maturity.
YIELD TO MATURITY . . . . . . . . . . . . 13 1/2%, calculated on a
semi-annual bond-equivalent
basis from July 29, 1994.
INTEREST PAYMENT DATES . . . . . . . . . The 13 1/2% Notes were issued
at a discount from their
principal amount and no cash
interest will accrue on the 13
1/2% Notes prior to August 1,
1999. Thereafter cash interest
will accrue and will be payable
on each February 1 and August 1,
commencing February 1, 2000. The
13 1/2% Notes bear OID, and the
holders of the 13 1/2% Notes
(including cash basis holders)
will be required to include such
OID as interest income on a
constant yield to maturity
</TABLE>
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<PAGE> 8
<TABLE>
<S> <C>
basis in advance of the receipt
of the cash payments to which
such income is attributable.
See "Certain Federal Income Tax
Considerations."
MATURITY DATE . . . . . . . . . . . . . . August 1, 2004.
OPTIONAL REDEMPTION . . . . . . . . . . . The 13 1/2% Notes are redeemable,
in whole or in part, at the
option of the Issuers, at any
time on or after August 1, 1999,
at the redemption prices set
forth elsewhere herein, plus
accrued interest to the
redemption date. Up to 25% of
the 13 1/2% Notes are also
redeemable at the option of the
Issuers prior to August 1, 1997
from the proceeds of certain
registered offerings of
Operating or MCC Capital Stock,
at 110% of the Accreted Value
(as defined in the Indenture
governing the 13 1/2% Notes)
thereof on the date of such
redemption. See "The Senior
Credit Facility" and
"Description of the 13 1/2%
Notes."
CHANGE OF CONTROL . . . . . . . . . . . . In the event of a Change of
Control (as defined in the
Indenture governing the 13 1/2%
Notes), the Issuers are required
to offer to purchase outstanding
13 1/2% Notes at a redemption
price of 101% of the Accreted
Value thereof on any repurchase
date prior to August 1, 1999, or
101% of the principal amount
thereof, plus accrued interest
to, any repurchase date on or
after August 1, 1999. In the
event of a Change of Control, as
defined in the Indenture
governing the $100,000,000
aggregate principal amount of 11
7/8% Senior Debentures due
October 1, 2005 (the "11 7/8%
Debentures"), MCC is
additionally required to offer
to purchase the outstanding 11
7/8% Debentures at 101% of the
principal amount thereof, plus
accrued interest to the date of
the purchase. In the event of a
Change of Control, as defined in
the Indenture governing the
$299,228,000 aggregate principal
amount of 14 1/4% Senior
Discount Notes due December 15,
2005 (the "14 1/4% Notes"), MCC
is required to offer to purchase
the outstanding 14 1/4% Notes at
101% of the Accreted Value (as
defined in the Indenture
governing the 14 1/4% Notes)
thereof on any repurchase date
prior to June 15, 2000, or 101%
of the principal amount thereof,
plus accrued interest to, any
repurchase date on or after June
15, 2000. The source of funds
for such purchases will be MCC's
available cash or cash generated
from the operations of the
Operating Partnerships or other
sources, including borrowings,
sales of assets, sales of equity
or other funds provided by a new
controlling person. If a Change
of Control were to occur today,
the Issuers would not have
sufficient funds to purchase all
of the 13 1/2% Notes nor would
MCC have sufficient funds to
purchase the 11 7/8% Debentures
and the 14 1/4% Notes were they
to be tendered in response to an
offer made as a result of a
Change of Control. In addition,
Operating's bank credit
facility (the "Senior Credit
Facility") includes "change of
control" provisions that permit
the bank lenders thereunder to
accelerate the repayment by
Operating of indebtedness under
the Senior Credit Facility
(which is senior in right of
payment to the 13 1/2% Notes),
as well as other provisions that
restrict the ability of the
Operating Partnerships to make
available to the Issuers funds
necessary to consummate an offer
to purchase outstanding 13 1/2%
Notes in connection with a
Change of Control. See "Risk
Factors--Purchase of 13 1/2%
Notes Upon a Change of Control,"
"--Dependence Upon Distributions
from Operating Partnerships,"
"The Senior Credit Facility" and
"Description of the 13 1/2%
Notes."
MANDATORY SINKING FUND . . . . . . . . . None.
ORIGINAL ISSUE DISCOUNT . . . . . . . . . The 13 1/2% Notes were issued
with an original issue discount
requiring holders of the 13 1/2%
Notes to include amounts in
gross income for federal income
tax
</TABLE>
-8-
<PAGE> 9
<TABLE>
<S> <C>
purposes in advance of
receipt of cash to which the
income is attributable. See
"Certain Federal Income Tax
Considerations--Original Issue
Discount on the 13 1/2% Notes."
CERTAIN COVENANTS . . . . . . . . . . . . The Indenture governing the 13
1/2% Notes contains certain
covenants that, among other
things, limit the ability of the
Issuers, MCC and certain of
their subsidiaries to incur
indebtedness and issue preferred
stock, create certain liens,
make certain restricted
payments, engage in transactions
with affiliates, merge or
consolidate with other entities
and sell assets or capital stock
of subsidiaries. See
"Description of the 13 1/2%
Notes--Covenants."
RANKING . . . . . . . . . . . . . . . . . The 13 1/2% Notes are unsecured
obligations of the Issuers and
will be subordinated in right of
payment to all existing and
future Senior Debt (as defined
in the Indenture governing the
13 1/2% Notes). Borrowings under
the Senior Credit Facility are
senior in right of payment to
the 13 1/2% Notes. At February
28, 1997, Operating and its
subsidiaries had an aggregate of
approximately $852,382,000 of
outstanding Senior Debt,
including approximately
$830,000,000 and $20,000,000 of
outstanding debt under the
Senior Credit Facility and
through other lending
institutions, respectively, and
did not have any outstanding
indebtedness that ranks pari
passu with the 13 1/2% Notes.
The operations of Operating and
MCC are conducted through the
Operating Partnerships and,
therefore, Operating and MCC are
dependent on the earnings and
cash flow of, and distributions
from, the Operating Partnerships
to meet their debt obligations,
including Operating's
obligations with respect to the
13 1/2% Notes and the Senior
Credit Facility and MCC's
obligations with respect to the
11 7/8% Debentures and the 14
1/4% Notes. Because the assets
of the Operating Partnerships
constitute substantially all of
the assets of Operating and MCC,
and because the Operating
Partnerships will not guarantee
the payment of principal and
interest on the 13 1/2% Notes,
the claims of holders of the 13
1/2% Notes will be effectively
subordinated to the claims of
creditors of the Operating
Partnerships. The Indenture
governing the 13 1/2% Notes
prohibits the Operating
Partnerships from incurring
additional indebtedness, subject
to certain exceptions, and from
placing limitations on their
ability to pay dividends or make
other payments to MCC or Operating or
any affiliate (as defined in
the Indenture governing the
13 1/2%) thereof. MCC's
guarantee of the 13 1/2%
Notes will rank pari passu with
MCC's 11 7/8% Debentures and 14
1/4% Notes and its guarantee of
the Senior Credit Facility. See
"Risk Factors--Dependence Upon
Distributions from Operating
Partnerships," "The Senior
Credit Facility" and
"Description of the 13 1/2%
Notes."
USE OF PROCEEDS . . . . . . . . . . . . . The net proceeds of
approximately $215,000,000 from
the offering of the 13 1/2%
Notes, and $26,500,000 in
additional equity investment in
MCC by certain affiliates of
Goldman Sachs in connection with
the offering of the 13 1/2%
Notes was used (i) to finance
the acquisition of the Star
Systems, (ii) to pay a
$1,500,000 transaction fee to
MCPI in connection with the Star
Acquisition, and (iii) to retire
the $95,000,000 of indebtedness
of the Operating Partnerships
previously outstanding under a
prior credit agreement.
</TABLE>
-9-
<PAGE> 10
The Prospectus includes a chart which sets forth the following
information regarding the Corporate Structure of the Company and its affiliates.
Listed below are the names of certain subsidiaries, owned
directly or indirectly, comprising the Company's corporate structure at December
31, 1996. Indented subsidiaries are direct subsidiaries of the company under
which they are indented.
<TABLE>
<CAPTION>
Percentage Percentage
Owned by Owned by
General Partner Limited Partner(s)
--------------- ------------------
<S> <C> <C>
Marcus Cable Properties, Inc.
Marcus Cable Properties, L.P. 66.2% 33.8%(4)
Marcus Cable Company, L.P. (Registrant): 14.3% (1) 85.7%(5)
Marcus Cable Capital Corporation 100.0% --
Marcus Cable Capital Corporation III 100.0% --
Marcus Cable Operating Company, L.P. 99.8% .2%(6)
Marcus Cable Capital Corporation II 100.0% --
Marcus Cable Associates, L.P. 99.8% .2%(7)
Marcus Cable Partners, L.P. 99.6% .4%(6)
Marcus Cable, Inc. 100.0% --
Marcus Cable of Alabama, Inc. (3) 100.0% --
Marcus Cable of Alabama, L.P. 99.0% 1%(3)
Marcus Cable of Delaware and Maryland, L.P. 99.9% .1%(6)
Marcus Fiberlink, L.L.C. 99.0% 1%(2)
</TABLE>
(1) Inclusive of interests owned by the General Partner and up to 31,517
Employee Units issued or issuable by MCC at the sole discretion of the
General Partner to the General Partner or key individuals providing
services to MCC or any of its subsidiaries. See "Management -- Incentive
Performance Plans -- Employee Unit Plan." As of March 31, 1997, 27,787.2
Employee Units had been issued, none of which were issued to the General
Partner. Mr. Marcus is the record owner of 16,600 issued Employee Units
and has been granted irrevocable proxies to exercise all voting rights
with respect to all other issued Employee Units.
(2) Marcus Cable Partners, L.P. holds a 1% limited partner interest in Marcus
Fiberlink, L.L.C.
(3) Marcus Cable of Alabama, Inc. holds 1% general partner interest in Marcus
Cable of Alabama, L.P.
(4) Held by certain employees of Marcus Cable Operating Company, L.P.
(5) Held by Goldman Sachs and other investors.
(6) Held by Marcus Cable Properties, L.P.
(7) Held by Marcus Cable Company, L.P.
-10-
<PAGE> 11
SUMMARY FINANCIAL AND OPERATING DATA
The summary financial data of the Company presented below are derived
from the audited historical consolidated financial statements of the Company.
Acquisitions of cable television systems during the periods for which the
summary data are presented below materially affect the comparability of such
data from one period to another. The data presented below should be read in
conjunction with the historical financial statements and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
FINANCIAL DATA AND RATIOS OF MARCUS CABLE COMPANY, L.P.
(IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995
------ -----
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (1) . . . . . . . . . . . . . . . . . $434,507 $198,294
Costs and expenses . . . . . . . . . . . . . . 230,214 102,024
Depreciation and amortization . . . . . . . . 166,429 83,723
Operating income . . . . . . . . . . . . . . . 37,864 12,547
Interest expense . . . . . . . . . . . . . . . 144,681 82,911
Net loss . . . . . . . . . . . . . . . . . . . (100,070) (52,816)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . . $1,687,550 $1,760,054
Total debt (including current maturities) . . 1,438,471 1,407,890
Subsidiary limited partner interests . . . . (246) (246)
Partners' capital . . . . . . . . . . . . . . 189,256 289,326
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
----------------------- -----------------------
<S> <C> <C>
OPERATING DATA:
Homes passed (2) . . . . . . . . . . . . . . . . . 1,863,299 1,833,401
Basic customers (3) . . . . . . . . . . . . . . . 1,181,293 1,154,718
Basic penetration (4) . . . . . . . . . . . . . . 63.4% 63.0%
Premium units (5) . . . . . . . . . . . . . . . . 666,702 651,121
Premium penetration (6) . . . . . . . . . . . . . 56.4% 56.4%
Average monthly revenue per basic customer (7) . . $30.83 $28.65
</TABLE>
-11-
<PAGE> 12
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995
---- ----
<S> <C> <C>
Financial Ratios:
Total debt to EBITDA (8) . . . . . . . . . . . . 7.04x 14.62x
EBITDA to total interest expense . . . . . . . . 1.41 1.16
EBITDA to total cash interest expense . . . . . 2.51 2.58
Other Data:
EBITDA (9) . . . . . . . . . . . . . . . . . . . $204,293 $96,270
Total cash interest expense . . . . . . . . . . 81,403 37,354
EBITDA to revenue margin (10) . . . . . . . . . 47% 49%
</TABLE>
- ----------------
(1) The increase in revenues in 1996 resulted mainly from the CALP and
Sammons Acquisitions on August 31, 1995 and November 1, 1995,
respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Fiscal 1996 Compared to Fiscal
1995".
(2) Homes passed refers to estimates by the Company of the approximate number
of dwelling units in a particular community that can be connected to the
Company's cable television distribution system without any further
extension of principal transmission lines.
(3) A home with one or more television sets connected to a cable system is
counted as one basic customer. Bulk accounts are included on a "basic
customer equivalent" basis in which the total monthly bill for the account
is divided by the basic monthly charge for a single outlet in the area.
(4) Basic customers as a percentage of homes passed.
(5) Premium service units include single channel services offered for a
monthly fee per channel. A customer may purchase more than one premium
service, each of which is counted as a separate premium service unit.
(6) Premium service units as a percentage of basic customers. This ratio may
be greater than 100% if the average customer subscribes to more than one
premium service.
(7) Average monthly revenue per basic customer equals combined revenues of
systems owned or acquired during the respective period (exclusive of
management fees) for the 12-month periods ended December 31, 1996 and 1995
divided by the total number of weighted average number basic customers of
the Company during the period ended December 31, 1996 and 1995.
(8) The decrease in total debt to EBITDA (as defined herein) in 1996 resulted
mainly from the earnings of the CALP and Sammons Systems being included
in EBITDA for the full year of 1996 and only for the four and two months
of 1995, respectively, while debt levels remained consistent from 1995 to
1996. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Fiscal 1996 Compared to Fiscal 1995".
(9) Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA")
is equal to operating loss plus depreciation and amortization. The
Company believes that EBITDA is a meaningful measure of performance
because it is commonly used in the cable television industry to analyze
and compare cable television companies on the basis of operating
performance, leverage and liquidity. In addition, the Indentures for the
13 1/2% Notes, the 11 7/8% Debentures and 14 1/4% Notes and the Senior
Credit Facility contain certain covenants measured by computations
substantially similar to those used in determining EBITDA. However,
EBITDA is not intended to be a performance measure that should be regarded
as an alternative either to operating income or net income as an indicator
of operating performance or to cash flows as a measure of liquidity, as
determined in accordance with generally accepted accounting principles.
(10) Reduced EBITDA is a direct reflection of higher selling, service and
system management costs and the resulting lower operating margins of
certain systems acquired in 1995.
-12-
<PAGE> 13
RISK FACTORS
Prospective purchasers of the 13 1/2% Notes should carefully consider
the following factors, together with the information contained herein, before
making an investment in the 13 1/2% Notes.
LEVERAGE/DEFICIENCY OF EARNINGS TO FIXED CHARGES
The Company is, and will continue to be, highly leveraged as a result
of the substantial indebtedness it has incurred, and may incur in the future,
to finance acquisitions and expand its operations. At February 28, 1997, the
Company's aggregate consolidated indebtedness was approximately $1,444,325,000.
In addition, the Company may incur other indebtedness to make additional
acquisitions in the future. The Company anticipates that, in light of the
amount of its existing indebtedness, it will continue to have substantial
leverage for the foreseeable future. Substantial leverage poses the risks that
(i) a significant portion of the Company's cash flow from operations must be
dedicated to servicing the Company's indebtedness; (ii) the Company may not be
able to generate sufficient cash flow to service the 13 1/2% Notes, the 11 7/8%
Debentures, the 14 1/4% Notes and the debt incurred under the Senior Credit
Facility and to adequately fund the Company's planned capital expenditures and
operations; (iii) the Company could be more vulnerable to changes in general
economic conditions; (iv) the Company's ability to obtain additional financing
for working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired; (v) the Company's operating and
financial ability may be impaired by restrictions imposed by various debt
instruments on the payment of dividends and on operations; and (vi) because
certain of the Company's borrowings are and will continue to be at variable
rates of interest, higher interest expenses could result in the event of
increases in interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company's consolidated earnings were insufficient to cover its
fixed charges by approximately $100,070,000 for the year ended December 31,
1996.
Substantial amounts of depreciation and amortization expense and
accretion of non-cash interest expenses have contributed (and will continue to
contribute) to the net losses experienced by the Company. These expenses,
however, do not result in an outflow of cash on the Company's current statement
of operations. Management believes that EBITDA provides a more meaningful
measure of fixed cost coverage. EBITDA was approximately $204,293,000 for the
year ended December 31, 1996 and would have been sufficient to cover fixed
charges by approximately $59,612,000. Although there can be no assurances, the
Company expects that it will continue to generate funds and obtain financing
sufficient to meet its obligations in the next 12 months.
Periods of high interest rates could have an adverse effect on the
Company to the extent that increased borrowing costs for floating rate debt may
not be offset by increases in revenues. As of February 28, 1997, the Company
had $180,000,000 (or 16%) of outstanding borrowings subject to floating
interest rates. These rates are based on the LIBOR or the prime rate plus
applicable margins, based on certain financial ratios.
RISKS RELATING TO ACQUISITION STRATEGY
A significant element of the Company's growth strategy is to expand by
acquiring cable television systems located in reasonable proximity to existing
systems or of a sufficient size to enable the acquired system to serve as the
basis for a regional cluster. There can be no assurance that the Company will
be able to identify and acquire such systems or that it will be able to finance
significant acquisitions in the future. Furthermore, any acquisition may
initially have an adverse effect upon the Company's operating results while the
acquired systems are being assimilated into the Company's operations. In
addition, there can be no assurance that the Company will be able to establish,
maintain or increase profitability of any acquisition once it has been made.
See "Business -- Business Strategy."
LIQUIDITY AND CAPITAL RESOURCES
The Investors, as of February 28, 1997, have contributed approximately
$493,327,000 to MCC. As of February 28, 1997, the Company had an aggregate of
$1,444,325,000 in consolidated indebtedness outstanding and had an additional
$268,209,000 of borrowing capacity under the Senior Credit Facility's revolving
credit facility. The Company's cash generated from operating and financing
activities has been sufficient to meet the Company's debt service, working
capital and capital expenditure requirements. The Company believes that it will
continue to generate cash and obtain financing sufficient to meet such
requirements in the future. If the Company were unable to do so, however, it
would have to refinance its indebtedness or obtain new financing. Although in
the past the Company has been able to obtain financing through equity
investments, debt issuances and bank borrowings, there can be no assurance that
the Company will be able to do so in the future or that, if the Company were
able to do so, the terms available would be favorable to the Company.
-13-
<PAGE> 14
DEPENDENCE UPON DISTRIBUTIONS FROM OPERATING PARTNERSHIPS
Payment of the principal of and interest on the 13 1/2% Notes has been
unconditionally guaranteed, on a senior basis, by MCC. MCC is a holding
company which has no significant assets other than its investments in
Operating. MCC, therefore, derives all of its operating income and cash flow
from Operating and the Operating Partnerships. Capital II, which is wholly
owned by Operating, is a corporation that was formed solely for the purpose of
serving as an issuer of certain debt of Operating, including the 13 1/2% Notes.
Capital II has no operations or assets from which it will be able to repay the
13 1/2% Notes. Accordingly, MCC must rely entirely upon distributions from
Operating and the Operating Partnerships to generate the funds necessary to
meet its obligations, including the payment of principal and interest on the 11
7/8% Debentures and the 14 1/4% Notes and its guarantee of the 13 1/2% Notes
and the Senior Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "The Senior Credit Facility"
and "Description of the 13 1/2% Notes."
EFFECTIVE SUBORDINATION OF THE 13 1/2% NOTES
The 13 1/2% Notes are unsecured obligations of the Issuers and will be
subordinated in right of payment to all existing and future Senior Debt (as
defined in the Indenture governing the 13 1/2% Notes). The Senior Credit
Facility is effectively senior in right of payment to the 13 1/2% Notes. At
February 28, 1997, Operating and its subsidiaries had an aggregate of
approximately $852,382,000 of outstanding Senior Debt, including approximately
$830,000,000 and $20,000,000 of outstanding debt under the Senior Credit
Facility and through other lending institutions, respectively, and did not have
any outstanding indebtedness that ranks pari passu with the 13 1/2% Notes. The
borrowings under the Senior Credit Facility are secured by a pledge of the
partnership interests or common stock in the Operating Partnerships held by
Operating and are guaranteed by MCC on an unsecured basis. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "The
Senior Credit Facility" and "Description of the 13 1/2% Notes."
PURCHASE OF THE 13 1/2% NOTES UPON A CHANGE OF CONTROL
In the event of a Change of Control (as defined in the Indenture
governing the 13 1/2% Notes), the Issuers are required to offer to purchase the
outstanding 13 1/2% Notes at a redemption price of 101% of the Accreted Value
(as defined in the Indenture governing the 13 1/2% Notes) thereof on any
repurchase date prior to August 1, 1999, or 101% of the principal amount
thereof, plus accrued interest to any repurchase date on or after August 1,
1999. In the event of a Change of Control (as defined in the Indenture
governing the 11 7/8% Debentures), MCC and Capital are required to offer to
purchase the outstanding 11 7/8% Debentures at 101% of the principal amount
thereof, plus accrued interest to the date of purchase. In the event of a
Change of Control (as defined in the Indenture governing the 14 1/4% Notes),
MCC and Capital III are additionally required to offer to purchase the
outstanding 14 1/4% Notes at a redemption price of 101% of the Accreted Value
(as defined in the Indenture governing the 14 1/4% Notes) thereof on any
repurchase date prior to June 15, 2000 or 101% of the principal amount thereof,
plus interest accrued to any repurchase date on or after June 15, 2000. The
source of funds for any such purchases will be the Company's available cash or
cash generated from the operations of the Operating Partnerships or other
sources, including borrowings, sales of assets, sales of equity or funds
provided by a new controlling person. If a Change of Control were to occur
today, the Company would not have sufficient funds to purchase all of the
outstanding 13 1/2% Notes, the 11 7/8% Debentures and the 14 1/4% Notes were
they to be tendered in response to an offer made as a result of a Change of
Control. In addition, the Senior Credit Facility includes "change of control"
provisions that permit the lenders thereunder to accelerate the repayment by
Operating of indebtedness thereunder, as well as other provisions that
restrict the ability of the Operating Partnerships to make available to MCC
funds necessary to consummate an offer to purchase the outstanding 13 1/2%
Notes in connection with a Change of Control. The Senior Credit Facility is
effectively senior in right of payment to the 13 1/2% Notes. See "The Senior
Credit Facility" and "Description of the 13 1/2% Notes."
NONRECOURSE NATURE OF THE 13 1/2% NOTES AS TO THE GENERAL PARTNER, MCPI AND
OTHERS
The 13 1/2% Notes have been issued solely by the Issuers and are
guaranteed solely by MCC. None of the General Partner, MCPI, the Investors or
any of their respective directors, officers, partners, stockholders, employees
or affiliates will be an obligor under the 13 1/2% Notes, and the Indenture
governing the 13 1/2% Notes expressly provides that the General Partner, MCPI
and the Investors, together with their respective directors, officers,
partners, stockholders and employees, shall not have any liability for any
obligations of the Issuers under the 13 1/2% Notes or such Indenture or any
claim based on, in respect of or by reason of, such obligations, and that by
accepting the 13 1/2% Notes, each holder of the 13 1/2% Notes waives and
releases all such liability, which waiver and release are part of the
consideration for issuance of the 13 1/2% Notes. There is no assurance and
there should be no expectation that the General Partner, MCPI or the Investors
will, in the future, fund the operations or deficits of the Issuers. See
"Description of the 13 1/2% Notes -- Release From Liability."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES OF THE 13 1/2% NOTES
The 13 1/2% Notes were originally issued at a substantial discount
from the stated principal amount thereof, and as a result purchasers of the
13 1/2% Notes generally are required to include the accrued portion of such
discount in gross income, as
-14-
<PAGE> 15
interest, for federal income tax purposes in advance of the receipt of cash
payments of such interest. If a bankruptcy case is commenced by or against the
Issuers under the U.S. Bankruptcy Code after the issuance of the 13 1/2% Notes,
the claim of a holder of the 13 1/2% Notes with respect to the principal amount
thereof may be limited to an amount equal to the sum of (i) the initial
offering price and (ii) that portion of the original issue discount which is
not deemed to constitute "unmatured interest" for purposes of the U.S.
Bankruptcy Code. Any original issue discount that was not amortized as of any
such bankruptcy filing would constitute "unmatured interest". See "Certain
Federal Income Tax Consequences" for a more detailed discussion of certain U.S.
federal income tax consequences to the holders of the 13 1/2% Notes of the
purchase, ownership and disposition of the 13 1/2% Notes.
LEGISLATION AND REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at
the federal, state and local levels. The Cable Communications Policy Act of
1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act" and with the 1984 Cable Act, the
"Cable Acts") and the Telecommunications Act of 1996 (the "1996 Telecom Act"),
which together amend the Communications Act of 1934 (the "Communications Act"),
establish a national policy to guide the development and regulation of cable
television systems. Principal responsibility for implementing the policies of
the Cable Acts and the 1996 Telecom Act is allocated between the Federal
Communications Commission ("FCC") and state or local franchising authorities.
The FCC and state regulatory agencies are required to conduct numerous
rulemaking and regulatory proceedings to implement the 1996 Telecom Act and
such proceedings may affect the cable television industry.
Cable Acts, 1996 Telecom Act and FCC Regulation. The Cable Acts, the
1996 Telecom Act and existing FCC rules establish, among other things, (i) rate
regulations, (ii) "anti-buy through" provisions, (iii) "must carry" and
"retransmission" consent requirements, (iv) rules for franchise renewals and
transfer, and (v) other regulations covering a variety of operational areas.
See "Business--Legislation and Regulation in the Cable Television Industry."
Telephone Company Ownership of Cable Television Systems. The 1984
Cable Act, FCC regulations and the 1982 federal court consent decree that
settled the AT&T antitrust suit regulated the provision of video programming
and other information services by telephone companies. The statutory provision
and corresponding FCC regulations are of particular importance because
telephone companies already own much of the plant necessary for cable
communications operations. The 1996 Telecom Act eliminates current legal
barriers to competition in the local telephone and cable communications
businesses, preempts legal barriers to competition that previously existed in
state and local laws and regulations and sets basic standards for relationships
between telecommunications providers. The FCC, and, in some cases, states are
required to conduct numerous proceedings to implement the 1996 Telecom Act.
The ultimate outcome of these rulemakings, and the ultimate impact of the 1996
Telecom Act cannot be determined at this time.
Rate Regulation. The Cable Acts and FCC regulations have imposed rate
requirements for basic services and equipment. Under the 1992 Cable Act, a
local franchising authority in a community not subject to "effective
competition" (as defined in the 1992 Cable Act) generally is authorized to
regulate basic cable service rates after certifying to the FCC that, among
other things, it will adopt and administer rate regulations consistent with FCC
rules, and in a manner that will provide a reasonable opportunity to consider
the views of interested parties. In regulating the basic service rates,
certified local franchise authorities have the authority to order a rate refund
of previously paid rates determined to be in excess of the permitted reasonable
rates. During the year ended December 31, 1994, the Company paid total
cumulative rate refunds of approximately $944,000 for 1993 and 1994 to its
cable customers as a result of rate orders issued by certain franchise
authorities within certain cable systems which have subsequently been sold.
During 1995, a total of $25,000 was paid for rate refunds. Additionally, there
are rate complaints pending at the FCC concerning certain of the Company's
cable programming service tiers that have not yet been resolved by the FCC. If
the FCC determines that the Company's cable programming service tier rates are
unreasonable, it has the authority to order the Company to reduce cable
programming service tier rates and to refund to customers any overcharges
occurring from the filing date of the rate complaint at the FCC. While the
Company believes that is has materially complied with the rate provisions of
the 1992 Cable Act, in jurisdictions that have not yet chosen to certify,
refunds covering a one-year period on basic service may be ordered upon future
certification if the Company is unable to justify its rates. The Company is
unable to estimate at this time the amount of refunds that may be payable by
the Company in the event the Systems' rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. The 1996
Telecom Act deregulates rates for cable programming service tiers in 1999 for
large multiple system operators (including the Company) and immediately for
certain small cable operators.
"Anti-Buy Through" Provisions. The 1992 Cable Act and corresponding
FCC regulations have established requirements for customers to be able to
purchase video programming on a per channel or per program basis without having
to subscribe to any tier of service (other than the basic tier), subject to
available technology. Most of the Company's cable television systems do not
have the technological capability to offer programming in the manner required
by the 1992 Cable Act and currently are exempt from complying with the
requirement. The Company cannot predict the extent to which this provision of
the 1992 Cable Act and the corresponding FCC rules may cause customers to
discontinue optional nonbasic service tiers in favor of the less expensive
basic cable service.
-15-
<PAGE> 16
"Must Carry" Requirements/"Retransmission" Consents. Cable television
operations are subject to mandatory broadcast signal carriage requirements that
allow local commercial and non-commercial television broadcast stations to
elect to require a cable system to carry the station, subject to certain
exceptions, or, in the case of commercial stations, to negotiate for
"retransmission consent" to carry the station. In addition, there are
requirements for cable systems to obtain retransmission consent for all
"distant" commercial television stations (except for
commercial/satellite-delivered independent "superstations" such as WTBS),
commercial radio stations and certain low power television stations carried by
such systems after October 6, 1993. As a result of the mandatory carriage
rules, some of the Company's systems have been required to carry television
broadcast stations that otherwise would not have been carried, thereby causing
displacement of possibly more attractive programming. The retransmission
consent rules have resulted in the deletion of certain local and distant
television broadcast stations which various systems were carrying. To the
extent retransmission consent fees must be paid for the continued carriage of
certain television stations, the Company's cost of doing business will increase
with no assurance that such fees can be recovered through rate increases.
Franchise Matters. The 1984 Cable Act contains franchise renewal
procedures designed to protect against arbitrary denials of renewal. The 1992
Cable Act made several changes to the renewal process that could make it easier
for a franchising authority to deny renewal. Moreover, even if a franchise is
renewed, a franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees. If a franchising authority's consent is required for
the purchase or sale of a cable television system, the franchising authority
may also seek to impose new and more onerous requirements as a condition to the
transfer. Historically, franchises have been renewed for cable operators that
have provided satisfactory services and have complied with the terms of their
franchises. Although the Company believes that it has generally met the terms
of its franchises and has provided quality levels of service, and anticipates
that its future franchise renewal prospects generally will be favorable, there
can be no assurance that this will be the case.
Other FCC Regulations. The Company is subject to a variety of other
FCC rules, covering such diverse areas as equal employment opportunity,
programming, maintenance of records and public inspection files, technical
standards, customer service and competition. The FCC has authority to enforce
its regulations through the imposition of substantial fines, the issuance of
cease and desist orders and/or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate certain
transmission facilities often used in connection with cable operations.
Although the Company believes it is in material compliance with all applicable
FCC requirements, there can be no assurance that the FCC would not find a
violation and impose sanctions that could affect the Company's operations.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, cable operators can obtain
blanket permission to retransmit broadcast signals. The nature and amount of
future copyright payments for broadcast signal carriage cannot be predicted at
this time. The possible simplification, modification or elimination of the
compulsory copyright license is the subject of continuing legislative review.
The elimination or substantial modification of the cable compulsory license
could adversely affect the Company's ability to obtain suitable programming and
could substantially increase the cost of programming that remained available
for distribution to the Company's customers. The Company cannot predict the
outcome of this legislative activity or the effect of such activity on the
Company's business. See "Business -- Legislation and Regulation in the Cable
Television Industry".
State and Local Regulation. Cable television systems generally are
operated pursuant to nonexclusive franchises, permits or licenses granted by a
municipality or other state or local government entity. Franchises generally
are granted for fixed terms and in many cases are terminable if the franchisee
fails to comply with material provisions. The terms and conditions of
franchises vary materially from jurisdiction to jurisdiction. A number of
states subject cable television systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. In the event that a state government
agency certifies and regulates basic rates, the agency must adopt and
administer regulations with respect to the rates for the basic service tier
that are consistent with the regulations prescribed by the FCC under the 1992
Cable Act. Because the state governmental agencies are required to follow FCC
rules when prescribing rate regulation, the state regulation is no more
restrictive than the federal. Attempts in other states to regulate cable
television systems are continuing and can be expected to increase. To date,
Delaware and Connecticut are the only states in which the Company currently
operates which have enacted such state level regulation. The Company cannot
predict whether any of the states in which it now operates will engage in such
regulation in the future. State and local franchising jurisdiction is not
unlimited, however, and must be exercised consistently with federal law. The
1992 Cable Act immunizes franchising authorities from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments. See "Business --
Legislation and Regulation in the Cable Television Industry."
COMPETITION IN THE CABLE TELEVISION BUSINESS
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
newspapers, movie theaters, live sporting events, interactive computer programs
and home video products, including videotape cassette recorders.
-16-
<PAGE> 17
Within the home video programming market, the Company competes with other cable
franchise holders and with satellite and wireless cable providers. In addition,
the 1996 Telecom Act and recent FCC and judicial decisions enable local
telephone companies to provide a wide variety of video services competitive
with services provided by cable systems and to provide cable services directly
to customers. The Company cannot predict the extent to which competition will
materialize from other cable television operators, other distribution systems
for delivering video programming to the home or other potential competitors,
or, if such competition materializes, the extent of its effect on the Company.
See "Business -- Competition" and "-- Legislation and Regulation in the Cable
Television Industry."
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. Advances in communications
technology as well as changes in the marketplace and the regulatory and
legislative environment are constantly occurring. Thus, it is not possible to
predict the effect that ongoing or future developments might have on the cable
industry.
POTENTIAL CONFLICTS OF INTEREST
Goldman Sachs is subject to potential conflicts of interest arising
out of investments by certain of its affiliates in MCC and certain other cable
entities and its provision of investment banking services for the Company.
Currently, the Investors that are affiliates of Goldman Sachs collectively own
approximately 36% of the partnership interests in MCC on a fully diluted basis.
There have been no significant transactions, new relationships or
indebtedness between the Company and related parties during 1996.
Transaction Fees
Transaction fees for services relating to the planning and negotiation
of acquisitions have been paid by the Company upon the closing of certain
transactions. In January 1995, MCPI received a transaction fee of $1,250,000
in connection with the Crown Acquisition. In November 1995, MCPI received a
transaction fee of $4,000,000 in connection with the Sammons Acquisition.
In addition, certain equity investors received equity commitment and
merger advisory fees, respectively, in connection with the closing of the
Sammons Acquisitions as follows: Goldman Sachs, $1,251,000 and $4,804,000;
Freeman Spogli & Co., Incorporated, $1,788,000 and $2,189,000; Greenwich Street
Capital Partners, Inc., $650,000 and $1,049,000; First Union Corporation,
$488,000 (merger advisory fee only); Weiss, Peck & Greer, $211,000 and
$508,000; and State of Wisconsin Investment Board, $325,000 (equity commitment
fee only). In addition, Hicks Muse, Tate & Furst, Incorporated will receive
financial monitoring fees totaling $4,998,000 (payable in six annual
installments commencing with the closure of the Sammons Acquisition) and has
received a merger advisory fee of $5,000,000.
Senior Credit Facility
Goldman Sachs and Goldman Sachs Credit Partners, L.P., formerly Pearl
Street, L.P., ("GS Credit Partners") an affiliate of Goldman Sachs, are part of
the lending syndicate under the Senior Credit Facility and made an initial
aggregate commitment of $183,333,333. In connection with this financing,
Goldman Sachs and GS Credit Partners received fees of approximately $3,300,000.
CALP
At the time of the CALP Acquisition, all of the outstanding CALP
ordinary limited partnership interests which were owned by affiliates of
Goldman Sachs were exchanged for Convertible Preference Units in MCC having a
distribution preference of $15,000,000. In addition, Special Limited
Partnership Units (including those owned by Mr. Marcus and affiliates of
Goldman Sachs) were redeemed and retired in connection with the CALP
Acquisition. Mr. Marcus and affiliates of Goldman Sachs received $2,100,000
and $7,800,000, respectively, in respect of their Special Limited Partnership
Units.
Investment Banking Agreement
MCC, MCPI, Mr. Marcus and Goldman Sachs have entered into an agreement
pursuant to which the parties have agreed that, for so long as Goldman Sachs
holds at least 30% of the total outstanding partnership interests of MCC, no
person or entity other than Goldman Sachs or its affiliates are to provide
investment banking, financial advisory, or underwriting or placement agent
services on behalf of the Company. Goldman Sachs received discounts and fees
aggregating $7,332,000 in connection with the offering of the 14 1/4% Notes.
-17-
<PAGE> 18
MCC Partnership Agreement
Although the MCC Partnership Agreement (as defined under the "The
Partnership Agreements") contains conflict of interest provisions, there are
circumstances where the General Partner and its affiliates may directly or
indirectly participate in business opportunities (i.e., investment
opportunities within the partnership purpose of MCC involving acquisitions of
cable television franchises with fewer than 175,000 customers in the aggregate)
that the Company elects not to pursue. In those circumstances, neither the
Company nor, through it, the holders of the 13 1/2% Notes will be entitled to
any of the benefits derived therefrom.
ABSENCE OF PUBLIC MARKET FOR THE 13 1/2% NOTES
There can be no assurance regarding the future development of a market
for the 13 1/2% Notes or the ability of the holders of the 13 1/2% Notes to
sell their 13 1/2% Notes or the price at which such holders may be able to sell
their 13 1/2% Notes. Goldman Sachs currently makes a market in the 13 1/2%
Notes. However, Goldman Sachs is not obligated to do so, and any such market
making may be discontinued at any time without notice (at the sole discretion
of Goldman Sachs). Therefore, no assurance can be given as to the liquidity of
or whether, at any given time, there will be an active trading market for the
13 1/2% Notes. The Issuers have not applied, and do not intend to apply, for
listing of the 13 1/2% Notes on any securities exchange. See "Plan of
Distribution."
Goldman Sachs may be deemed to be an affiliate of the Issuers and, as
such, may be required to deliver a prospectus in connection with its
market-making activities in the 13 1/2% Notes. Pursuant to the Underwriting
Agreement, dated July 22, 1994 between Operating and Capital II and Goldman
Sachs and A.G. Edwards & Sons, Inc., with respect to the 13 1/2% Notes, the
Issuers agreed to file and maintain a registration statement that would allow
Goldman Sachs to engage in market-making transactions in the 13 1/2% Notes.
The registration statement will remain effective for as long as Goldman Sachs
may be required to deliver a prospectus in connection with secondary
transactions in the 13 1/2% Notes. The Issuers have agreed to bear
substantially all the costs and expenses related to such registration
statement.
-18-
<PAGE> 19
RECENT TRANSACTIONS
ACQUISITIONS
Harron Acquisition. On March 4, 1997, the Company entered into the
Harron Acquisition. The communities served by this system are located in and
around the Company's operations in Texas. The Harron Acquisition is subject to
certain closing conditions and is expected to close in the second quarter of
1997.
Frankfort Acquisition. On July 31, 1996, the Company purchased the
Frankfort System from Frankfort Cable Communications, Inc. for an aggregate
purchase price of approximately $6,700,000. The Frankfort System provides
service to customers in and around Frankfort, Indiana, located near the
Company's other operations in Indiana. As of the date of the acquisition,
the former Frankfort System served approximately 5,600 basic customers. The
purchase price for the Frankfort Acquisition represented, as of the date of the
acquisition, a price of approximately $1,200 per basic customer.
Futurevision Acquisition. On July 8, 1996, the Company acquired the
Futurevision System from Futurevision Cable Systems of Brookhaven for an
aggregate purchase price of approximately $2,600,000. The communities served
by the Futurevision System are located in and around the Company's operations
in Mississippi. As of the date of the acquisition, the former Futurevision
System served approximately 2,500 basic customers. The purchase price for the
Futurevision Acquisition represented, as of the date of the acquisition, a
price of approximately $1,040 per basic customer.
Weatherford Acquisition. On January 11, 1996, the Company purchased
the Weatherford System from C & R Cable Investments Corporation for an
aggregate purchase price of approximately $875,000. The Weatherford System
provides service to customers contiguous to the Company's existing systems in
Weatherford, Texas. As of the date of the acquisition, the former
Weatherford System served approximately 700 basic customers. The purchase
price for the Weatherford Acquisition represented, as of the date of the
acquisition, a price of approximately $1,250 per basic customer.
Sammons Acquisition. On November 1, 1995, the Company acquired the
Sammons Systems owned by Sammons Communications, Inc. and certain of its
subsidiaries operating in 15 states for approximately $961,701,000 plus direct
acquisition costs of $31,187,000, and assumed liabilities of $4,524,000. As of
the date of the acquisition, the Sammons Systems passed 1,038,609 homes and
served 664,796 basic customers who subscribed for 345,353 premium service
units. The purchase price for the former Sammons Acquisition represented, as
of the date of acquisition, a price of approximately $1,453 per basic customer.
The basic customers of the Sammons Systems were clustered as follows as of the
date of the acquisition:
<TABLE>
<CAPTION>
BASIC
CUSTOMERS
---------
<S> <C>
Dallas/Ft. Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,003
Indiana/Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,490
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,978
Tennessee/Kentucky/North Carolina . . . . . . . . . . . . . . . . . . . . . . 93,069
Connecticut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,876
Mississippi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,800
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,580
-------
664,796
=======
</TABLE>
See "Recent Transactions -- Sammons Acquisition."
CALP Acquisition. The Company acquired the general partnership interest and
certain of the ordinary limited partnership interests in CALP in September 1994
and January 1995, respectively. On August 31, 1995, the Company acquired all
remaining ordinary limited partnership interests in CALP owned by affiliates of
Goldman Sachs in exchange for Convertible Preference Units of MCC with a
$15,000,000 distribution preference, and caused the redemption and retirement
for cash of the outstanding Special Limited Partnership Units in CALP (16.3% of
which were owned by Mr. Marcus and affiliates of Goldman Sachs) and the
repayment of the outstanding bank debt of CALP for an aggregate consideration
of approximately $138,280,000. On such date, CALP was renamed MCALP. MCALP
owns and operates the Alabama Systems in areas surrounding Birmingham, Alabama.
As of the date of the acquisition, the Alabama Systems passed 122,301 homes and
served 84,955 basic customers who subscribed for 37,726 premium service units.
The purchase price for the CALP Acquisition represented, as of the date of the
acquisition, a price of approximately $1,816 per basic customer.
Crown Acquisition. Effective January 1, 1995, the Company completed the
Crown Acquisition from Crown of the Crown Systems in Wisconsin and Minnesota
for an aggregate purchase price of $331,717,000 in cash. The communities served
by the Crown Systems are adjacent to the Company's original operations in
Wisconsin, and those acquired in the Star Acquisition. At
-19-
<PAGE> 20
the date of the acquisition, the former Crown Systems passed 294,032 homes and
served 193,325 basic customers who subscribed for 100,218 premium service
units. The purchase price for the Crown Systems represented, as of the date of
acquisition, a price of $1,716 per basic customer. Since acquisition, the
former Crown Systems and Star Systems have been combined.
Star Acquisition. On July 29, 1994, the Company purchased from Star the
Star Systems located in Wisconsin and Minnesota for an aggregate purchase price
of $139,232,000. The communities served by the Star Systems are adjacent to the
Company's original operations in Wisconsin. At the date of the acquisition,
the former Star Systems passed 109,507 homes and served 70,794 basic customers
who subscribed for 48,703 premium service units. The purchase price for the
Star Systems represented, as of the date of the acquisition, a price of $1,966
per basic customer.
DIVESTITURES
Maryland Cable Systems. Effective January 31, 1997, the Maryland Cable
Systems were sold to Jones Communications of Maryland, Inc. Under the Maryland
Cable Agreement, Operating was entitled to an incentive management fee if the
Maryland Cable Systems sold above certain threshold amounts. In conjunction
with the sale, Operating recognized an incentive management fee of $4,083,000
in January 1997. Additional incentive management fees may be recognized upon
finalization of the purchase price adjustment, anticipated to occur during the
second quarter of 1997 and upon dissolution of Maryland Cable, anticipated to
occur during the first quarter of 1998. There is no assurance that any of such
fees will be realized. Although Operating is no longer involved in the active
management of those cable television systems, Operating has entered into an
agreement with Maryland Cable to oversee the activities, if any, of Maryland
Cable through the liquidation of the partnership. Pursuant to such agreement,
Operating will earn a monthly fee ranging from $25,000 to $50,000.
Moses Lake Disposition. On October 11, 1996, the Company completed the sale
of the Moses Lake System serving approximately 12,700 customers in the state of
Washington for a sales price of approximately $21,000,000, less selling costs
of $320,000. As of the date of sale, the Moses Lake System passed
approximately 15,200 homes and served approximately 12,800 basic customers who
subscribed for approximately 5,300 premium service units. The gross sales
price of the Moses Lake System represented, as of the date of sale, a price of
approximately $1,646 per basic customer. The sales price resulted in a gain on
the sale of approximately $6,442,000.
San Angelo Divestiture. On June 30, 1995, the Company sold the assets of the
San Angelo Systems to Teleservice Corporation of America for approximately
$65,037,000 in cash (net of selling costs of $809,000). As of the date of
sale, the San Angelo Systems passed 45,838 homes and served 32,515 basic
customers who subscribed for 21,528 premium service units. The gross sales
price of the San Angelo Systems represented, as of the date of sale, a price of
approximately $2,025 per basic customer. The sales price resulted in a gain on
the sale of approximately $26,409,000.
-20-
<PAGE> 21
THE COMPANY
At December 31, 1996, the Company owned or managed cable television systems
in 18 states, serving 1,267,520 basic customers. Since its formation in 1990,
the Company has grown internally and through acquisitions, and is now the ninth
largest cable television operator in the United States. The Company's basic
customers were clustered as follows as of December 31, 1996.
<TABLE>
<CAPTION>
BASIC
CUSTOMERS
---------
<S> <C>
North Central Region (MN, WI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385,303
Southeast Region (AL, GA, NC, TN, KY, LA, MS). . . . . . . . . . . . . . . . . . . . . . . . . 252,466
Southwest Region (TX, OK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,761
East Region (DE, MD, VA, CT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,140(1)
Midwest Region (IN, IL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,138
West Region (CA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,712
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,267,520
=========
</TABLE>
- -----------------
(1) Includes 86,227 basic customers in a cable television system managed
by the Company. Such systems were sold on January 31, 1997. See
"Recent Transactions -- Divestitures -- Maryland Cable Systems".
As of December 31, 1996, the Systems passed 1,863,299 homes and served
1,181,293 basic customers who subscribed for 666,702 premium units. The
President and Chief Executive Officer of MCC is Jeffrey A. Marcus. Mr. Marcus
has successfully acquired, developed and managed cable television systems since
1979.
Operating was organized as a Delaware limited partnership in 1994.
Capital II was organized as a Delaware corporation in 1994 for the purpose of
serving as a co-issuer of MCC's debt securities, including the 13 1/2% Notes,
and is wholly owned by Operating. Capital II has nominal assets. In serving as
a co-issuer of the 13 1/2% Notes, Capital II is acting as an agent of
Operating. The principal offices of the Issuers are located at 2911 Turtle
Creek Boulevard, Suite 1300, Dallas, Texas 75219, and their telephone number is
(214) 521-7898.
-21-
<PAGE> 22
CAPITALIZATION
The following table sets forth the Company's consolidated
capitalization at December 31, 1996:
<TABLE>
<CAPTION>
CAPITALIZATION
(IN THOUSANDS)
-------------
<S> <C>
Long-term debt, including current maturities(1):
Senior Credit Facility(2) . . . . . . . . . . . . . . . . . . . . . $ 855,000,000
13 1/2% Senior Subordinated Guaranteed Discount Notes due 2004(3) . 295,119,000
11 7/8% Senior Debentures due 2005(4) . . . . . . . . . . . . . . . 100,000,000
14 1/4% Senior Discount Notes due 2005(4) . . . . . . . . . . . . . 185,862,000
Capital lease obligations and other notes . . . . . . . . . . . . . 2,490,000
---------------
Total long-term debt, including current
maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,438,471,000
Partners' capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,256,000
---------------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . $ 1,627,727,000
===============
</TABLE>
- -----------------
(1) Includes current maturities of $569,000 relating to capital lease
obligations and other notes. See "The Senior Credit Facility" and Note
6 to MCC and Subsidiaries' Consolidated Financial Statements for a
description of the Company's debt.
(2) The Senior Credit Facility is an obligation of Operating that is
guaranteed by MCC.
(3) The 13 1/2% Notes are obligations of Operating that are guaranteed by
MCC.
(4) The 11 7/8% Debentures and 14 1/4% Notes are obligations of MCC. MCC
has contributed funds provided by the issuances of the 11 7/8%
Debentures and the 14 1/4% Notes to Operating in exchange for
preference partnership interests and Operating, in turn, has
distributed such funds to the Operating Partnerships in exchange for
intercompany notes.
-22-
<PAGE> 23
SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the
audited historical consolidated financial statements of the Company. The
Company's acquisitions of cable television systems during the periods for which
the selected data are presented below materially affect the comparability of
such data from one period to another. The data presented below should be read
in conjunction with the historical financial statements and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
FINANCIAL DATA AND RATIOS OF MARCUS CABLE COMPANY, L.P.
(IN THOUSANDS, EXCEPT RATIOS AND OPERATING DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1) . . . . . . . . . . . . . $434,507 $198,294 $64,747 $52,307 $38,310
Costs and expenses . . . . . . . . . 230,214 102,024 31,453 21,849 16,104
Management fees and expenses(2) . . . -- -- 2,165 3,617 2,224
Depreciation and amortization . . . . 166,429 83,723 37,412 28,633 26,652
Operating income (loss) . . . . . . . 37,864 12,547 (6,283) (1,792) (6,670)
Interest expense . . . . . . . . . . 144,681 82,911 28,105 13,443 11,114
Net loss . . . . . . . . . . . . . . (100,070) (52,816) (30,610) (9,643) (21,323)
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . $1,687,550 $1,760,054 $315,217 $195,148 $206,641
Total debt (including current 1,438,471 1,407,890 327,264 195,000 162,500
maturities) . . . . . . . . . . . .
Subsidiary limited partner interests . (246) (246) (246) 5,788 34,608
Partners' capital (deficit) . . . . . . 189,256 289,326 (21,290) (11,670) 4,991
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Homes passed(3) . . . . . . . . . . . . 1,863,299 1,833,401 322,842 209,549 209,979
Basic customers(4) . . . . . . . . . . 1,181,293 1,154,718 222,735 141,323 138,274
Basic penetration(5) . . . . . . . . . 63.4% 63.0% 69.0% 67.4% 65.8%
Premium units(6) . . . . . . . . . . . 666,702 651,121 156,656 97,944 81,257
Premium penetration(7) . . . . . . . . 56.4% 56.4% 70.3% 69.3% 58.8%
Average monthly revenue per basic
customer(8) . . . . . . . . . . . . $ 30.83 $ 28.65 $ 29.30 $ 30.84 $ 28.84
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FINANCIAL RATIOS:
Total debt to EBITDA . . . . . . . . 7.04x 14.62x 10.51x 7.27x 8.13x
EBITDA to total interest expense . . 1.41 1.16 1.11 2.00 1.80
EBITDA to total cash interest expense 2.51 2.58 2.02 1.91 1.92
OTHER DATA:
EBITDA(9) . . . . . . . . . . . . . . $204,293 $96,270 $31,129 $26,841 $19,982
Total cash interest expense . . . . . 81,403 37,354 15,438 14,046 10,409
EBITDA to revenue margin . . . . . . 47% 49% 48% 51% 52%
Deficiency of earnings available to
cover fixed charges (10) . . . . . . $(100,070) $(52,816) $(30,610) $(9,643) $(21,323)
</TABLE>
- -------------
(1) All statement of operations data reflect the following acquisitions
and divestitures by the Company from the date of acquisition or sale:
(i) the May 1, 1992 acquisition of the San Angelo Systems; (ii) the
October 1, 1992 acquisition of certain systems located in Delaware and
Maryland ("the Delaware/Maryland Systems"); (iii) the July 29, 1994
acquisition of the Star Systems, (iv) the acquisition of the Crown
Systems effective January 1, 1995, (v) the June 30, 1995 divestiture
of the San Angelo Systems, (vi) the August 31, 1995 acquisition of the
CALP Systems, (vii) the November 1, 1995 acquisition of the Sammons
Systems, (viii) the January 11, 1996 acquisition of the Weatherford
System, (ix) the July 8, 1996 acquisition of the Futurevision System,
(x) the July 31, 1996 acquisition of the Frankfort System and (xi) the
October 11, 1996 divestiture of the Moses Lake System.
-23-
<PAGE> 24
(2) Each of the Operating Partnerships formerly entered into management
agreements, pursuant to which each Operating Partnership paid Marcus
Cable Management, Inc., a specified percentage of the revenues from
the systems owned and operated by such Operating Partnership, plus
certain reimbursable expenses. These agreements terminated July 29,
1994, in connection with the acquisition and financing of the Star
Systems.
(3) Homes passed refers to estimates by the Company of the approximate
number of dwelling units in a particular community that can be
connected to the Company's cable television distribution system
without any further extension of principal transmission lines.
(4) A home with one or more television sets connected to a cable system is
counted as one basic customer. Bulk accounts are included on a "basic
customer equivalent" basis in which the total monthly bill for the
account is divided by the basic monthly charge for a single outlet in
the area.
(5) Basic customers as a percentage of homes passed.
(6) Premium service units include single channel services offered for a
monthly fee per channel. A customer may purchase more than one
premium service, each of which is counted as a separate premium
service unit.
(7) Premium service units as a percentage of basic customers. This ratio
may be greater than 100% if the average customer subscribes to more
than one premium service.
(8) Average monthly revenue per basic customer equals combined revenues of
systems owned or acquired during the respective 12-month period
(exclusive of management fees) divided by the total number of basic
customers of the Company at the end of such respective period. The
weighted average number of basic customers of the Company during the
period ended December 31, 1992, 1994, 1995 and 1996 was used in place
of basic customers at the end of the respective periods to give effect
to the impact of acquisitions.
(9) EBITDA is equal to operating loss plus depreciation and amortization.
The Company believes that EBITDA is a meaningful measure of
performance because it is commonly used in the cable television
industry to analyze and compare cable television companies on the
basis of operating performance, leverage and liquidity. In addition,
the Indentures for the 13 1/2% Notes, the 11 7/8% Debentures and the
14 1/4% Notes and the Senior Credit Facility contain certain covenants
measured by computations substantially similar to those used in
determining EBITDA. However, EBITDA is not intended to be a
performance measure that should be regarded as an alternative either
to operating income or net income as an indicator of operating
performance or to cash flows as a measure of liquidity, as determined
in accordance with generally accepted accounting principles.
(10) For purposes of this computation, earnings are defined as income
(loss) before fixed charges. Fixed charges are defined as the sum of
(i) interest costs, (ii) amortization of deferred financing costs and
(iii) preferred returns on subsidiary limited partnership interests.
The interest portion of rental expense does not have a material impact
on this computation.
-24-
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
The following discussion relates to the consolidated financial
condition and results of operations of MCC and its subsidiaries.
RESULTS OF OPERATIONS
In each of the past three years, the Company has generated
substantially all of its revenues from monthly customer fees for basic, premium
and other services (such as the rental of home terminal devices and remote
control devices) and from installation income. Additional revenues were
generated from pay-per-view programming, the sale of advertising and home
shopping networks. Beginning in September and October of 1994, revenues were
also generated from management fees earned in conjunction with the CALP Systems
and the Maryland Cable Systems, respectively. On August 31, 1995, the Company
purchased the CALP Systems and thus terminated the related management
agreement. Effective January 31, 1997, the Maryland Cable Systems were sold.
As a result of these two transactions, the Company is no longer involved in the
active management of cable systems for third parties.
The Company has experienced significant increases in revenues and
EBITDA in each of the past three fiscal years. This growth was accomplished
primarily through acquisitions and through internal customer growth. During
1996, the Company acquired systems serving approximately 700 basic customers in
Weatherford, Texas on January 11, 1996, 2,600 basic customers in Mississippi
with the Futurevision Acquisition on July 8, 1996 and 5,400 basic customers in
Indiana with the Frankfort Acquisition on July 31, 1996. Also during 1996, the
Company sold its cable television system serving approximately 12,600 customers
in the state of Washington. The significant increases in revenues and EBITDA
are primarily the result of the acquisitions during 1995 which increased MCC's
basic customer base by approximately 950,000 basic customers with the
significant portions of the increase resulting from the Crown Acquisition
(193,300 customers) effective January 1, 1995, the CALP Acquisition (85,000
customers) on August 31, 1995 and the Sammons Acquisition (664,700 customers)
on November 1, 1995.
Total selling, service and system management expenses, and general and
administrative expenses have also increased significantly due to the
acquisitions mentioned above, growth within the Company's existing systems,
increased marketing efforts and the continued development of advertising sales
efforts. Until July 29, 1994, certain general and administrative services were
performed on behalf of the Company by Marcus Cable Management, Inc. (the
"Management Company"), for which the Operating Partnerships, then in existence,
paid a management fee of 5.5% of gross revenues. After that date, the
employees and related expenses of the Management Company became a part of
Operating, and Operating now records all overhead expenses relating to the
Dallas home office and the Wisconsin regional office within selling, service
and system management and general and administrative expenses, instead of
management fees.
Programming expenses have increased both in dollars and as a
percentage of revenue for the past three years due to system acquisitions,
additional programming being provided to customers and increased costs to
produce or purchase certain cable programming services. However, the increase
in the Company's size has allowed the Company to recognize certain volume
discounts. Effective April 1, 1996, the Company became a member of
TeleSynergy, a cable television cooperative buying venture representing over
5,000,000 customers. Members of this cooperative benefit from lower
programming costs per customer through consolidated buying efforts. The
TeleSynergy membership has partially offset the increased programming costs
noted above.
The significant increases in charges for depreciation and amortization
are due to acquisitions and capital expenditures related to continued
construction and upgrading of the systems. Similarly, interest expense has
increased significantly due to additional amounts outstanding under long-term
obligations which were necessary to finance the acquisitions.
-25-
<PAGE> 26
The following table sets forth for the periods indicated, certain income
statement items as a percentage of total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE FOR
PERIODS ENDED
DECEMBER 31, (1)
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Selling, service and system management 36.2 34.7 33.4
General and administrative 16.8 16.8 15.1
Management fees and expenses 0.0 0.0 3.3
Depreciation and amortization 38.3 42.2 57.8
Operating income (loss) 8.7 6.3 (9.7)
Interest 33.3 41.8 43.4
Other (income) expense (1.6) (13.1) 0.0
Subsidiary limited partner interests (3) 0.0 0.0 (9.3)
------ ------ ------
Net loss before extraordinary items (23.0)% (22.4)% (43.7)%
====== ====== ======
EBITDA (2) 47.0%(4) 48.5% 48.1%
====== ====== ======
</TABLE>
(1) All statement of operations data reflect the following acquisitions
and divestitures by the Company from the date of acquisition or sale:
(i) the July 29, 1994 acquisition of the Star Systems, (ii) the
acquisition of the Crown Systems effective January 1, 1995, (iii) the
June 30, 1995 divestiture of the San Angelo Systems, (iv) the August
31, 1995 acquisition of the CALP Systems, (v) the November 1, 1995
acquisition of the Sammons Systems, (vi) the January 11, 1996
acquisition of the Weatherford System, (vii) the July 8, 1996
acquisition of the Futurevision System, (viii) the July 31, 1996
acquisition of the Frankfort System and (ix) the October 11, 1996
divestiture of the Moses Lake System.
(2) EBITDA is equal to operating income (loss) plus depreciation and
amortization. The Company believes that EBITDA is a meaningful
measure of performance because it is commonly used in the cable
television industry to analyze and compare cable television companies
on the basis of operating performance, leverage and liquidity. In
addition, the indentures governing the 14 1/4% Notes, the 11 7/8%
Debentures and the 13 1/2% Notes and the Senior Credit Facility
contain certain covenants measured by computations substantially
similar to those used in determining EBITDA. However, EBITDA is not
intended to be a performance measure that should be regarded as an
alternative either to operating income or net income as an indicator
of operating performance or to cash flows as a measure of liquidity,
as determined in accordance with generally accepted accounting
principles. The Company has substantial noncash charges to earnings
from depreciation, amortization and interest.
(3) Represents preferred returns and allocated net income or loss to
partners who are affiliated with, but not a part of, the Company.
Subsequent to July 29, 1994, remaining subsidiary limited partner
interests are not entitled to preferred returns.
(4) Reduced EBITDA is a direct reflection of higher selling, service and
system management costs and the resulting lower operating margins of
certain of the systems acquired in 1995.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues increased from $198,294,000 for the year ended December 31, 1995
to $434,507,000 for the year ended December 31, 1996. Approximately
$231,916,000 of such increase was the result of the CALP and Sammons
Acquisitions. This increase from acquisitions was partially offset by the
divestiture of the San Angelo Systems on June 30, 1995. The San Angelo Systems
generated reported revenues of $6,022,000 for the year ended December 31, 1995.
Management fees earned by Operating decreased by $955,000. Eight and twelve
months of such fees pursuant to the management agreement between Operating and
CALP (the "CALP Agreement") and the Maryland Cable Agreement respectively, were
recorded in 1995, compared to a full year of fees earned pursuant to just the
Maryland Cable Agreement in 1996. The CALP Agreement terminated upon the
completion of the CALP Acquisition on August 31, 1995. The revenues generated
from internal and continued customer growth account for the remaining increase.
The Company's basic customers and pay units for its Systems increased from
1,154,718 and 651,121, respectively, at December 31, 1995, to 1,181,293 and
666,702, respectively, at December 31, 1996. This customer and unit growth was
-26-
<PAGE> 27
developed through the extension of existing plant infrastructure to pass
additional dwelling units, marketing promotions and continued implementation of
premium packaging, and was negatively affected by the net affect of the
Weatherford, Frankfort and Futurevision Acquisitions and Moses Lake Divestiture
(a net reduction in basic customers of 4,300).
Selling, service and system management expenses increased from $68,753,000
for the year ended December 31, 1995 to $157,197,000 for the year ended
December 31, 1996, primarily due to an $86,284,000 increase from the CALP and
Sammons Acquisitions, offset by a $2,238,000 decrease from the divestiture of
the San Angelo Systems. The remaining increase resulted primarily from growth
within the Company's existing systems, increased marketing efforts, the
continued development of advertising sales efforts and increased costs of
certain programming services. Effective April 1, 1996, the Company became a
member of TeleSynergy, a cable television cooperative buying venture
representing over 5,000,000 customers. Members of this cooperative benefit
from lower programming costs per customer through consolidated buying efforts.
The TeleSynergy membership has partially offset the increased programming
costs.
General and administrative expenses increased from $33,271,000 for the year
ended December 31, 1995 to $73,017,000 for the year ended December 31, 1996.
Approximately $35,468,000 of the increase, from the CALP and Sammons
Acquisitions, was offset by a $718,000 decrease from the divestiture of the San
Angelo Systems. The remaining increase resulted primarily from the necessary
expansion of the home office operations in order to manage the increased size
of the business and increases in operating costs due to the growth experienced
in other of the Systems.
Depreciation and amortization expense increased from $83,723,000 for the
year ended December 31, 1995 to $166,429,000 for the year ended December 31,
1996 due primarily to the CALP and Sammons Acquisitions offset by a $4,078,000
decrease from the divestiture of the San Angelo Systems. Interest expense
increased from $82,911,000 for the year ended December 31, 1995 to $144,681,000
for the comparable period in 1996, due to the inclusion of interest expense
related to the borrowings under the 14 1/4% Notes and the Senior Credit
Facility, which became effective on June 9, 1995 and August 31, 1995,
respectively (borrowings under the Senior Credit Facility were substantially
increased on November 1, 1995). Borrowings, excluding capital leases,
increased from $1,406,006,000 at December 31, 1995 to $1,436,269,000 at
December 31, 1996. The weighted average interest rate on all outstanding
indebtedness was 11.6% and 9.97% for the year ended December 31, 1995 and
December 31, 1996, respectively.
The difference between the loss before extraordinary item of $44,421,000
and $100,070,000 for the year ended December 31, 1995 and 1996, respectively,
was due to the net effects of the $26,394,000 gain and the $6,442,000 gain from
the sales of the San Angelo and Moses Lake cable television systems in 1995 and
1996, respectively. The remaining increase resulted from the increases in
operations, depreciation, amortization and interest expense as discussed above.
No losses were allocated to the subsidiary limited partner interests for
the year ended December 31, 1996 or 1995. The Company recognized a loss of
$8,395,000 from the write-off of debt issuance costs from the early retirement
of the outstanding balance under its previous senior credit facility for the
year ended December 31, 1995.
As a result of the changes explained in the foregoing paragraphs, EBITDA
increased from $96,270,000 for the year ended December 31, 1995 to $204,293,000
for the year ended December 31, 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Revenues increased from $64,747,000 for the year ended December 31, 1994 to
$198,294,000 for the year ended December 31, 1995. Approximately $135,410,000
of such increase was the result of the Star, Crown, CALP and Sammons
Acquisitions. This increase from acquisitions was partially offset by the
divestiture of the San Angelo Systems on June 30, 1995. The San Angelo Systems
generated revenues of $11,992,000 for the year ended December 31, 1994, while
revenues from the San Angelo Systems through the date of sale in 1995 were
$6,022,000. Management fees earned by Operating increased by $2,172,000.
Three and four months of such fees pursuant to the CALP and Maryland Cable
Agreements, respectively, were recorded in 1994, compared to a full year of
fees earned pursuant to the Maryland Cable Agreement in 1995 and eight months
of fees earned under the CALP Agreement. The CALP Agreement terminated upon
the completion of the CALP Acquisition on August 31, 1995. The revenues
generated from internal growth account for the remaining increase.
The Company's basic customers for its Systems increased from 222,735 at
December 31, 1994, to 1,154,718 at December 31, 1995 due primarily to the
Crown, CALP and Sammons Acquisitions along with continued direct sales efforts,
-27-
<PAGE> 28
offset by the divestiture of the San Angelo Systems. The total number of
premium units increased from 156,656 units at December 31, 1994, to 651,121
units at December 31, 1995. The Crown, CALP and Sammons Acquisitions account
for 488,115 of the increase in premium units, or 94.6% of the growth, after
considering the divestiture of the San Angelo Systems. The remaining growth
was developed through marketing promotions and continued implementation of
premium packaging.
Selling, service and system management expenses increased from $21,660,000
for the year ended December 31, 1994 to $68,753,000 for the year ended December
31, 1995, primarily due to a $48,214,000 increase from the Star, Crown, CALP
and Sammons Acquisitions, offset by a $2,236,000 decrease from the divestiture
of the San Angelo Systems. The remaining increase resulted primarily from
growth within the Company's existing systems, increased marketing efforts, the
development of more advertising sales ventures and increases in rates charged
by certain programming vendors.
General and administrative expenses increased from $9,793,000 for the year
ended December 31, 1994 to $33,271,000 for the year ended December 31, 1995.
Excluding the $18,473,000 increase from the Star, Crown, CALP and Sammons
Acquisitions and the $794,000 decrease from the divestiture of the San Angelo
Systems, general and administrative expenses increased by $6,276,000. Such
increase was mainly the result of the inclusion of expenses which were formerly
expenses of the Management Company and previously recorded as management fees
and expenses. The remaining decrease of $477,000 is primarily the result of
improved operating efficiencies, partially due to office consolidations within
the existing Marcus systems.
Depreciation and amortization expense increased from $37,412,000 for the
year ended December 31, 1994 to $83,723,000 for the year ended December 31,
1995 due mainly to the Star, Crown, CALP and Sammons Acquisitions. Interest
expense for the year ended December 31, 1994 increased from $28,105,000 to
$82,911,000 for 1995, as borrowings, excluding capital leases, increased from
$327,264,000 at December 31, 1994 to $1,406,006,000 at December 31, 1995. The
weighted average interest rate on all outstanding indebtedness was 11.0% and
11.6% for the year ended December 31, 1994 and December 31, 1995, respectively.
The sale of the San Angelo Systems on June 30, 1995 resulted in a gain of
approximately $26,409,000, which is included in other income (see note 2 of the
Notes to the Consolidated Financial Statements).
No losses were allocated to the subsidiary limited partner interests for
the year ended December 31, 1995 compared to allocated losses of $6,034,000 for
the year ended December 31, 1994, primarily due to the conversion of certain
subsidiary limited partner interests into MCC partnership units in July 1994.
The loss before subsidiary limited partner interests and extraordinary item for
the year ended December 31, 1995, was $44,421,000, compared to a loss before
subsidiary limited partnership interests and extraordinary item of $34,337,000
for the year ended December 31, 1994. The change in loss between the last two
years is due to the factors discussed above. The Company recognized losses of
$8,395,000 and $2,307,000 from the write-off of debt issuance costs from the
early retirement of the outstanding balance under its previous credit
agreements for the years ended December 31, 1995 and 1994, respectively.
As a result of the changes explained in the foregoing paragraphs, EBITDA
increased from $31,129,000 for the year ended December 31, 1994 to $96,270,000
for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has grown significantly over the past several years through
acquisitions as well as through upgrading, extending and rebuilding its
existing cable television systems. Since expansion by means of these methods
is capital intensive, the Company has relied upon various sources of financing
to meet its funding needs. These sources have included contributions from
equity investors, borrowings under various debt instruments and positive cash
flows from operations.
As of December 31, 1996, unreturned capital contributions from equity
investors totaled approximately $493,327,000. There was no capital contributed
from equity investors during 1996. The Company has an aggregate of
$1,438,471,000 of indebtedness outstanding in the form of the 11 7/8%
Debentures, the 13 1/2% Notes and the 14 1/4% Notes, borrowings under its
Senior Credit Facility and capital lease obligations. The Company has an
additional $243,000,000 of borrowing capacity under its Revolving Credit
Facility. Cash flows generated from operating activities have been positive
over the past three years and increased from $15,889,000 and $86,030,000 in
1994 and 1995, respectively, to $118,986,000 in 1996. Funding from equity
contributions, borrowings and positive cash flows from operations have been
sufficient to meet the Company's debt service, working capital and capital
expenditure requirements including the purchase costs incurred in connection
with all of the completed acquisitions.
-28-
<PAGE> 29
The Company's most significant need for capital in the next year will be to
finance the planned system upgrades, rebuilds and extensions and the purchase
of modems and home terminal devices for use in customers' homes. Certain of
the Company's systems will be upgraded or rebuilt principally to 860 MHz or 750
MHz capability over the next three years to allow for additional programming
and service offerings through networks characterized by such bandwidth
capacity. Capital expenditures are expected to approximate $167,000,000 (or
$139 per customer) in 1997. Such expenditures include certain upgrade and
rebuild projects occurring principally in the Company's cable systems located
in Alabama, California, Wisconsin and Texas. Ongoing capital expenditures in
excess of these rebuild amounts are consistent with current costs to extend and
maintain the existing networks. The Company expects to fund these capital
expenditures through cash generated from operations and available borrowings
under the Revolving Credit Facility.
Cash interest is payable monthly, quarterly and semiannually on borrowings
outstanding under Operating's Senior Credit Facility and the 11 7/8%
Debentures. No cash interest is payable on the 13 1/2% Notes until February 1,
2000 and no cash interest is payable on the 14 1/4% Notes until December 15,
2000. Maturities of all long-term debt total approximately $383,737,000 over
the next five years. The Company expects to cover both interest and principal
payments on its long-term obligations through internally generated funds.
On March 14, 1997, Operating entered into an agreement to amend its
Senior Credit Facility. The amendment provides for, among other items, a
reduction in the interest rate margins under the Senior Credit Facility as well
as increased flexibility for the Company as it relates to investments,
permitted lines of businesses and the incurrence of unsecured indebtedness. In
addition, the availability under the Revolving Credit Facility was increased by
$50,000,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 125, "Transfers of Financial Assets
and Extinguishments of Liabilities". SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The provisions of SFAS No. 125 are generally
effective for transactions occurring after December 31, 1996, however, the
effective adoption of SFAS No. 125 is not expected to have a material impact on
the Company's financial statements and related disclosures.
INFLATION
Based on the FCC's current rate regulation standards, an inflation factor
is included in the benchmark formula in establishing the initial permitted
rate. Subsequent to establishing the initial rate, an annual rate increase
based on the year-end inflation factor is permitted. In addition to annual
rate increases, certain costs over the prescribed inflation factors, defined by
the FCC as "external costs", may be passed through to customers.
Certain of the Company's expenses, such as those for wages and benefits,
equipment repair and replacement, and billing and marketing generally increase
with inflation. However, the Company does not believe that its financial
results have been adversely affected by inflation. Periods of high inflation
could have an adverse effect to the extent that increased borrowing costs for
floating rate debt may not be offset by increases in revenues. As of December
31, 1996, Operating and its subsidiaries had $205,000,000 of outstanding
borrowings under its Senior Credit Facility which are subject to floating
interest rates. The rates are based on either the Eurodollar rate, prime rate
or CD base rate, plus a margin of up to 2.75% subject to certain adjustments
based on the ratio of Operating's total debt to annualized operating cash flow.
To reduce the impact of changes in interest rates on its floating rate
long-term debt, the Company entered into certain interest rate swap agreements
with certain of the participating banks under the Senior Credit Facility. At
December 31, 1996, interest rate swap agreements covering a notional balance of
$650,000,000 were outstanding. These outstanding swap agreements mature during
1997 and 1998 and require the Company to pay a fixed rate of 5.77% to 5.81%,
plus the applicable interest rate margin. Extensions for additional periods
are available within the swap agreements at the option of the other parties
thereto.
-29-
<PAGE> 30
BUSINESS
GENERAL
At December 31, 1996, the Company owned or managed cable television
systems in 18 states, serving 1,267,520 basic customers. Since its formation in
1990, the Company has grown internally and through acquisitions, and is now the
ninth largest cable television operator in the United States. The Company's
customers were clustered as follows as of December 31, 1996.
<TABLE>
<CAPTION>
BASIC
CUSTOMERS
---------
<S> <C>
North Central Region (MN, WI) . . . . . . . . . . . 385,303
Southeast Region (AL, GA, NC, TN, KY, LA, MS) . . . 252,466
Southwest Region (TX, OK) . . . . . . . . . . . . . 187,761
East Region (DE, MD, VA, CT). . . . . . . . . . . . 175,140(1)
Midwest Region (IN, IL) . . . . . . . . . . . . . . 139,138
West Region (CA). . . . . . . . . . . . . . . . . . 127,712
---------
Total . . . . . . . . . . . . . . . . . . . . . 1,267,520
=========
</TABLE>
- ---------------
(1) Includes 86,227 basic customers in a cable television system managed
by the Company. Such systems were sold on January 31, 1997. See
"Recent Transactions -- Divestitures -- Maryland Cable Systems".
As of December 31, 1996, the Systems passed 1,863,299 homes and served
1,181,293 basic customers who subscribed for 666,702 premium units. The
President and Chief Executive Officer of MCC is Jeffrey A. Marcus. Mr. Marcus
has successfully acquired, developed and managed cable television systems since
1979.
THE CABLE TELEVISION INDUSTRY
A cable television system receives television, radio and data signals
that are transmitted to the system's headend site by means of off-air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, primarily through coaxial and, in some
instances, fiber optic cable, to customers who pay a fee for this service.
Cable systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to nonexclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
Cable television systems offer customers various levels (or "tiers")
of basic cable services consisting of off-air television signals of local
network, independent and educational stations, a limited number of television
signals from so-called superstations originating from distant cities, various
satellite-delivered, non-broadcast channels (such as Cable News Network
("CNN"), the USA Network ("USA"), Entertainment and Sports Programming Network
("ESPN") and Turner Network Television ("TNT")), and certain programming
originated locally by the cable system (such as public, governmental and
educational access programs) and informational displays featuring news,
weather, stock market and financial reports and public service announcements.
Cable systems also typically offer premium television services to their
customers for an extra monthly charge. These services (such as Home Box Office,
Showtime, The Disney Channel and regional sports networks) are
satellite-delivered channels consisting principally of feature films, live
sports events, concerts and other special entertainment features, usually
presented without commercial interruption.
A customer generally pays an initial installation charge and fixed
monthly fees for basic and premium television services and for other services
(such as the rental of home terminal devices and remote control devices). Such
monthly service fees constitute the primary source of revenues for cable
television systems. In addition to customer revenues from these services, cable
systems generate revenues from additional fees paid by customers for
pay-per-view programming of movies and special events and from the sale of
available advertising spots on advertiser-supported programming. Cable systems
also offer home shopping services to their customers, a service which pays the
systems a share of revenues from sales of products in the systems' service
areas. The cable television industry is changing rapidly due to new technology
and new alliances between cable television and telephone companies.
Distributing traditional cable television programming is only one aspect of the
industry, as potential opportunities to expand into Internet access, telephone,
educational and entertainment services on an interactive basis continue to
develop. See "Business -- Legislation and Regulation in the Cable Television
Industry."
-30-
<PAGE> 31
BUSINESS STRATEGY
OPERATING OVERVIEW
The Company's owned and managed cable television systems are operated
in six geographic areas as follows: (1) North Central (Wisconsin and
Minnesota); (2) Southeast (Alabama, Georgia, North Carolina, Tennessee,
Kentucky, Louisiana and Mississippi); (3) Southwest (Texas and Oklahoma); (4)
East (Delaware, Maryland, Virginia and Connecticut); (5) Midwest (Indiana and
Illinois); and (6) West (California). The table below sets forth certain
operating statistics for these six regions as of December 31, 1996:
OPERATING DATA
<TABLE>
<CAPTION>
Homes Basic Basic Premium Premium
Region Passed Customers Penetration Units Penetration
------ ------- --------- ----------- ----- -----------
(1) (2) (3) (4) (5)
<S> <C> <C> <C> <C> <C>
North Central 607,529 385,303 63.4% 254,220 66.0%
Southeast 352,908 252,466 71.5% 101,356 40.2%
Southwest 408,058 187,761 46.0% 128,666 68.5%
East (6) 279,090 175,140 62.8% 125,061 71.4%
Midwest 177,621 139,138 78.3% 74,994 53.9%
West 186,614 127,712 68.4% 58,139 45.5%
--------- --------- -------
Total Systems and
Maryland Cable 2,011,820 1,267,520 63.0% 742,436 58.6%
========= ========= =======
</TABLE>
- ----------------
(1) Homes passed refers to estimates by the Company of the approximate
number of dwelling units in a particular community that can be
connected to the Company's cable television distribution system
without any further extension of principal transmission lines.
(2) A home with one or more television sets connected to a cable system is
counted as one basic customer. Bulk accounts are included on a "basic
customer equivalent" basis in which the total monthly bill for the
account is divided by the basic monthly charge for a single outlet in
the area.
(3) Basic customers as a percentage of homes passed.
(4) Premium units include single channel services offered for a monthly
fee per channel. A customer may purchase more than one premium
service, each of which is counted as a separate premium service unit.
(5) Premium units as a percentage of basic customers. A customer may
purchase more than one premium service, each of which is counted as a
separate premium service unit. This ratio may be greater than 100% if
the average customer subscribes for more than one premium service.
(6) Includes 148,521 homes serving 86,227 basic customers who subscribed
for 75,734 premium units in a cable system managed by the Company
through January 31, 1997. See "Recent Transactions -- Divestitures --
Maryland Cable Systems".
GENERAL STRATEGY
The Company's business strategy focuses on three principles: (i)
forming regional clusters of cable television systems through strategic
acquisitions, internal growth and divestitures of non-strategic assets, (ii)
promoting internal growth and enhanced operating and financial performance by
streamlining operations in newly clustered systems and applying innovative
marketing techniques and (iii) upgrading systems and employing state-of-the-art
technology to enhance existing service and to develop, on a cost-effective
basis, ancillary revenue streams. This strategy was first employed by
expanding the originally acquired cable television systems in Wisconsin through
strategic acquisitions and internal growth. Upon completion of the Star and
Crown Acquisitions and the successful integration of their operations, the
Company's operations in that state more than tripled in size and the Company is
now the largest cable operator in Wisconsin.
The Sammons Acquisition elevated the Company's standing to the ninth
largest Multiple System Operator ("MSO") in the United States. The Sammons
Acquisition expanded the Company's operations from five states to nineteen
states. The Company developed an operating strategy to facilitate this
integration, which included (i) establishing a high- performance sales and
customer service culture; (ii) consolidating regional operations; (iii)
launching innovative programming packages and sales
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and marketing programs; and (iv) investing in and deploying HFC plant with
advanced analog home terminal devices. The successful integration of the
Sammons Systems has allowed the Company to continue to take advantage of
operational synergies due to its increased size and visibility in the industry.
As part of this acquisition integration, the Company underwent a
departmental restructuring, dividing managerial responsibilities into regional
system groups. At the corporate level and within each of the regional system
groups, several initiatives to grow revenues and reduce operating expenses were
undertaken which have improved the acquired systems operating performance. The
Company's objective is to increase the value of its systems and to increase
system cash flow through the following business strategies.
Emphasis on Regional Clusters and Growth Through Acquisitions. The
Company has followed a systematic approach in acquiring, operating and
developing cable television systems based on the principle of increasing
operating cash flow while maintaining a high quality standard of service. A
key element of the Company's strategy is building regional clusters of cable
television systems in proximity to its existing systems or of sufficient size
to serve as cores for new operating regions.
The Company's historical growth pattern illustrates this strategy. In
1990, the Company acquired cable television systems in the Wisconsin area and
in 1992, purchased systems in Texas and in the Delaware/Maryland area. In
1994, the Company added to its systems in Wisconsin through the acquisition of
the Star Systems in Wisconsin and Minnesota. The Crown Acquisition, in January
1995, further strengthened the Company's position, making it the largest cable
television operator in Wisconsin. The Sammons Acquisition more that doubled
the size of the Company and significantly expanded the areas served by the
Company.
Each of these acquisitions involved selected groups of cable
television systems which the Company believed had the potential for increased
basic and premium customer penetration and for growth in operating cash flow
and operating margins. The Company believes that increasing its operating
scale through strategic acquisitions, as well as through internal growth,
enhances its ability to reduce its programming costs, develop new technologies,
offer new services and improve operating margins, and thus improve its
long-term competitiveness.
In addition, the Company's specific focus on Wisconsin provided it
with further opportunities to improve operating performance by eliminating
duplicative positions and excess office locations, creating regional customer
service centers and centralizing signal distribution facilities and
consolidating corporate support functions, including accounting, billing,
marketing, technical and administration services. The Sammons Acquisition
offered the Company an opportunity to increase system cash flow through the
introduction of value-added programming packages and additional channel
launches in systems which had been previously undermarketed and underdeveloped.
The Company believes that, as a result of its clustering strategy, it
has recognized and will continue to recognize benefits through reduced
operating costs as a result of economies of scale. The Company has also
recognized economies of scale as a result of its increased size, including
programming cost savings and increased discounts on equipment purchases.
Future expansion efforts are expected to focus on acquiring or
swapping systems in proximity to existing operations, with the strategic goal
of forming or expanding clusters of systems to permit the operating
efficiencies and economies of scale similar to those achieved by the Company in
Wisconsin. Opportunistic divestitures, in areas where consolidation
opportunities do not exist, are also considered. The Company's decision to
divest the Moses Lake and San Angelo Systems, which presented limited
clustering opportunities for the Company, is illustrative of this strategy.
System Operations. Upon completion of an acquisition, the Company
generally implements extensive management, operational and organizational
changes designed to enhance operating cash flow and operating margins, while
promoting superior customer service and strong community relations. After
consolidating acquired systems with existing ones, the Company selectively
upgrades the cable plant to allow for the offering of additional programming
and services. The Company then seeks to add customers and increase revenue per
customer by aggressively marketing innovative basic, tier and premium service
packages and by developing ancillary sources of revenue, such as local spot
advertising and pay-per- view programming. The Company has been successful in
increasing revenues in its acquired systems through the introduction of
multiple premium service packages that emphasize customer value and enable the
Company to take advantage of the programming agreements offering cost
incentives based on premium service unit growth. The Company's customer and
revenue growth, in combination with economies of scale and other operating cash
flow and operating margins recognized through regional clusters, has enabled
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the Company to increase operating cash flow and operating margins of its
existing systems. At the same time, the Company has a decentralized and
locally responsive management structure which provides significant management
experience and stability and allows the Company to respond more effectively to
the specific needs of the communities it serves.
Locally Responsive Management. The Company's operations are grouped
on a regional basis into geographic areas in order to allow the flexibility and
response of decentralized management. At the same time, the systems are
combined to benefit from the Company's critical mass and economies of scale in
such areas as programming and marketing. The combined operations are grouped
into operating regions consisting of six geographic areas as follows: (1) North
Central (Wisconsin and Minnesota); (2) Southeast (Alabama, Georgia, North
Carolina, Tennessee, Kentucky, Louisiana and Mississippi); (3) Southwest (Texas
and Oklahoma); (4) East (Delaware, Maryland, Virginia and Connecticut); (5)
Midwest (Indiana and Illinois); and (6) West (California).
Innovative Marketing. The Company seeks to add customers and increase
its revenue per customer by aggressively marketing innovative basic, tier and
premium cable service packages and by developing ancillary sources of revenue
through local spot advertising sales and pay-per-view programming. The Company
believes that it has benefitted and will continue to benefit from its
aggressive marketing strategy. The Company's systems typically offer a choice
of two tiers of basic cable television programming service: a broadcast basic
programming tier (consisting generally of network and public television signals
available over-the-air in the franchise community and "superstation" signals)
and a satellite programming tier (consisting primarily of satellite-delivered
programming such as CNN, USA, ESPN and TNT). Approximately 96% of the
Company's customers subscribed to both tiers of basic service as of December
31, 1996.
The Company also offers premium programming services, both on an a la
carte basis and as part of premium service packages. The former service is
designed to increase consumer options while the latter is designed to enhance
customer value and enable the Company to take advantage of programming
agreements offering cost incentives based on premium service unit growth. The
Company has successfully promoted innovative premium service packages, such as
its Maximum Value Package program where customers are offered combinations of
premium television services such as HBO, Cinemax and Showtime as a package for
a discounted price, throughout all of its systems. Overall premium service
penetration has increased significantly in systems where such packages have
been introduced by the Company.
The Company has been and expects to continue to be successful by
actively marketing its services through direct mail, advertising, telemarketing
and door-to-door selling campaigns. The Company also seeks to add customers by
extending its cable plant to new housing developments once a potential for a
significant number of additional customers is exhibited. Through its marketing
efforts, the Company strives to attract and retain customers in order to
increase its market penetration.
Customer Service and Community Relations. The Company is dedicated to
providing superior customer service and fostering strong community relations in
the towns and cities served by its cable television systems. As part of this
effort, the Company places special emphasis on the personal and professional
growth of its employees, which includes a strong commitment to, and investment
in, training. All of the Company's employees receive extensive training in
customer service, sales and customer retention skills on a regular basis from
outside professionals and qualified management personnel. Technical employees
are encouraged to enroll in courses available from the National Cable
Television Institute and attend regularly scheduled on-site seminars conducted
by equipment manufacturers to keep pace with the latest technological
developments in the cable television industry. The Company believes that all
of these training programs improve the overall quality of employee workmanship
in the field, resulting in fewer service calls from customers, improved cable
television picture and product quality and greater system reliability. The
Company also utilizes surveys, focus groups and other research tools as another
part of its effort to determine and respond to the needs of its customers.
The Company seeks to further develop its community relations by
participating in charitable activities and other community affairs in the towns
and cities served by its cable television systems. In addition to the
Company's commitment to training its own employees, the Company places a
special emphasis on education in the communities it serves and regularly awards
scholarships to customers who intend to pursue courses of study related to the
communications field. The Company has demonstrated its commitment to education
through its active involvement in the Cable in the Classroom program, where
cable television companies throughout the United States provide schools with
cable television service free of charge. The Company also supports numerous
local charities and community causes through marketing promotions to raise
money and supplies for persons in need. Recent charity affiliations have
included campaigns for Toys for Tots, local food banks and volunteer fire and
ambulance corps.
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<PAGE> 34
Technology. The Company strives to maintain high technological
standards in its cable television systems on a cost-effective basis and is
constantly upgrading its cable plant to achieve this goal. Subsequent to
acquiring systems, in addition to implementing extensive management,
operational and organizational changes designed to enhance operating cash flow
and promote customer service and community relations, the Company selectively
upgrades the cable plant of such systems to increase channel capacity and
expand the number and variety of services available to its customers. The
Company may also seek to deploy fiber optic technology, which is capable of
carrying hundreds of video, data and voice channels, in its systems during the
system upgrade process. The Company continually monitors and evaluates new
technological developments on the basis of its ability to make optimal use of
its existing assets and to anticipate the introduction of new services and
program delivery capabilities. Currently, the Company intends to
systematically rebuild its cable systems so that within the next three years
substantially all existing systems will have a bandwidth of between 450 MHz and
860 MHz. This program should enable the Company to deliver technological
innovations to its customers as such services become commercially viable.
For fiscal year 1997, the Company is projecting approximately
$167,000,000 of capital expenditures, of which $106,000,000 is directly
committed to system rebuilds and upgrades. The capital expenditures projected
for 1997 will provide, among other benefits, a substantial increase in channel
capacity. This will permit the Company to offer additional programming through
the expansion of existing product tiers, the introduction of new product tiers,
the multiplexing of premium services and the offering of additional
pay-per-view channels.
The Company has undertaken a program that will upgrade substantially
all of its plant facilities to a minimum bandwidth of 450 MHz by the end of
1999. As part of this program, certain systems, such as those serving the
areas in and around Ft. Worth/Tarrant County (Texas), Glendale/Burbank
(California) and suburban Birmingham, Alabama, together with selected systems
in Wisconsin, Indiana, Tennessee and other states in which the Company operates
cable systems, are being upgraded to 750 MHz or 860 MHz with two-way
communication capabilities. The Company's network architecture combines two
design criteria: (1) copper reach of the coaxial cable portion of the plant
which is defined as delivering a carrier to noise specification of 48 dB and is
generally limited to less than an 8,500 foot radius from an optical node and
(2) an optical node limited to serving no greater than 500 homes with excess
fiber capacity to allow for further reducing the number of customers served
from each node. This architecture insures a highly reliable network that, when
coupled with an active return path, is capable of supporting both analog and
digital interactive services, including the deployment of cable modems.
In addition to expanding revenue opportunities, upgrading network
architecture serves to enhance picture quality and system reliability, reduce
operating costs and improve overall customer satisfaction. As of December 31,
1996, the average channel capacity of the Systems was approximately 65 analog
channels with approximately 25% of the customers served by systems with 550 MHz
or greater bandwidth capacity, and approximately 76% of its customers were
served by systems that utilize addressable technology. The Company's current
plan contemplates that by the end of 1997, its systems will have (i) an average
capacity of approximately 78 analog channels with approximately 43% of the
customers being served by systems with 550 MHz or greater bandwidth capacity,
(ii) warehoused digital spectrum of up to 200 MHz in systems serving
approximately 28% of the Company's customers and (iii) systems that utilize
addressable technology serving approximately 83% of its customers.
Through the upgrade of its cable plant, including the utilization of
addressable technology and fiber optic cable, the Company seeks to position
itself to benefit from the further development of advertising, pay-per-view and
home shopping services, as well as anticipated future services such as
video-on-demand and other interactive applications. This advanced broadband
platform has allowed the Company to enter into arrangements to provide video
and data transmission services to various educational institutions and to
pursue similar arrangements with utility providers. For example, in March
1995, the Company, together with a neighboring cable television operator, was
selected to create a two-way broadband fiber network to connect 12 school
districts in south central Wisconsin as part of a "distance education" project.
The fiber network allows live interaction among classrooms in various
locations. The Company was also awarded a contract to connect the main campus
of a technical college in the Fond du Lac, Wisconsin area to two remote
campuses in West Bend and Beaver Dam. These projects will accelerate the rate
at which the Company is able to build a technologically advanced fiber network
through shared funding with various third parties. The Company, together with
several public utilities, is also exploring certain applications of its cable
plant for digital meter reading and electronic load monitoring applications
which would provide "real time" power usage information and would assist the
utilities in monitoring and distributing power in times of peak demand.
In addition to allowing for increased channel offerings, the expanded
bandwidth of the upgraded systems creates the optimal medium for transmitting
vast amounts of information at high speed. Cable modem technology enables data
traffic to
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be carried at rates up to 100 times faster than current telephone modems. Most
current Internet users are accessing the network through narrow band telephony
technology. This telephony technology severely limits the types of content and
services that can be effectively utilized. The high speed capabilities of
cable modems eliminate the current data bottle necks and will "free up" users.
The Company currently is testing the capabilities of cable modems and its HFC
network in one of its Dallas area systems. This test is utilizing a 750 MHz
system to provide high speed Internet access to several customers. In addition
to implementing the technical and operational steps in deploying high speed
data modems utilizing HFC plant, the Company plans to explore various products
and services that can be offered utilizing the high speed data modems.
Although there can be no assurance, it is anticipated that commercial
deployment of the service in this system will begin in late 1997 with expanding
deployment in other systems in 1998.
SYSTEMS
The following information describes the Company's Systems and the
Maryland Cable Systems, as of December 31, 1996.
NORTH CENTRAL REGION
The North Central Region is comprised of the original Wisconsin
Systems acquired by the Company in 1990, the Star Systems acquired in July 1994
and the Crown Systems purchased in January 1995. Through these systems, the
Company serves customers in a majority of suburban and rural regions in
Wisconsin, and in parts of Minnesota. As of December 31, 1996, the North
Central systems consisted of approximately 9,400 miles of distribution plant
passing approximately 607,500 homes and serving approximately 385,300 basic
customers who subscribed for approximately 254,200 premium units. The North
Central Region comprises approximately 30% of the Company's customer base,
making it the largest of the Company's six operating regions.
The North Central Region serves eight districts throughout Wisconsin
and Minnesota, including certain suburbs of Milwaukee, the communities of
Janesville, Wausau and Sheboygan, Wisconsin, and the communities of Apple
Valley and Northfield, Minnesota. The areas served include a blend of rural
and suburban municipalities and counties with a diverse socioeconomic mix and
few entertainment alternatives. The Wisconsin Systems are classic in nature,
serving communities where customers require cable to receive television signals
as a result of inadequate off-air television reception due to topography or
remoteness from broadcast towers. The main features of the combined Wisconsin
Systems are high penetration rates and a stable customer base. Additionally,
certain of the former Star and Crown Systems also are located in expanding
communities with strong potential for future growth.
The consolidations and expenditures that the Company has made and
plans to make should provide increased operating, technical and marketing
efficiencies, including expansion of advertising sales opportunities and wider
distribution of addressable converter technology to expand the customer base
having access to special event and movie pay-per-view services. The Company
plans to develop similar revenue streams in other systems in the Wisconsin
operating region by consolidation and through economies of scale afforded by
the Star and Crown Systems.
SOUTHEAST REGION
The Company owns four groups of systems in Alabama, Georgia,
Tennessee/North Carolina/Kentucky and Mississippi/Louisiana. As of December
31, 1996, these systems consisted of approximately 7,600 miles of distribution
plant passing approximately 352,900 homes and serving approximately 252,500
basic customers who subscribed for approximately 101,400 premium units. The
Southeast Region comprises approximately 20% of the Company's customer base,
making it the second largest of the Company's six operating regions. The
Alabama systems, which serve approximately 39% of the customers in the
Southeast Region, consisted of approximately 3,400 miles of distribution plant
passing approximately 142,400 homes and serving approximately 98,500 basic
customers who subscribed for approximately 44,100 premium units. The Alabama
systems serve communities surrounding the city of Birmingham as well as the
towns of Tuskegee and Russellville. The Georgia systems serve rural areas
straddling the Georgia-Alabama border including the city of West Point. The
Tennessee/North Carolina/Kentucky cluster serves primarily suburban and rural
areas including the Tennessee cities of Bristol, Johnson City and Morristown,
and Middlesboro, Kentucky and Waynesville, North Carolina. The
Mississippi/Louisiana cluster, located primarily in southwestern Mississippi,
serves mainly the communities of Brookhaven, Natchez, McComb and Pascagoula,
Mississippi.
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SOUTHWEST REGION
The Company owns several clusters of systems in the Dallas/Ft. Worth
metropolitan area and in northwest Texas and southwest Oklahoma. The
Dallas/Ft. Worth systems are primarily urban and suburban in nature while the
northwest Texas and southwest Oklahoma systems are located in relatively rural
areas. As of December 31, 1996, the Southwest Region consisted of
approximately 4,800 miles of distribution plant passing approximately 408,100
homes and serving approximately 187,800 basic customers who subscribed for
approximately 128,700 premium units. The Southwest Region comprises
approximately 15% of the Company's customer base, making it the third largest
of the six operating regions.
The Dallas/Ft. Worth systems serve the communities of Ft. Worth,
Tarrant County, Denton, Duncanville, University Park, Highland Park and
surrounding areas. Northern Tarrant County is one of the fastest growing areas
in Texas, and its dense concentration of businesses provides opportunities for
the future provision of telecommunications services, including the expansion of
existing alternate access businesses. The Dallas/Ft. Worth cluster also
includes several upper middle class residential communities including the Park
Cities and Duncanville, both suburbs of Dallas with median household incomes in
excess of $50,000. The service area includes three universities: Texas
Christian University, Southern Methodist University and the University of North
Texas, as well as several colleges. The northwest Texas and southwest Oklahoma
systems serve primarily working class communities with stable economies in
Pampa, Borger and Dumas, Texas and Clinton and Elk City, Oklahoma.
EAST REGION
The East region comprises approximately 14% of the Company's customer
base (including the Maryland Cable System). As of December 31, 1996, the East
Region consisted of approximately 3,400 miles of distribution plant passing
approximately 279,100 homes and serving approximately 175,100 basic customers
who subscribed for 125,100 premium units.
The Company currently owns two groups of systems located in the
center of the Delmarva peninsula. As of December 31, 1996, the
Delaware/Maryland Systems consisted of approximately 1,200 miles of
distribution plant passing approximately 39,900 homes and serving approximately
26,500 basic customers who subscribed for approximately 21,000 premium units.
The Delaware/Maryland Systems serve communities in middle Delaware and adjacent
portions of eastern Maryland. In combination, the two systems serve a
geographic area ranging from the suburban areas of Dover, Delaware on the
northeast, to the suburban areas of Georgetown, Maryland on the southeast and
west to the Chesapeake Bay at Cambridge. The population includes diverse
middle, upper middle and working class communities.
The Company's East Region also includes systems located in Waterbury,
Connecticut and Petersburg, Virginia. The Waterbury system serves the
community of Waterbury, Connecticut and surrounding areas. The population is
predominantly middle class, with many professionals and state government
employees due to its proximity to Hartford. The Petersburg system, located
near Richmond, serves primarily suburban, middle class communities. As of
December 31, 1996, these systems consisted of approximately 900 miles of
distribution plant passing approximately 90,700 homes and serving approximately
62,400 basic customers who subscribed for approximately 28,400 premium units.
Maryland Cable Systems. As of December 31, 1996, the Company managed
cable television systems owned by Maryland Cable, a company controlled by an
affiliate of Goldman Sachs, pursuant to a management agreement. The Maryland
Cable Systems serve communities in and around Prince Georges County, Maryland.
As of December 31, 1996, the Maryland Cable Systems consisted of approximately
1,300 miles of distribution plant passing approximately 148,500 homes and
serving approximately 86,200 basic customers who subscribed for approximately
75,700 premium units. The Maryland Cable Systems were sold on January 31,
1997. See "Recent Transactions -- Divestitures -- Maryland Cable Systems".
MIDWEST REGION
The Company owns two groups of systems clustered in Indiana and
Illinois. As of December 31, 1996, the Midwest Region consisted of
approximately 3,000 miles of distribution plant passing approximately 177,600
homes and serving approximately 139,100 basic customers who subscribed for
approximately 75,000 premium units. The Midwest Region comprises approximately
11% of the Company's customer base making it the fifth largest of the six
operating regions. These systems serve a mix of suburban areas and rural
communities (including Crawfordsville, Connersville, Columbus, New Albany,
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Logansport, Monticello and Frankfort, Indiana and Ottawa and Jacksonville,
Illinois), with significant business presence and strong, stable economies.
WEST REGION
The Company operates two clusters of systems in the West Region. The
two clusters are in the State of California, with one being located in the
Glendale/Burbank/Whittier region of Los Angeles County in southern California
and the other being located in the Turlock region of northern California.
As of December 31, 1996, the West Region consisted of approximately
1,400 miles of distribution plant passing approximately 186,600 homes and
serving approximately 127,700 basic customers who subscribed for 58,100 premium
units. The West region comprises approximately 10% of the Company's customer
base.
The Glendale/Burbank cluster serves the communities of Glendale and
Burbank, which are upper middle class suburban areas. Whittier also is an
urban/suburban, upper middle class community. Due to signal shadowing in the
area from the San Gabriel mountains and hilly terrain, both of the southern
California systems are reception-based markets. The Turlock system serves the
suburban and rural areas outside of Modesto, in the San Joaquin Valley. Due to
its location in a multiple-ADI market, its distance from Sacramento, San Jose
and Fresno and the generally poor off-air signal reception, this market is also
reception-based with 81% basic penetration.
TECHNOLOGY
At December 31, 1996, approximately 76% of the Company's customers are
served by systems which utilize addressable technology (i.e., systems having
the capacity to offer addressable services if addressable converters are
present in customer homes), and approximately 40% of the Company's customers
have addressable converters. Addressable technology enables a cable television
system operator to activate, from the headend site or another central location,
the cable television services delivered to each customer having an addressable
converter. With addressable technology, the Company can upgrade or downgrade
services to a customer immediately, without the delay or expense associated
with dispatching a technician to the home. Addressable technology also allows
the Company to offer pay-per-view services, reduces premium service theft, and
through the ability to deactivate service automatically, to disconnect
delinquent customer accounts. In certain of its systems, the Company has taken
active steps to remove from service older addressable converter equipment which
was costly to maintain. Through this equipment replacement, the Company has
enhanced customer convenience and revenue growth through increased premium
service orders and simultaneously has achieved significant reductions in
service costs. The Company's current plan contemplates that by the end of
1997, its systems will have an average capacity of approximately 78 analog
channels with approximately 43% of the customers being served by systems with
550 MHz or greater bandwidth capacity, warehoused digital spectrum of up to 200
MHz in systems serving approximately 28% of the Company's customers, and
approximately 83% of its customers will be served by systems that utilize
addressable technology.
The Company continually monitors and evaluates new technological
developments on the basis of its ability to make optimal use of its existing
assets and to anticipate the introduction of new services and program delivery
capabilities. The use of fiber optic cable as an enhancement to coaxial cable
is playing a major role in expanding channel capacity and improving the
performance of cable television systems. Fiber optic cable is capable of
carrying hundreds of video, data and voice channels. To date, the Company has
sought to implement fiber optic technology in portions of its systems,
primarily by undertaking fiber-to-the-node upgrades. Such upgrades use fiber
optic cable to carry signals from a systems's headend to multiple locations
within the system reducing the need to deploy amplifiers, thereby enhancing
signal quality and reducing service interruptions. The Company plans to
continue to deploy fiber-to-the-node to upgrade and expand channel capacity,
using both analog and digital transmission techniques, to interconnect systems
and groups of systems into regional networks.
New technological advances that are anticipated to be commercially
viable in the next few years include digital compression and expanded bandwidth
amplifiers, which offer cable operators the potential for a dramatic expansion
of channel capacity, along with alternative communications delivery systems.
As this new technology and related services become available, the Company
intends to carefully assess the economic return and market demand for such
technology and services in order for the Company to prudently implement
additional services in the most cost-effective manner.
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PROGRAMMING
The Company has various contracts to obtain basic and premium
programming for its systems from program suppliers whose compensation is
typically based on a fixed fee per customer. The Company's programming
contracts are generally for a fixed period of time and are subject to
negotiated renewal. Some program suppliers provide volume discount pricing
structures or offer marketing support to the Company. In particular, the
Company has negotiated programming agreements with premium service suppliers
that offer cost incentives to the Company under which premium service unit
prices decline as certain premium service growth thresholds are met. The
Company's successful marketing of multiple premium service packages emphasizing
customer value has enabled the Company to take advantage of such cost
incentives.
The Company's cable programming costs have increased in recent years
and are expected to continue to increase due to system acquisitions, additional
programming being provided to customers, increased cost to produce or purchase
cable programming, inflationary increases and other factors. Program suppliers
may continue to increase rates. However, under the new FCC rules, the cable
operator may have the ability to mark up these increases by 7.5% and pass the
increase on to customers. In lieu of the 7.5% markup, the Company had the
right to recover up to $1.20 per customer between January 1, 1995 and 1997 for
additional channels added to Cable Programming Service Tiers ("CPSTs") (not to
exceed $0.20 per added channel) and up to $0.30 per customer over that same
period for aggregate license fees. Beginning on January 1, 1997, the cap for
additional channels increased to $1.40. After January 1, 1998, the optional
rate increase for additional channels will lapse. Although there can be no
assurances, the Company believes it will continue to have access to cable
programming services at reasonable prices.
Effective April 1, 1996, the Company became a member of TeleSynergy, a
cable television cooperative buying venture representing over 5,000,000
customers. Members of this cooperative benefit from lower programming costs
per customer through consolidated buying efforts. The TeleSynergy membership
has partially offset the increased programming costs noted above.
FRANCHISES
Cable television systems are generally constructed and operated under
nonexclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
the provision of free service to schools and certain other public institutions;
and the maintenance of insurance, indemnity bonds and customer service
standards. The provisions of local franchises are subject to federal
regulation under the 1984 Cable Act and the 1992 Cable Act, now consolidated
under the 1996 Telecom Act.
As of December 31, 1996, the Company operated pursuant to 751
franchises. These nonexclusive franchises provide for the payment of fees to
the issuing authority. Annual franchise fees imposed on the systems range up
to the 5% federally mandated cap on gross revenues generated by a system. In
substantially all of the Systems, such franchise fees are passed through to the
customers directly as an addition to the rates for cable television service.
The table below illustrates the grouping of the franchises by date of
expiration and presents the approximate number and percentage of basic service
customers for each group as of December 31, 1996.
<TABLE>
<CAPTION>
Year of Percentage
Franchise Number of Number of of Total
Expiration Communities Customers Customers
- ----------- ----------- --------- ---------
<S> <C> <C> <C>
Prior to 1997 (1)................................. 60 90,954 7.2%
1997-2001......................................... 247 405,100 32.0%
2002 and after.................................... 405 733,311 57.8%
Other (2)......................................... 39 38,155 3.0%
--- --------- -----
Total............................................. 751 1,267,520 100.0%
=== ========= =====
</TABLE>
- ----------------
(1) All expired franchises have open extensions pending renegotiation of
long-term renewals.
(2) The Company operates a number of systems that serve multiple
communities and, in some instances, portions of such systems extend
into jurisdictions for which the Company believes no franchise is
necessary.
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The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process where franchise renewal will not be unreasonably
withheld or, if renewal is withheld, the franchise authority must pay the
operator the "fair market value" for the system covered by such franchise. In
addition, the 1984 Cable Act establishes comprehensive renewal procedures that
require that an incumbent franchisee's renewal application be assessed on its
own merit and not as part of a comparative process with competing applications.
The Company believes that it generally has good relationships with its
franchising communities. Neither the Company nor its predecessor entities
controlled by Mr. Marcus (who has owned and operated cable television systems
since 1979) has ever had a franchise revoked or failed to have a franchise
renewed. In addition, all of the franchises of the Company and such
predecessors eligible for renewal have been renewed or extended at or prior to
their stated expirations, and no material franchise community has refused to
consent to a franchise transfer to the Company or any such predecessor.
COMPETITION
Cable television systems face competition from alternative methods of
receiving and distributing television signals such as Direct Broadcast
Satellites ("DBS") and from other sources of news, information and
entertainment such as off-air television broadcast programming, newspapers,
movie theaters, live sporting events, interactive computer services and home
video products, including videotape cassette recorders. The extent to which a
cable communications system is competitive depends, in part, upon the cable
system's ability to provide, at a reasonable price to customers, a greater
variety of programming and other communications services than those which are
available off-air or through other alternative delivery sources. See "--
Legislation and Regulation in the Cable Television Industry."
The 1996 Telecom Act enables local telephone companies and others to
provide a wide variety of video services competitive with services provided by
cable systems and to provide cable services directly to customers. Various
local telephone companies currently are seeking to provide video programming
services within their telephone service areas through a variety of distribution
methods. Cable systems could be placed at a competitive disadvantage if the
delivery of video programming services by local telephone companies becomes
widespread since telephone companies may not be required, under certain
circumstances, to obtain local franchises to deliver such video services or to
comply with the variety of obligations imposed upon cable systems under such
franchises. Issues of cross-subsidization by local telephone companies of
video and telephony services also pose strategic disadvantages for cable
operators seeking to compete with local telephone companies who provide video
services. The Company cannot predict at this time the likelihood of success of
any video programming ventures by local telephone companies or the impact on
the Company of such competitive ventures.
Cable systems generally operate pursuant to franchises granted on a
nonexclusive basis. The 1992 Cable Act gives local franchising authorities
jurisdiction over basic cable service rates and equipment in the absence of
"effective competition", prohibits franchising authorities from unreasonably
denying requests for additional franchises and permits franchising authorities
to operate cable systems. It is possible that a franchising authority might
grant a second franchise to another company containing terms and conditions
more favorable than those afforded the Company. Well-financed businesses from
outside the cable industry (such as the public utilities that own the poles on
which cable is attached) may become competitors for franchises or providers of
competing services. The costs of operating a cable system where a competing
service exists will be substantially greater than if there were no competition
present. Although the potential for competition exists, there are presently
only two competing systems located in each of the East and Midwest operating
regions, which represent an aggregate of approximately 1,250 of the homes in
the Company's franchise areas. The Company is not aware of any other company
that is actively seeking local governmental franchises for areas presently
served by the Company.
Cable operators face additional competition from private Satellite
Master Antenna Television ("SMATV") systems that serve condominiums, apartment
and office complexes and private residential developments. The operators of
these SMATV systems often enter into exclusive agreements with building owners
or homeowners' associations. Due to the widespread availability of reasonably
priced earth stations, SMATV systems now offer both improved reception of local
television stations and many of the same satellite-delivered program services
offered by franchised cable systems. Various states have enacted laws to
provide franchised cable systems access to private complexes. These laws have
been challenged in the courts with varying results. Additionally, the 1984
Cable Act gives a franchised cable operator the right to use existing
compatible easements within its franchise area; however, there have been
conflicting judicial decisions interpreting the scope of this right,
particularly with respect to easements located entirely on private property.
The ability of the Company to compete for customers
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in residential and commercial developments served by SMATV operators is
uncertain. The 1996 Telecom Act broadens the definition of SMATV systems not
subject to local franchising regulation and gives cable operators greater
flexibility in pricing cable services provided to customers in condominiums,
apartment and office complexes and private residential developments.
Competition for the Company's customers is likely to increase from
medium power and higher power DBS that use higher frequencies to transmit
signals that can be received by dish antennas much smaller in size than the
traditional Home Satellite Dish ("HSD"). Primestar distributes a multi-channel
programming service via a medium power communications satellite to HSDs of
approximately 3 feet in diameter. DirecTv, Inc., United States Satellite
Broadcasting Corporation and EchoStar Communication Corporation transmit from
high power satellites and generally use smaller dishes to receive their
signals. Alphastar, Inc. began offering medium power service in the second
quarter of 1996. MCI Communications, Corp/News Corp. has announced that it
expects to commence offering high power service by the end of 1997. DBS
operators have the right to distribute substantially all of the significant
cable television programming services currently carried by cable television
systems. The Company expects that competition from DBS will continue to grow.
DBS has advantages and disadvantages as an alternative means of
distributing video signals to the home. Among the advantages are that the
capital investment (although initially high) for the satellite and uplinking
segment of a DBS system is fixed and does not increase with the number of
customers receiving satellite transmissions; that DBS is not currently subject
to local regulation of service and prices or required to pay franchise fees;
and that the capital costs for the ground segment of a DBS system (the
reception equipment) are directly related to, and limited by, the number of
service customers. DBS's disadvantages presently include limited ability to
tailor the programming package to the interests of different geographic
markets, such as providing local news, other local origination services and
local broadcast stations; signal reception being subject to line of sight
angles; substantial upfront costs for customers; significant costs to customers
for providing service on multiple television sets within a single home; and
limited ability to locally service the customer's reception equipment.
Although the effect of competition from these DBS services cannot be
specifically predicted, it is clear there has been significant growth in DBS
customers and the Company assumes that such DBS competition will continue as
developments in technology continue to increase satellite transmitter power and
decrease the cost and size of equipment needed to receive these transmissions.
Another alternative method of distribution are Multichannel,
Multipoint Distribution Service ("MMDS systems"), which deliver programming
services over microwave channels received by customers with special antennas.
MMDS systems are less capital intensive, are not required to obtain local
franchises or pay franchise fees and are subject to fewer regulatory
requirements than cable television systems. The 1992 Cable Act also ensures
that MMDS systems have access to acquire all significant cable television
programming services. Although there are relatively few MMDS systems in the
United States currently in operation, virtually all markets have been licensed
or tentatively licensed. The FCC has taken a series of actions intended to
facilitate the development of wireless cable systems as an alternative means of
distributing video programming, including reallocating the use of certain
frequencies to these services and expanding the permissible use of certain
channels reserved for educational purposes. The FCC's actions enable a single
entity to develop an MMDS system with a potential of up to 35 analog channels,
and thus compete more effectively with cable television. Developments in
digital compression technology will significantly increase the number of
channels that can be made available from MMDS. Further, in 1995, several large
telephone companies acquired significant ownership in numerous MMDS companies.
This infusion of money into the MMDS industry was expected to accelerate its
growth and its competitive impact. However, in 1996, telephone company backing
of MMDS appeared to diminish as both Bell Atlantic and NYNEX suspended their
investments in two major MMDS companies. Finally, an emerging technology,
Local Multipoint Distribution Services ("LMDS"), could also pose a threat to
the cable television industry, if and when it becomes established. LMDS,
sometimes referred to as cellular television, could have the capability of
delivering more than 100 channels of video programming to a customer's home.
The potential impact of LMDS is difficult to assess due to the newness of the
technology and the absence of any current fully operational LMDS systems.
Although long distance telephone companies have no legal prohibition
on the provision of video services, they historically have not been providers
of such services in competition with cable systems. However, such companies
may prove to be a source of competition in the future. The long distance
companies are expected to expand into local markets with local telephone and
other offerings (including video services) in competition with the Regional
Bell Operating Companies ("RBOCs").
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<PAGE> 41
Cable-like programming can also be delivered through on-line computer
services on the Internet such as CompuServe. However, due to its substandard
picture quality and transmission speed, the technology of these services
presently is not comparable to cable television service. The Company is unable
to predict the effect of competition from on-line services on its future
operations.
Other new technologies may become competitive with nonentertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information
useful both to consumers and businesses. The FCC also permits commercial and
noncommercial FM stations to use their subcarrier frequencies to provide
nonbroadcast services including data transmissions. The FCC established an
over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with
informational and data services. The expansion of fiber optic systems by
telephone companies and other common carriers are providing facilities for the
transmission and distribution to homes and businesses of video services,
including interactive computer-based services like the Internet, data and other
nonvideo services. The FCC has held spectrum auctions for licenses to provide
Personal Communications Services ("PCS"). PCS will enable license holders,
including cable operators, to provide voice and data services as well as video
programming.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environments are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or
future developments might have on the cable industry or on the operations of
the Company.
LEGISLATION AND REGULATION IN THE CABLE TELEVISION INDUSTRY
The operation of cable television systems is extensively regulated by
the FCC, some state governments and most local governments. On February 8,
1996, the President signed into law the 1996 Telecom Act. This new law alters
the regulatory structure governing the nation's telecommunications providers.
It removes barriers to competition in both the cable television market and the
local telephone market. Among other things, it reduces the scope of cable rate
regulation.
The 1996 Telecom Act required the FCC to undertake a host of
implementing rulemakings, the final outcome of which cannot yet be determined.
Moreover, Congress and the FCC have frequently revisited the subject of cable
television regulation and may do so again. Future legislative and regulatory
changes could adversely affect the Company's operations. This section briefly
summarizes key laws and regulation currently affecting the growth and
operations of the Company's cable systems.
Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry. Under that regime, all
cable systems are subject to rate regulation, unless they face "effective
competition" in their local franchise area. Under the 1992 Cable Act, the
incumbent cable operator can demonstrate "effective competition" by showing
either low penetration (less than 30% of the local population) or the presence
(measured collectively as 50% availability, 15% customer penetration) of other
Multichannel Video Programming Distributors ("MVPDs"). The 1996 Telecom Act
expands the existing definition of "effective competition" to create a special
test for a competing MVPD (other than a DBS distributor) affiliated with a
Local Exchange Carrier ("LEC"). There is no penetration minimum for an LEC
affiliate to qualify as an effective competitor, but it must offer comparable
programming services in the franchise area.
Although the FCC establishes all cable rate rules, local government
units, commonly referred to as Local Franchising Authorities ("LFAs") are
primarily responsible for administering the regulation of the lowest level of
cable, the Basic Service Tier ("BST"), which typically contains local broadcast
stations and public, educational, and government access channels. Before an
LFA begins BST rate regulation, it must certify to the FCC that it will follow
applicable federal rules, and many LFAs have voluntarily declined to exercise
this authority. LFAs also have primary responsibility for regulating cable
equipment rates. Under federal law, charges for various types of cable
equipment must be unbundled from each other and from monthly charges for
programming services. The 1996 Telecom Act allows operators to aggregate costs
for broad categories of equipment across geographic and functional lines. This
change should facilitate the introduction of new technology to a broader
customer base.
The FCC itself directly administers rate regulation of any CPST, which
typically contains satellite-delivered programming. Under the 1996 Telecom
Act, the FCC can regulate CPST rates only if an LFA first receives at least two
complaints from local customers within 90 days of a CPST rate increase and then
files a formal complaint with the FCC. When new CPST rate complaints are
filed, the FCC now considers only whether the incremental increase is justified
and will not reduce the previously established CPST rate.
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<PAGE> 42
Under the FCC's rate regulations, the Company was required to reduce
its BST and CPST rates in 1993 and 1994, and has since had its rate increases
governed by a complicated price cap scheme that allows for the recovery of
inflation and certain increased costs, as well as providing some incentive for
expanding channel carriage. The FCC has modified its rate adjustment
regulations to allow for annual rate increases and to minimize previous
problems associated with regulatory lag. Operators also have the opportunity
of bypassing this "benchmark" scheme in favor of traditional cost-of-service
regulation in cases where the latter methodology appears favorable. However,
the FCC significantly limited the inclusion in the rate base of acquisition
costs in excess of the book value of tangible assets. As a result, the Company
pursued cost of service justifications in only a few cases. The FCC has also
provided operators with a mechanism to recover costs associated with a system
rebuild. Using a cost-of-service approach, the amounts produced by the FCC's
calculation are added to the BST & CPST rates discussed above and recovered
over a 10 year period. Premium cable service offered on a per channel or per
program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product.
The Company believes that it has materially complied with provisions
of the Cable Acts, including rate setting provisions promulgated by the FCC on
April 1, 1993. However, in jurisdictions which have chosen not to certify,
refunds covering a one-year period on basic service may be ordered if the
Company is regulated at a later date and is unable to justify its rates through
a benchmark or cost-of-service filing. The amount of refunds, if any, which
may be payable by the Company in the event that these systems' rates are
successfully challenged by franchising authorities is not currently estimable.
During the year ended December 31, 1994, the Company paid total cumulative rate
refunds of approximately $944,000 for 1993 and 1994 to its cable customers as a
result of rate orders issued by certain franchise authorities within certain
cable systems which have subsequently been sold. During 1995, a total of
approximately $25,000 was paid for rate refunds. Additionally, there are rate
complaints currently pending at the FCC concerning certain of the Company's
CPST's. Pursuant to the re-regulation covering the time period from September
1, 1993 through May 15, 1994, there are currently under review by the FCC 18
cost-of-service filings and two benchmark filings. Pursuant to the
re-regulation covering the time period from May 1994 to the date hereof, there
are 48 benchmark filings under review by the FCC. These pending reviews
potentially affect 351,000 of the Company's basic customers. During 1996,
there were no rate refunds issued. Reviews involving certain of the Company's
systems serving approximately 75,000 customers have been completed in which the
FCC found no errors in the Company's rate calculations. As a result, the
related complaints were denied. If the FCC determines that the Company's CPST
rates are unreasonable, it has the authority to order the Company to reduce
such rates and to refund to customers any overcharges with interest occurring
from the filing date of the rate complaint at the FCC. The amount of refunds,
if any, which may be required by the FCC in the event the Company's CPST rates
are found to be unreasonable is not currently estimable.
The 1996 Telecom Act sunsets FCC regulation of CPST rates for all
systems (regardless of size) on March 31, 1999. It also relaxes existing
uniform rate requirements by specifying that uniform rate requirements do not
apply where the operator faces "effective competition," and by exempting bulk
discounts to multiple dwelling units, although complaints about predatory
pricing still may be made to the FCC.
Cable Entry Into Telecommunications. The 1996 Telecom Act provides
that no state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications services. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way.
Although the 1996 Telecom Act clarifies that traditional cable franchise fees
may be based only on revenues related to the provision of cable television
services, it also provides that LFAs may require reasonable, competitively
neutral compensation for management of the public rights-of-way when cable
operators provide telecommunications service. The 1996 Telecom Act prohibits
LFAs from requiring cable operators to provide telecommunications service or
facilities as a condition of a franchise grant, renewal or transfer, except
that LFAs can seek "institutional networks" as part of such franchise
negotiations. The favorable pole attachment rates afforded cable operators
under federal law can be increased by utility companies owning the poles during
a five year phase in period beginning in 2001, if the cable operator provides
telecommunications services, as well as cable service over its plant.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Telecom Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. Review of the FCC's
initial interconnection order is now pending before the Eighth Circuit Court of
Appeals.
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Telephone Company Entry Into Cable Television. The 1996 Telecom Act
allows telephone companies to compete directly with cable operators by
repealing the historic telephone company/cable cross-ownership ban and the
FCC's video dialtone regulations. This will allow LECs, including the RBOCs,
to compete with cable operators both inside and outside their telephone service
areas. Because of their resources, LECs could be formidable competitors to
traditional cable operators, and certain LECs have begun offering cable service
to a very limited number of households.
Under the 1996 Telecom Act, an LEC providing video programming to
customers will be regulated as a traditional cable operator (subject to local
franchising and federal regulatory requirements), unless the LEC elects to
provide its programming via an Open Video System ("OVS"). LECs providing
service through an OVS can proceed without a traditional cable franchise,
although an OVS operator will be subject to general rights-of-way management
regulations and can be required to pay franchise fees to the extent it provides
cable services. To be eligible for OVS status, the LEC itself cannot occupy
more than one-third of the system's activated channels when demand for channels
exceeds supply. Nor can it discriminate among programmers or establish
unreasonable rates, terms or conditions for service.
Although LECs and cable operators can now expand their offerings
across traditional service boundaries, the general prohibitions remain on LEC
buyouts (i.e., any ownership interest exceeding 10 percent) of co-located cable
systems, cable operator buyouts of co-located LEC systems, and joint ventures
between cable operators and LECs in the same market. The 1996 Telecom Act
provides a few limited exceptions to this buyout prohibition. The "rural
exemption" permits buyouts where the purchased system serves an area with fewer
than 35,000 inhabitants outside an urban area, and the cable system plus any
other system in which the LEC has interest do not represent 10% or more of the
LECs telephone service area. The 1996 Telecom Act also provides the FCC with
the power to grant waivers of the buyout prohibition in cases where: (1) the
cable operator or LEC would be subject to undue economic distress; (2) the
system or facilities would not be economically viable; or (3) the
anticompetitive effects of the proposed transaction are clearly outweighed by
the effect of the transaction in meeting community needs. The LFA must approve
any such waiver.
Electric Utility Entry Into Telecommunications/Cable Television. The
1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating
authority. Again, because of their resources, electric utilities could be
formidable competitors to traditional cable systems.
Additional Ownership Restrictions. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership (including broadcast
network/cable restrictions), but leaves in place existing FCC regulations
prohibiting local cross-ownership between television stations and cable
systems. The 1996 Telecom Act also eliminates the three year holding period
required under the 1992 Cable Act's "anti-trafficking" provision. The 1996
Telecom Act leaves in place existing restrictions on cable cross-ownership with
SMATV and MMDS facilities, but lifts those restrictions where the cable
operator is subject to effective competition. In January 1995, however, the
FCC adopted a regulation which permits cable operators to own and operate SMATV
systems within their franchise area, provided that such operation is consistent
with local cable franchise requirements.
Must Carry/Retransmission Consent. The 1992 Cable Act contains
broadcast signal carriage requirements that allow local commercial television
broadcast stations to elect once every three years to require a cable system to
carry the station ("must carry") or negotiate for payments for granting
permission to the cable operator to carry the station ("retransmission
consent"). Less popular stations typically elect "must carry," and more
popular stations typically elect "retransmission consent." Must carry requests
can dilute the appeal of a cable system's programming offerings, and
retransmission consents demands may require substantial payments or other
concessions. Either option has a potentially adverse affect on the Company's
business. Additionally, cable systems are required to obtain retransmission
consent for all "distant" commercial television stations (except for commercial
satellite-delivered independent "superstations" such as WTBS).
Access Channels. LFAs can include franchise provisions requiring
cable operators to set aside certain channels for public, educational and
governmental access programming. Federal law also requires a cable system with
36 or more channels to designate a portion of its channel capacity (either 10%
or 15%) for commercial leased access by unaffiliated third parties. The FCC
has adopted rules regulating the terms, conditions and maximum rates a cable
operator may charge for use of these designated channel capacity, but use of
commercial leased access channels has been relatively limited. In February of
1997,
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<PAGE> 44
the FCC released revised rules which mandate a modest rate reduction and could
make commercial leased access a more attractive option for third party
programmers.
"Anti-Buy Through" Provisions. Federal law requires each cable system
to permit customers to purchase video programming offered by the operator on a
per-channel or a per-program basis without the necessity of subscribing to any
tier of service (other than the basic service tier) unless the system's lack of
addressable home terminal devices or other technological limitations does not
permit it to do so. The statutory exemption for cable systems that do not have
the technological capability to comply expires in December 2002, but the FCC
may extend that period if deemed necessary.
Access to Programming. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Act precludes video programmers affiliated with cable companies from
favoring cable operators over competitors and requires such programmers to sell
their programming to other multichannel video distributors (such as DBS and
MMDS). This provision limits the ability of vertically integrated cable
programmers to offer exclusive programming arrangements to the Company.
Other FCC Regulations. In addition to the FCC regulations noted
above, there are other FCC regulations covering such areas as equal employment
opportunity, customer privacy, programming practices (including, among other
things, syndicated program exclusivity, network program nonduplication, local
sports blackouts, indecent programming, lottery programming, political
programming, sponsorship identification, and children's programming
advertisements), registration of cable systems and facilities licensing,
maintenance of various records and public inspection files, frequency usage,
lockbox availability, antenna structure notification, tower marking and
lighting, consumer protection and customer service standards, technical
standards and consumer electronics equipment compatibility. The FCC is
expected to impose new Emergency Alert System requirements on cable operators
this year. The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
Two pending FCC proceedings of particular competitive concern involve
inside wiring and navigational devices. The first of such proceedings is
considering ownership of cable wiring located inside multiple dwelling unit
complexes. If the FCC concludes that such wiring belongs to, or can be
unilaterally acquired by the complex owner, it will become easier for complex
owners to terminate service from the incumbent cable operator in favor of a new
entrant. The second of such proceedings is considering whether cable customers
should be permitted to purchase cable converters from third party vendors. If
the FCC concludes that such distribution is required, and does not make
appropriate allowances for signal piracy concerns, it may become more difficult
for cable operators to combat theft of service.
Copyright. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool (that varies depending on the size
of the system and the number of distant broadcast television signals carried),
cable operators can obtain blanket permission to retransmit copyrighted
material on broadcast signals. The possible modification or elimination of
this compulsory copyright license is subject to continuing review and could
adversely affect the Company's ability to obtain desired broadcast programming.
In addition, the cable industry pays music licensing fees to Broadcast Music,
Inc. ("BMI") and is negotiating a similar arrangement with the American Society
of Composers, Authors and Publishers ("ASCAP"). Copyright clearances for
nonbroadcast programming services are arranged through private negotiations.
State and Local Regulation. Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity. The 1996 Telecom Act clarified that the need
for an entity providing cable services to obtain a local franchise depends
solely on whether the entity crosses public rights of way. Federal law now
prohibits franchise authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing cable
system's service area. Cable franchises generally are granted for fixed terms
and in many cases are terminable if the franchisee fails to comply with
material provisions. Non-compliance by the cable operator with franchise
provisions may also result in monetary penalties.
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The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing cable operations, service rates, franchise fees, system construction
and maintenance obligations, system channel capacity, design and technical
performance, customer service standards and indemnification protections. A
number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. Although LFAs have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, LFAs cannot insist on franchise fees
exceeding 5% of the system's gross revenues, cannot dictate the particular
technology used by the system, and cannot specify video programming other than
identifying broad categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees (limited to 5% of gross revenue) as a condition of
renewal. Similarly, if a franchise authority's consent is required for the
purchase or sale of a cable system or franchise, such authority may attempt to
impose more burdensome or onerous franchise requirements in connection with a
request for consent. Historically, franchises have been renewed for cable
operators that have provided satisfactory services and have complied with the
terms of their franchises.
EMPLOYEES
At December 31, 1996, the Company had 2,078 full-time employees and
147 part-time employees. Approximately 220 of the employees at seven of its
cable television systems are represented by a designated collective bargaining
representative or under various labor agreements. The Company considers its
relations with its employees to be good.
REAL PROPERTY
At December 31, 1996, the Company operated or managed systems in 751
communities in Alabama, California, Connecticut, Delaware, Georgia, Indiana,
Illinois, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, North
Carolina, Oklahoma, Tennessee, Texas, Wisconsin and Virginia. In connection
with its operation of the systems, the Company owns or leases parcels of real
property for signal reception sites (antenna towers and headends), microwave
facilities and business offices, and owns most of its service vehicles. The
Company believes that its properties, both owned and leased, are in good
condition and are suitable and adequate for the Company's business operations.
Cable television systems generally consist of four principal operating
components. The first component, known as the headend facility, receives
television and radio signals and other programming and information by means of
special antennae, microwave relays and satellite earth stations. The second
component, the distribution network, which originates at the headend and
extends throughout the system's service area, typically consists of coaxial or
fiber optic cables placed on utility poles or buried underground, and
associated electronic equipment. The third component of the system is a drop
cable, which extends from the distribution network into each customer's home
and connects the distribution system to the customer's television set. The
fourth component, a converter, is the home terminal device that expands channel
capacity to permit reception of more than 12 channels of programming. Some
systems utilize home terminal devices that can be addressed by sending coded
signals from the headend over the cable network.
The Company's cables generally are attached to utility poles under
pole rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. The physical
components of the systems require maintenance and periodic upgrading to keep
pace with technological advances.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which MCC or any of
its subsidiaries are a party or to which any of their respective properties are
subject.
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<PAGE> 46
MANAGEMENT
DIRECTOR AND EXECUTIVE OFFICERS OF MARCUS CABLE PROPERTIES, INC.
The sole general partner of Operating is MCC. The sole general
partner of MCC is the General Partner, whose sole general partner is MCPI. The
sole director and executive officers of MCPI, which as the sole general partner
of the General Partner is responsible for the overall management of the
business and operations of the Company, are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jeffrey A. Marcus 50 President, Chief Executive Officer and Sole Director
Louis A. Borrelli, Jr. 41 Executive Vice President and Chief Operating Officer
Thomas P. McMillin 35 Senior Vice President and Chief Financial Officer
Richard A. B. Gleiner 44 Senior Vice President, Secretary and General Counsel
David L. Hanson 48 Senior Vice President of Operations
Edwin F. Comstock, III 44 Vice President of Operations
J. Christian Fenger 42 Vice President of Operations
Steven P. Brockett 46 Vice President of Operations - Administration
Cynthia J. Mannes 38 Vice President of Human Resources and Administration
David M. Intrator 41 Vice President of Marketing and Programming
John C. Pietri 47 Vice President of Engineering and Technology
John P. Klingstedt, Jr. 34 Vice President and Controller
Daniel J. Wilson 32 Vice President of Finance and Development
Susan C. Holliday 31 Vice President of Regulatory Compliance and Planning
</TABLE>
The following sets forth certain biographical information with respect
to the director and executive officers of MCPI:
JEFFREY A. MARCUS, is President, Chief Executive Officer and Sole
Director of MCPI, a cable television industry executive with more than 28 years
of experience in system operations and ownership, who founded the Company in
1990. Mr. Marcus had previously founded Marcus Communications, Inc. in 1982, a
cable television company that ultimately served and managed over 160,000
customers by the time of its 1988 merger into publicly held Western
Tele-Communications, Inc. The combined companies were renamed WestMarc
Communications, Inc. ("WestMarc"), and grew to serve over 550,000 customers
during the period when Mr. Marcus served as WestMarc's Chairman and Chief
Executive Officer. Mr. Marcus exchanged his interest in WestMarc at the end of
1988 for cable television systems in Wisconsin which were operated from 1989
until August 1990 by Marcus Communications, Inc. These Systems were
subsequently contributed to the Company as part of the acquisition of the
Wisconsin Systems. Prior to forming the original Marcus Communications, Inc.
in 1982, Mr. Marcus co-founded Communications Equity Associates ("CEA") in
1975. From its inception until 1982, when Mr. Marcus sold his interest in the
company, CEA grew to become the second-largest brokerage firm in the cable
television industry. Mr. Marcus also served as Director of Sales for
Teleprompter Corporation from 1973 to 1975, as Vice President of Marketing for
Sammons Communications, Inc. from 1971 to 1973 and as the owner of Markit
Communications, Inc., a cable marketing and installation company, from 1969 to
1971.
Long active in state and national cable television industry matters
and community affairs, Mr. Marcus serves as a member of the board of directors
for the National Cable Television Association ("NCTA"), the Cable Television
Association ("CATA"), the Cable Television Advertising Bureau, Cable in the
Classroom, CSPAN, Chancellor Broadcasting and Brinker International. He has
also served as Executive Director of the Minnesota and Wisconsin Cable
Television Associations, as a Director of Daniels & Associates, one of the
cable television industry's largest brokerage and investment services
companies, and as Director of TCI Northeast, Inc., a subsidiary of
TeleCommunications, Inc.
LOUIS A. BORRELLI, JR. is Executive Vice President and Chief Operating
Officer of MCPI, with responsibility for the Company's general operations as
well as strategic planning. From October 1989 to March 1994, Mr. Borrelli
served as
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<PAGE> 47
Senior Vice President of MCPI. Mr. Borrelli has had an extensive 18 year
career in the cable television industry, with specific expertise in the
marketing, programming and operations areas. Mr. Borrelli joined Marcus
Communications, Inc. in 1986 as Director of Operations. In connection with
the 1988 WestMarc merger, he was appointed as a Vice President - Operations for
WestMarc, with responsibility for a division of cable systems serving 200,000
customers. In October 1989 Mr. Borrelli returned to Marcus Communications,
Inc. as Senior Vice President.
From 1978 to 1986, Mr. Borrelli served in various capacities for the
predecessor company to United Artists Cable Systems Corp., including service as
the Director of Programming/Marketing from 1984 to 1986. There he coordinated
all programming and marketing activities and the development of new revenue
opportunities such as advertising sales and pay-per-view. Long active in the
cable television industry, Mr. Borrelli is a member of the Cable Television
Administration and Marketing Society ("CTAM"), and has served as President of
CTAM's South Central region, Director of CTAM's National Board and Chairman of
CTAM's National Pay-Per-View and Interactive Media Conference and as Chairman
of the Planning and Development Committee of the Metro Cable Marketing Co-Op,
representing over 3 million cable customers in the New York tri-state area. He
is also a member of the Board of Directors of TeleSynergy, Women in
Telecommunications and the Mentor Program of the National Association of
Minorities in Cable.
THOMAS P. MCMILLIN is Senior Vice President and Chief Financial
Officer of MCPI, with responsibility for overseeing all of the financing,
accounting, regulatory and information system aspects of the Company. He
joined the Company in September 1994, as Vice President of Finance and
Development. Prior to joining the Company, Mr. McMillin served for three years
as Vice President - Cable Development for Crown Media, a cable television
subsidiary of Hallmark Cards, Inc. Prior to his position with Crown, Mr.
McMillin served five years in various positions for Cencom Cable Associates,
Inc.("Cencom"), most recently as Vice President - Finance and Acquisitions.
Prior to joining Cencom in 1987, Mr. McMillin served four years with Arthur
Andersen & Co., certified public accountants. Mr. McMillin received his
Bachelor of Science Degree in Accountancy from the University of Missouri -
Columbia.
RICHARD A. B. GLEINER is Senior Vice President, Secretary and General
Counsel of MCPI, with responsibility for overseeing all of the legal affairs of
the Company. Prior to joining the Company in 1994, Mr. Gleiner had been of
counsel to Dow, Lohnes & Albertson, New York, New York from 1988 until 1991,
where he was the primary outside counsel to the Company and its predecessors.
From 1991 until joining Marcus Cable, Mr. Gleiner was in private practice in
Northampton, Massachusetts. Mr. Gleiner received his A.B. Degree from Vassar
College in 1974, and his J.D. Degree from Boston University in 1977.
DAVID L. HANSON is Senior Vice President of Operations of MCPI, with
responsibility for the daily operations of the North Central Region. Mr.
Hanson is a native of Wisconsin and has spent more than 20 years in the state's
cable television industry designing, building and managing systems. Mr. Hanson
held a number of technical and management positions with Badger CATV in
Wisconsin from 1973 through 1982, when Badger CATV was acquired by Marcus
Communications, Inc., after which Mr. Hanson was named Wisconsin Regional
Manager of Marcus Communications, Inc. After the 1988 WestMarc merger, Mr.
Hanson was named a Vice President/Regional Manager of WestMarc, and he became a
Vice President of Marcus Communications, Inc. in 1989 when Mr. Marcus exchanged
his ownership position in WestMarc for the original Wisconsin systems
previously owned by Badger CATV. Mr. Hanson is a longtime board member and
past President of both the North Central Cable Television Association (serving
Minnesota, Wisconsin, Michigan, Iowa, North Dakota and South Dakota) and the
Wisconsin Cable Communications Association. He also has served as a regional
Vice-Director on the national board of the Community Antenna Television
Association.
EDWIN F. COMSTOCK, III is Vice President of Operations of MCPI, with
responsibility for the daily operations of the Southeast and East Regions. Mr.
Comstock brings 20 years of experience in the cable television industry to
MCPI. Prior to joining the Company, he spent his cable career with Sammons.
Most recently he was the Vice President of Business Development. From 1986 to
1993, Mr. Comstock was Vice President of Regional Operations overseeing all
aspects of operations and management of ten cable systems. He also served as
Director of Operations, in 1986, Manager of Plant Development, from 1982 to
1986, and Director of Security Operations, in 1982. Mr. Comstock holds a
Bachelor of Arts degree from Alfred University, Alfred, New York.
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<PAGE> 48
J. CHRISTIAN FENGER is Vice President of Operations of MCPI, with
responsibility for the daily operations of the Southwest, Midwest and West
Regions. Mr. Fenger brings over 16 years of diverse operating experience in
the cable television business. Prior to joining the Company in the Fall of
1992, he served as Regional Manager for Simmons Cable TV for its systems
throughout Maryland and Delaware since 1986 (including those systems that now
comprise the Company's Delaware/Maryland systems). Previously, he served from
1985 to 1986 as General Manager for the Warner Amex cable system in Nashua, New
Hampshire, where he was responsible for upgrading system operations, and from
1980 to 1985, he served as Marketing Manager for Rogers Cablesystems in
Syracuse, New York. He has held various volunteer positions with the
Delaware/Maryland/DC Cable Associations and is a past President of the Board of
Directors of Easton Community Television. Mr. Fenger earned his undergraduate
and Masters Degree in Communications Management from Syracuse University.
STEVEN P. BROCKETT is Vice President of Operations - Administration of
MCPI, with responsibility for the coordination of operating activities common
to all operating regions. Prior to joining the Company in February of 1995,
Mr. Brockett worked for two years as Vice President - Administration and one
year as Vice President - Controller for Crown. Mr. Brockett began his cable
career in 1978 with Heritage Communications, Inc., where he gained experience
in both Accounting (Cable Division Controller) and Operations (Director of
System Training). Mr. Brockett has held various positions at the cable system
operating level including System Controller in New Castle County, Delaware
(125,000 customers). Mr. Brockett holds a Bachelors of Science Degree in
Accountancy from the University of South Dakota and is an active member of the
Cable Television Administration Marketing Society (National and Texas).
CYNTHIA J. MANNES is Vice President of MCPI, with responsibility for
human resources, employee benefits, general administration and insurance
matters. Ms. Mannes began her cable television career in 1984 as a
receptionist with Marcus Communications, Inc., expanding her role with the
Company in later years by becoming Assistant to the President, with
responsibility for corporate administration. Upon the merger of Marcus
Communications, Inc. with WestMarc in 1988, Ms. Mannes was named Assistant to
the Chairman. At the end of 1988, Ms. Mannes left WestMarc to become Vice
President of Corporate Affairs at Marcus Communications, Inc., with
responsibility for day-to-day operations and administration. Ms. Mannes is an
active member of Women in Cable & Telecommunications, Dallas Human Resource
Management Association, and the Cable Television Human Resource Association.
Ms. Mannes is also a charter fellow of The Betsy Magness Leadership Institute.
DAVID M. INTRATOR is Vice President of Marketing and Programming of
MCPI, with responsibility for the Company's programming, marketing, advertising
sales and ancillary revenue business. Prior to joining the Company in October
of 1994, Mr. Intrator has had a diverse 15 year career in the cable television
industry, managing systems for Acton, Capital Cities, Post-Newsweek and Centel,
and working in cable programming with the Home Shopping Network, where he was
Director, Affiliate Relations from 1986 to 1990 and with Viewer's Choice
Pay-Per-View where he was Vice President, Affiliate Relations from 1990 to
1994. Mr. Intrator is a member of CTAM and is a Board member of the CTAM Texas
chapter. Mr. Intrator is a graduate of the University of Connecticut and holds
a Masters Degree in Public Administration from the Maxwell School of Public
Administration of Syracuse University.
JOHN C. PIETRI is Vice President of Engineering and Technology of
MCPI, with responsibility for the technical operations and standards of the
Company's cable television systems including: new construction and rebuild
projects; routine maintenance and installation practices; capital control and
purchasing; and regulatory compliance and reporting. Mr. Pietri has spent the
past 19 years in the cable television industry in a variety of technical
management positions. Prior to joining the Company, Mr. Pietri was Regional
Plant Manager for WestMarc, managing all technical operations, budgeting and
purchasing. Mr. Pietri also held positions as Operations Manager of Minnesota
Utility Contracting, General Manager of Double "A" Enterprises and President of
the Milwaukee Division of Mullen Communications Construction Company. Mr.
Pietri attended the University of Wisconsin.
JOHN P. KLINGSTEDT, JR. is Vice President and Controller of MCPI, with
responsibility for the accounting and financial reporting of the Company. Mr.
Klingstedt joined Marcus Communications, Inc. in 1987 and became Controller in
1989, with the election to Vice President following in 1994. Mr. Klingstedt
holds a Bachelors of Science Degree in
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<PAGE> 49
Accountancy from Oklahoma State University and is a member of the Cable
Television Tax Professionals Institute and the National Cable Television
Association Accounting Committee.
DANIEL J. WILSON is Vice President of Finance and Development of MCPI,
with responsibility for the treasury, finance and acquisition and divestiture
activities of the Company. Mr. Wilson joined MCPI in March 1995 as Director of
Finance and Development and was promoted to Vice President of Finance and
Development in June 1995. Prior to joining the Company, Mr. Wilson served for
three years in various positions at Crown, including as Director of Regulatory
Affairs and Director of Finance and Development. Prior thereto, Mr. Wilson
served for three years in various positions with Cencom, most recently as
Senior Financial Analyst. Prior to joining Cencom in 1989, Mr. Wilson served
for four years with Arthur Andersen & Co., certified public accountants. Mr.
Wilson received his Bachelor of Science in Business Administration with majors
in Finance and Accounting from Saint Louis University.
SUSAN C. HOLLIDAY is Vice President of Regulatory Compliance and
Planning of MCPI, with responsibility for all FCC rate regulatory compliance
and procedures; the budgeting process and operational audit procedures. Prior
to joining the Company in 1993, Ms. Holliday had been an audit manager with
KPMG Peat Marwick. Ms. Holliday holds a Bachelors Degree in Business
Administration with concentration in Accounting from the College of William and
Mary, and is a Certified Public Accountant (CPA).
EXECUTIVE COMPENSATION
MCPI presently does not pay any compensation to its director or
officers. The executives of MCPI are compensated in their capacity as officers
of Operating. The following table summarizes the compensation paid by
Operating to its Chief Executive Officer and to each of its four other most
highly compensated executive officers receiving compensation in excess of
$100,000 for services rendered during the fiscal years ended December 31, 1994,
1995, and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1)
--------------------------- ---- ------ ------ ----------------
<S> <C> <C> <C> <C>
Jeffrey A. Marcus 1994 $163,949 $200,000 $575,765 (2)
President and 1995 $583,196 - -
Chief Executive Officer 1996 $980,781 $500,000 $38,186 (3)
Louis A. Borrelli, Jr. 1994 $176,275 $263,942 $ 4,620 (3)
Executive Vice President and 1995 $276,235 $185,000 $ 6,464 (3)
Chief Operating Officer 1996 $353,099 $ 52,000 $15,377 (3)
Thomas P. McMillin 1994 $ 36,050 $ 69,567 -
Senior Vice President and 1995 $172,680 $200,000 $ 6,214 (3)
Chief Financial Officer 1996 $255,000 $ 32,000 $15,244 (3)
Richard A.B. Gleiner 1994 $ 48,799 $ 10,667 -
Senior Vice President, Secretary 1995 $170,816 $200,000 $ 6,526 (3)
and General Counsel 1996 $220,673 $ 32,000 $16,662 (3)
David L. Hanson 1994 $ 86,034 $ 93,380 $ 2,368 (3)
Senior Vice President of 1995 $150,350 $ 55,000 $17,646 (3)
Operations 1996 $155,263 $ 40,000 $19,024 (3)
</TABLE>
- ----------------
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<PAGE> 50
(1) During 1995: (a) Mr. Marcus was issued 16,670 Employee Units with a
Strike Price (hereinafter defined) of $1,750 per Unit (the "Series II
Employee Units"); (b) Mr. Borrelli was issued 1,235 Series II Employee
Units; (c) Mr. McMillin was issued 973.7 Employee Units with a Strike
Price of $1,600 per Unit (the "Series I Employee Units") and 1,035
Series II Employee Units; (d) Mr. Gleiner was issued 973.7 Series I
Employee Units and 300 Series II Employee Units; and (e) Mr. Hanson
was issued 110 Series I Employee Units. Mr. Marcus' Employee Units
are fully vested. Of the Series I Employee Units issued in 1995, 40%
are vested and the remaining 60% will vest in equal amounts on the
second through fourth anniversaries of the date of issuance thereof.
Of the Series II Employee Units issued in 1995 (other than those held
by Mr. Marcus) 10% are vested and 10%, 20%, 30% and 30% vest on
November 1, 1997, 1998, 1999 and 2000, respectively. The first year
in which Employee Units were issued was 1995. The Company believes
that the Employee Units issued in 1995 have no current value. See
"Incentive Performance Plans-Employee Unit Plan" and "Security
Ownership of Certain Beneficial Owners and Management-Principal
Security Holders."
(2) Represents distribution to Jeffrey A. Marcus and Nancy C. Marcus as
the stockholders of the Management Company. MCPI, which is owned by
Mr. and Mrs. Marcus, had contracted with the Company to provide
services relating to the planning and negotiation of acquisitions in
the merger of Marcus Management, Inc. into MCPI in December 1993.
(3) Represents the employer matching contribution under the Company's
401(k) matched savings plan, vehicle expense for each of the executive
officers other than Mr. Marcus and the value of term life insurance
premiums paid by the Company for the benefit of the named executive.
See "Management-Pension and Profit Sharing Plans". Other compensation
for Mr. Marcus also includes amounts paid by the Company for airplane
usage. Other compensation for Mr. Hanson in 1995 and 1996 and for Mr.
Gleiner in 1996 also includes amounts paid by the Company for
relocation expenses.
INCENTIVE PERFORMANCE PLANS
Employee Unit Plan. The General Partner may elect at any time and
from time to time to cause MCC to issue a limited number of Class B Units
designated "Employee Units" to the General Partner or to key individuals
providing services to MCC or any of its subsidiaries. Employee Units will be
issued in series, as more fully described in the partnership agreement of MCC.
A series generally will not be entitled to distributions until such time as all
units (other than Convertible Preference Units and subsequently issued Employee
Units) outstanding at the date of a given distribution will have been
distributed an amount equal to the product of all such units outstanding on the
date of a given distribution multiplied by a specified price (the "Strike
Price") related to such Employee Units. The General Partner is authorized to
issue (and reissue to the extent forfeited) up to a total of 31,517 Employee
Units. As of March 26, 1997, MCC had issued 5,602.2 Employee Units with a
$1,600 Strike Price and 22,185.0 Employee Units with a $1,750 Strike Price.
The General Partner, in its sole discretion, may determine the other terms and
conditions (e.g., vesting, forfeiture and restrictions on transfer) governing
grants of Employee Units. The General Partner may, but is not obligated to,
require in connection with the grant of any Employee Units that the holder
thereof grant to the General Partner, Mr. Marcus or any of their affiliates (i)
a right of first refusal on such holder's Employee Units as well as an option
to purchase such holder's Employee Units upon such holder's termination
(voluntary or involuntary) of employment with MCC or any of its subsidiaries
and (ii) a proxy, which is coupled with an interest and is irrevocable, to vote
such holder's Employee Units in such proxy's sole discretion.
Limited Partner Interests in General Partner. The General Partner has
issued certain limited partner interests in the General Partner ("LP Units") to
key employees of MCC and its subsidiaries without requiring such employees to
make capital contributions to the General Partner. As of the date hereof, most
of the outstanding LP Units issued are fully vested and all of the outstanding
LP Units will be fully vested by 1999.
Among the executive officers of MCPI named in the Summary Compensation
Table, Louis A. Borrelli, Jr. and David L. Hanson hold 13.75 and 3.63 vested LP
Units, respectively. Thomas P. McMillin has been granted 2.50 LP Units and
Richard A.B. Gleiner has been granted 1.00 LP Unit. 60% of Mr. McMillin's and
Mr. Gleiner's LP Units are vested and the remaining 40% will vest equally on
each of April 1, 1998 and 1999. No LP Units were issued during the year ended
December 31, 1996. The total number of units of general partner interest ("GP
Units") will automatically be reduced at such time as any unvested LP Units
vest in order to ensure that the total number of outstanding GP Units and fully
vested LP Units (for which no capital contribution was required) does not
exceed 100%.
PENSION AND PROFIT SHARING PLANS
The Company sponsors a 401(k) plan for its employees that are age 21
or older and have been employed by the Company for at least six months.
Employees of the Company can contribute up to 15% of their salary, on a
before-tax basis, with a maximum 1996 contribution of $9,500 (as set by the
Internal Revenue Service). The Company matches participant
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<PAGE> 51
contributions up to a maximum of 2% of a participant's salary. All
employee-participant contributions and earnings are fully vested upon
contribution and Company contributions and earnings vest 20% per year of
employment with the Company, becoming fully vested after five years. See
"Summary Compensation Table."
COMPENSATION OF DIRECTORS
Mr. Jeffrey A. Marcus is not compensated for his service as the sole
director of MCPI.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Jeffrey A. Marcus, as the president and sole director of MCPI, the
ultimate general partner, sets the compensation of the executive officers of
MCPI in their executive positions with Operating.
PRINCIPAL SECURITY HOLDERS
The following table sets forth, as of March 26, 1997, (i) the units of
general partnership interests and limited partnership interests of MCC
constituting a class of voting security and which are owned by the sole
director and executive officers of MCPI and each person who is known to MCC to
own beneficially more than 5% of any class of MCC's partnership interests and
(ii) the units of the equity securities of MCPI and the General Partner owned
by the sole director and executive officers of MCPI named in the Summary
Compensation Table and by the sole director and all executive officers of MCPI
as a group.
<TABLE>
<CAPTION>
Name and Address of # of Equivalent
Beneficial Owners (1) Units/Shares % of Class (2)
------------------------ ---------------- ----------
<S> <C> <C> <C>
MCC (3) . . . . . . . . General Partner 22,577.99(4) 6.37%
The Goldman Sachs Group, L.P. (5) 125,866.241(6) 35.68
85 Broad Street
New York, New York 10004
Hicks, Muse, Tate & Furst Equity 65,714.286 18.63
Fund II, L.P.
200 Crescent Court, Suite 1600
Dallas, Texas 75201
Freeman Spogli & Co. Incorporated 56,428.571 15.99
Affiliates (7)
11100 Santa Monica Boulevard
Los Angeles, California 90025
Greenwich Street Capital Partners, 27,053.571 7.67
Inc. Affiliates (8)
388 Greenwich Street
New York, New York 10013
Jeffrey A. Marcus (9) 50,365.190 14.28
Louis A. Borrelli, Jr. (10) 1,235.000 *
Thomas P. McMillin (10) 2,008.700 *
</TABLE>
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<PAGE> 52
<TABLE>
<CAPTION>
Name and Address of # of Equivalent
Beneficial Owners (1) Units/Shares % of Class (2)
------------------------ ---------------- ----------
<S> <C> <C> <C>
Richard A. B. Gleiner (10) 1,273.700 *
David L. Hanson (10) 110.000 *
Sole Director and Executive Officers as a 50,365.190 14.28
Group (14 persons)
MCPI . . . . . . . . . Jeffrey A. Marcus (9) 1,000.00 100.00%
General Partner . . . . MCPI (9) 67.25 66.15%
Jeffrey A. Marcus 67.25 (11) 66.15
Louis A. Borrelli, Jr. 13.75 (12) 13.53
Thomas P. McMillin 2.50 (12) 2.46
Richard A. B. Gleiner 1.00 (12) 0.98
David L. Hanson 3.63 (12) 3.57
Sole Director and Executive Officers as a 100.13 98.50
Group (14 persons)
</TABLE>
* Less than 1%.
(1) The address for the General Partner, MCPI and Messrs Marcus, Borrelli,
McMillin, Gleiner and Hanson is 2911 Turtle Creek Blvd., Dallas, Texas
75219.
(2) Assumes all 31,517 Employee Units are outstanding.
(3) As of the date hereof, all partnership interests in MCC, other than
Convertible Preference Units, are designated Class B Units. The
interests held by the General Partner are comprised of different types
of Class B Units which are entitled to different distribution rights
and, in certain cases, the Class B Units held by the General Partner
do not have voting rights. MCC has issued 7,500 Convertible
Preference Units which have a general distribution preference over the
Class B Units and are convertible, initially, into Class B Units on a
one-for-one basis. The current ownership of Convertible Preference
Units is as follows: Broad Street Investment Fund I, L.P. (5,003.0831
units); Broad Street Advancement Corporation (1,260.1681 units); The
Goldman Sachs Group, L.P. (586.3515 units); Broad Street Strategic
Corporation (243.6068 units); Stone Street Fund 1991, L.P. (233.9071
units); Bridge Street Fund 1991, L.P. (77.9690 units); Stone Street
Fund 1990, L.P. (60.3397 units); and Bridge Street Fund 1990, L.P.
(34.5747 units). All of the holders of Convertible Preference Units
are affiliates of Goldman Sachs.
(4) Reflects the General Partner's ownership of 18,848.19 units and
3,729.80 unissued Employee Units.
(5) Represents stock owned by certain investment partnerships, of which
affiliates of The Goldman Sachs Group, L.P. ("GS Group") are the
general partner, managing general partner or investment manager. The
current ownership of affiliates of GS Group of the outstanding Class B
Units of MCC is as follows: Broad Street Investment Fund I, L.P.
(81,511.696 units); The Goldman Sachs Group, L.P. (8,095.855 units); GS
Capital Partners II, L.P. (6,705.000 units); Broad Street Acquisition
Corporation (5,028.885 units); GS Capital Partners II Offshore Marcus
Holding I, L.P. (2,893.000 units); GS Capital Partners II Marcus
Holding I, L.P. (1,503.000 units); Bridge Street Fund 1995, L.P.
(1,480.000 units); Broad Street Income Corporation (1,456.490 units);
Stone Street Fund 1992, L.P. (1,416.686 units); Stone Street Fund
1995, L.P. (1,253.100 units); Broad Street Funding Corp. (1,026.000
units); Bridge Street Fund 1994, L.P. (986.220 units); Stone Street
Fund 1994, L.P. (895.740 units); Broad Street Yield Corporation
(866.080 units); Bridge Street Fund 1992, L.P. (831.163 units); Stone
Street Fund 1990, L.P. (462.834 units); Broad Street Exploration
Corporation (405.405 units); GS Capital Partners II Offshore, L.P.
(370.000 units); Bridge Street Fund 1990, L.P. (308.272 units); GS
Capital Partners II Germany Marcus Holding I, L.P. (303.000 units);
Stone Street Fund 1991, L.P. (257.670 units); Broad Street Empire
Corporation (121.618 units); Broad Street Value Corporation (79.497
units); Stone Street Marcus Holding, Inc. (49.000 units);
Participation Subsidiary Corporation II (46.130 units); and Stone
Street 1995 Marcus Holding, Inc. (13.900 units). GS Group disclaims
beneficial ownership of the shares owned by such investment
partnerships to the extent attributable to partnership interests herein
held by persons other than GS Group and its affiliates. Each of such
investment partnerships shares voting and investment power with certain
of its respective affiliates.
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<PAGE> 53
(6) Includes 7,500 Convertible Preference Units. See note 3 above.
(7) The current ownership by affiliates of Freeman Spogli & Co.
Incorporated of the outstanding Class B Units of MCC is as follows:
FS Equity Partners III, L.P. (54,278.285 units) and MCC International
Holdings, Ltd. (2,150.286 units).
(8) The current ownership by affiliates of Greenwich Street Capital
Partners, Inc. of the outstanding Class B Units of MCC is as follows:
Greenwich Street Capital Partners, L.P. (17,146.840 units); TRV
Employees Fund, L.P. (7,532.012 units); GSCP Offshore Holdings, Inc.
(1,060.783 units); The Travelers Insurance Company (880.337 units);
and The Travelers Life and Annuity Company (433.599 units).
(9) Mr. and Mrs. Marcus own all the issued and outstanding common stock of
MCPI, the general partner of the General Partner, which stock is
subject to a voting trust agreement which gives Mr. Marcus the right
to vote all of such stock. Accordingly, the numbers for Mr. Marcus
reflect all units held by the General Partner. Additionally, such
numbers include 27,787.20 issued Employee Units. Mr. Marcus has the
right to issue additional authorized but unissued or forfeited
Employee Units to employees, himself or the General Partner. Mr.
Marcus has been granted irrevocable proxies to exercise all voting
rights with respect to issued Employee Units. Mr. Marcus is the
record owner of 16,600.00 Employee Units. Mr. Marcus' address is 2911
Turtle Creek Boulevard, Suite 1300, Dallas, Texas 75219.
(10) Reflects the executive officers' ownership of Employee Units. Such
Employee Units are subject to certain vesting schedules. The address
for all executive officers is 2911 Turtle Creek Boulevard, Suite 1300,
Dallas, Texas 75219.
(11) Reflects the number of GP Units currently owned by MCPI, assuming full
vesting of all LP Units.
(12) Reflects the current ownership of vested and unvested LP Units.
Thomas P. McMillin also holds 1.00 unvested LP Units and Richard A.B.
Gleiner also holds 0.40 unvested LP Units. These units are currently
scheduled to vest equally on each of April 1, 1998 and 1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no significant transactions, new relationships or
indebtedness between the Company and related parties during 1996.
Transaction Fees
Transaction fees for services relating to the planning and negotiation of
acquisitions have been paid by the Company upon the closing of certain
transactions. In January 1995, MCPI received a transaction fee of $1,250,000
in connection with the Crown Acquisition. In November 1995, MCPI received a
transaction fee of $4,000,000 in connection with the Sammons Acquisition.
In addition, certain equity investors received equity commitment and merger
advisory fees, respectively, in connection with the closing of the Sammons
Acquisition as follows: Goldman Sachs, $1,251,000 and $4,804,000; Freeman
Spogli & Co., Incorporated, $1,788,000 and $2,189,000; Greenwich Street Capital
Partners, Inc., $650,000 and $1,049,000; First Union Corporation, $488,000
(merger advisory fee only); Weiss, Peck & Greer, $211,000 and $508,000; and
State of Wisconsin Investment Board, $325,000 (equity commitment fee only). In
addition, Hicks Muse, Tate & Furst, Incorporated will receive financial
monitoring fees totaling $4,998,000 (payable in six annual installments
commencing with the closing of the Sammons Acquisition) and received a merger
advisory fee of $5,000,000 in connection with such acquisition.
Senior Credit Facility
Goldman Sachs and GS Credit Partners, an affiliate of Goldman Sachs, are part
of the lending syndicate under the Senior Credit Facility and made an initial
aggregate commitment of $183,333,333. In connection with this financing,
Goldman Sachs and GS Credit Partners received fees of approximately $3,300,000.
CALP
At the time of the CALP Acquisition, all of the outstanding CALP ordinary
limited partnership interests which were owned by affiliates of Goldman Sachs
were exchanged for Convertible Preference Units in MCC having a distribution
preference of $15,000,000. In addition, Special Limited Partnership Units
owned by Mr. Marcus and affiliates of Goldman Sachs were
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redeemed and retired in connection with the CALP Acquisition. Mr. Marcus and
affiliates of Goldman Sachs received $2,100,000 and $7,800,000, respectively,
in respect of their Special Limited Partnership Units.
Investment Banking Agreement
MCC, MCPI, Mr. Marcus and Goldman Sachs have entered into that certain
Investment Banking Agreement dated as of January 17, 1990 pursuant to which the
parties have agreed that, for so long as Goldman Sachs holds at least 30% of
the total outstanding partnership interests of MCC, no person or entity other
than Goldman Sachs or its affiliates are to provide investment banking,
financial advisory, or underwriting or placement agent services on behalf of
the Company. Goldman Sachs received discounts and fees aggregating $7,332,000
in connection with the offering of the 14 1/4% Notes.
THE PARTNERSHIP AGREEMENTS
The following is a summary of certain material terms of the First Amended and
Restated Agreement of Limited Partnership of Operating (the "Operating
Partnership Agreement"), and the Fifth Amended and Restated Agreement of
Limited Partnership of MCC (the "MCC Partnership Agreement"). The summary is
qualified in its entirety by reference to the full text of the Operating
Partnership Agreement and the MCC Partnership Agreement, complete copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part and are available in the manner described in "Additional
Information."
THE OPERATING PARTNERSHIP AGREEMENT
Organization and Duration. Operating was formed as a limited partnership
pursuant to the provisions of the Delaware Revised Uniform Limited Partnership
Act, as amended, and a certificate of limited partnership of Operating was
filed with the Secretary of State of Delaware on June 23, 1994. The purposes
of Operating, as set forth in the Operating Partnership Agreement, are to (i)
invest, directly or indirectly through other entities, in the cable television
business (which includes acquiring, owning, constructing, maintaining,
operating, promoting, selling, disposing and otherwise developing cable
television systems), and related businesses as determined by MCC, and (ii) do
all things necessary, appropriate, or advisable in connection with such
purpose.
Operating will be dissolved upon the earliest to occur of (i) December 31,
2005; (ii) the dissolution, withdrawal or bankruptcy of MCC, as the general
partner unless, within 90 days after such event, a majority of the other
partners agree to continue the business of Operating and select a new general
partner(s); and (iii) an election to dissolve Operating by the affirmative vote
of MCC and the limited partner.
Ownership of Interests by MCC. In addition to owning the ordinary general
partner interests of Operating, MCC owns all of the outstanding Class A
Preference Units of Operating (the "Class A Preference Units") and the Class B
Preference Units of Operating (the "Class B Preference Units"). The Class A
Preference Units and the Class B Preference Units entitle MCC to a preferential
return of capital pursuant to the terms of the Operating Partnership Agreement.
Control of Operations. The Operating Partnership Agreement provides that MCC
has full and complete charge of all of the affairs of Operating.
Voting Rights. Except with respect to the termination of Operating following
certain terminating events as described above, the limited partner has no right
to vote on any partnership matters. Certain material amendments to the
Operating Partnership Agreement, however, require the written consent of all of
Operating's partners.
Capital Contributions. Under the Operating Partnership Agreement, the
partners have made certain capital contributions to Operating. MCC initially
contributed cash in the amount of $999 and subsequently contributed all of its
partnership interests in and to Marcus Cable of San Angelo, L.P., Marcus Cable
of Delaware and Maryland, L.P., and Marcus Cable Partners, L.P.
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Thereafter, MCC contributed $142,671,000 in cash in consideration for 142,671
Class A Preference Units and exchanged a $100,000,000 obligation owed to MCC by
Operating for 100,000 Class B Preference Units. The limited partner, Marcus
Cable Properties, L.P., initially contributed cash in the amount of $1 and has
made other subsequent contributions.
Issuance and Sale of Units. MCC has the right to admit additional limited
partners without the consent of the limited partner, but such admission shall
not affect the rights of any existing limited partner to its share in profits,
losses and distributions.
Liability of General Partner. Under the Operating Partnership Agreement,
neither MCC nor its affiliates will be liable, in damages or otherwise, to
Operating or any of its limited partners, and neither Operating nor any of its
limited partners shall take any action against MCC or any of its affiliates, in
respect of any loss arising out of any acts or omissions performed or omitted
by it pursuant to the authority granted by the Operating Partnership Agreement,
or otherwise performed on behalf of Operating, if MCC or its affiliates in good
faith determined that such course of action was in the best interests of
Operating. Under the Operating Partnership Agreement, Operating will indemnify
MCC and its affiliates against losses, damages, expenses (including attorneys'
fees), judgments and settlement amounts actually and reasonably incurred by
such party with respect to activities performed on behalf of Operating not
constituting bad faith, willful misconduct or fraud. MCC is not personally
liable for the return of the investment made by the limited partners.
Liability of Limited Partners. Limited partners of Operating are not
personally responsible for the liabilities of Operating except to the extent a
limited partner assumes or guarantees any debts of Operating. Limited partners
will not be liable, except as otherwise required by law, to (i) pay to
Operating or to any creditor of Operating or any other partner any deficiency
in its capital account or (ii) return to Operating or to pay to any creditor or
any other partner the amount of any return to it of its capital contribution or
other distribution made to it.
THE MCC PARTNERSHIP AGREEMENT
Organization. MCC was formed as a limited partnership pursuant to the
provisions of the Delaware Revised Uniform Limited Partnership Act, as amended,
and a certificate of limited partnership of MCC was filed with the Secretary of
State of Delaware on January 17, 1990. The purpose of MCC, as set forth in the
MCC Partnership Agreement, is to (i) carry on the business of acquiring,
owning, constructing, maintaining, operating, promoting, selling, disposing and
otherwise developing cable television systems and franchises and other related
activities and to acquire and hold interests in any entity or individual
engaged in such activities and (ii) do all other lawful things necessary,
appropriate or advisable in connection with such purposes.
Classes of Partnership Interests. Under the MCC Partnership Agreement, all
of the outstanding partnership interests in MCC ("Units") are Class B Units or
Convertible Preference Units. (The Class A Units were all redeemed on or prior
to July 29, 1994.) The partnership interests of MCC consist of both the General
Partner's total interest in MCC (the "GP Units") and the limited partnership
interests in MCC (the "LP Units"). GP Units, in turn, include GP Profits Units,
DCA Class B Units and other Class B Units, and LP Units include Class B LP
Units and Convertible Preference Units. "Class B LP Units" are defined under
the MCC Partnership Agreement as all Class B Units excluding the Class B Units
held by the General Partner.
The MCC Partnership Agreement authorizes MCC to issue certain Class B Units
to be designated Employee Units to the General Partner or to key individuals
providing services to MCC or any of MCC's subsidiaries. Under the MCC
Partnership Agreement, the General Partner has the authority to cause MCC to
issue (and to reissue to the extent forfeited or otherwise returned to MCC) up
to a total of 31,517 Employee Units.
The Convertible Preference Units were issued to the former limited partners
of CALP in connection with the CALP Acquisition, entitle the holders thereof to
a return of capital pursuant to the terms of the MCC Partnership Agreement and
are convertible into Class B LP Units. The Convertible Preference Units are LP
Units, although they are not Class B Units prior to conversion. The Convertible
Preference Units vote together with Class B Units as a single class, and the
voting percentage of each Convertible Preference Unit, at a given time, is
based on the number of Class B LP Units into which such Convertible Preference
Unit is then convertible. For purposes of the MCC Partnership Agreement,
"Outstanding Class B Units" at any given time consists of the sum of all Class
B Units then issued and outstanding plus Class B Units then issuable upon
conversion of
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issued and outstanding Convertible Preference Units, if any, and "Outstanding
Class B LP Units" consist of all Outstanding Class B Units other than GP Units.
Duration. Under the MCC Partnership Agreement, MCC will be dissolved upon
the earliest to occur of: (i) December 31, 2005, unless extended on an annual
basis by the affirmative vote of holders of 51% or more of the Outstanding
Class B Units and the written consent of the General Partner, (ii) any
Disabling Event (defined below), (iii) the removal of the General Partner
pursuant to the MCC Partnership Agreement and (iv) an election to dissolve MCC
pursuant to the terms set forth below; provided, however, in the case of (ii)
and (iii) above, dissolution shall not occur if, within 90 days after the
triggering event, holders of 90% or more of the Class B LP Units elect to
reconstitute the business in a new limited partnership and elect a new general
partner. The MCC Partnership Agreement defines "Disabling Event" to include (a)
the bankruptcy of the General Partner, (b) the withdrawal of the General
Partner from MCC, (c) the death, retirement or disability of Mr. Marcus (which
includes the inability of Mr. Marcus to perform the duties of general partner,
were he the general partner, or the failure by Mr. Marcus to possess the sole
right to elect a majority of the Board of Directors of MCPI), if a majority in
interest of the holders of LP Units demand in writing within 60 days after such
event that such event be a Disabling Event, or (d) the assignment, transfer or
conveyance by the General Partner of any part of its interest in MCC in
violation of the MCC Partnership Agreement. An election to dissolve MCC must be
based on the vote of the Outstanding Class B LP Units, the percentage of the
Outstanding Class B LP Units required for the dissolution to be effective will
vary over time and the consent of the General Partner will not be required
beginning on November 1, 2002. The required percentage of votes will decrease
from 60%, with certain exceptions, prior to November 1, 1998, to 51% from
November 1, 1998 through October 31, 2002, to 40% from November 1, 2002 through
October 31, 2004, and 15% from and after November 1, 2004.
The partners of MCC agreed in the MCC Partnership Agreement that, prior to
November 1, 2002, so long as any 11 7/8% Debentures, 13 1/2% Notes or 14 1/4%
Notes are outstanding or any other debentures or notes issued by MCC or any of
its subsidiaries in connection with the CALP Acquisition and/or the Sammons
Acquisition are outstanding, they will take all action necessary, except in the
case of the bankruptcy or insolvency of the General Partner, in which case MCC
shall use its best efforts, to ensure that MCC is not dissolved or that a
Successor Company (as defined in the Indentures governing the 11 7/8%
Debentures, the 13 1/2% Notes and the 14 1/4% Notes) assumes all of the
obligations of MCC pursuant to the Indentures governing the 11 7/8% Debentures,
the 13 1/2% Notes and the 14 1/4% Notes, respectively.
Control of Operations. The MCC Partnership Agreement provides that the
General Partner has exclusive authority with respect to the management and
control of the business and operations of MCC, subject to the terms and
provisions of the MCC Partnership Agreement. Among the limitations on its
power, the General Partner does not or will not have the right: (i) to alter
the purpose of MCC, (ii) to cause MCC to issue Additional Units (defined
below), except as set forth in the MCC Partnership Agreement, (iii) to possess
any MCC property or assign rights to such property for other than a partnership
purpose, (iv) to perform any act or employ any assets of MCC in contravention
of the MCC Partnership Agreement, (v) to perform any act which would subject
any limited partner to liability as a general partner, (vi) to employ funds or
assets of MCC in any manner except for the exclusive benefit of MCC, (vii) to
cause any withdrawal by the General Partner or any assignment of any interest
of the General Partner, not in accordance with the MCC Partnership Agreement,
(viii) to cause any LP Units to qualify as an Attributable Interest (defined
below) with respect to any limited partner, other than a holder of Employee
Units, (ix) to cause MCC or any subsidiary thereof to effect certain material
transactions without an affirmative vote of disinterested holders of 51% or
more of the Outstanding Class B Units (a "Disinterested Required Vote"). The
MCC Partnership Agreement defines "Attributable Interest" as any direct or
indirect ownership in any radio station, television station, cable television
system, wireless cable television system, satellite master antenna television
system or English language daily newspaper which is deemed attributable to any
person holding such interest under the rules, regulations, policies and
decisions of the FCC.
Voting Rights and Amendment of the MCC Partnership Agreement. Under the MCC
Partnership Agreement the limited partners of MCC (the "Limited Partners") have
no right to vote on any partnership matters except as to matters for which
consent or approval is expressly required under the MCC Partnership Agreement.
Pursuant to the MCC Partnership Agreement, Convertible Preference Units will
vote, together with Class B Units, as a single class. Where a vote is required
under the MCC Partnership Agreement, each Partner is entitled to one vote per
Unit held by it and the voting percentage of each Convertible
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Preference Unit, at a given time, will be based on the number of Class B LP
Units into which such Convertible Preference Unit is then convertible.
In general, the MCC Partnership Agreement may be modified or amended by the
vote or written consent of the holders of 80% or more of the Outstanding Class
B Units and the written consent of the General Partner; provided, however, the
MCC Partnership Agreement may be amended from time to time by the General
Partner without the consent of any of the Limited Partners to reflect the
admission of Limited Partners or the change of MCC's chief executive offices or
other places of business.
Under the MCC Partnership Agreement, (i) the holders of the same percentage
and type of LP Units will have to agree to any amendment of a provision which
requires the consent or vote of holders of a specified percentage and type of
LP Units, (ii) the consent of holders of 80% or more of the outstanding Class B
LP Units will be required to alter any distribution or allocation of income,
gain, loss, deduction, expense or credit under the MCC Partnership Agreement,
(iii) no amendment providing for additional capital contributions will be
effective absent the consent of each partner affected thereby, (iv) no
amendment to the indemnification and exculpation provisions will be effective
as to any person who at any time has served as a director, officer, employee of
the General Partner or its affiliates who, in such capacity, engaged in
activities on behalf of MCC, with respect to any acts or omissions performed or
omitted to be performed prior to the date of such amendment, (v) the consent of
holders of at least 66 2/3% of the Outstanding Class B LP Units will be
required for the issuance of additional GP Profits Units or Units substantially
similar to GP Profits Units, (vi) the consent of Limited Partners who hold at
least 66 2/3% of the issued and outstanding Convertible Preference Units,
voting as a class, will be required for MCC to alter any of the preferences or
rights of the holders of Convertible Preference Units that are not preferences
or rights of the holders of Class B LP Units so as to materially adversely
affect such preferences and rights, (vii) the consent of holders of 75% or more
of the Outstanding Class B Units will be required for issuing any class of
Additional Units ranking prior or in preference to Class B LP Units, (viii) the
affirmative vote or consent of holders of 51% or more of the Outstanding Class
B Units (a "Required Vote") will be necessary for MCC to issue any Additional
Units other than Employee Units and Class B LP Units issued in exchange for
Convertible Preference Units, (ix) a Disinterested Required Vote will be
required to permit MCC or any subsidiary to enter into a material disposition
or become bound by a material contract, (x) a Required Vote (excluding units
beneficially owned by the General Partner and its affiliates) will be required
to remove the General Partner for Cause (as defined below), (xi) the election
by the Class B Limited Partners holding 90% or more of the Outstanding Class B
LP Units to reconstitute the business of MCC will be required to avoid
dissolution upon the occurrence of any Disabling Event or the removal of the
General Partner, (xii) the affirmative vote of holders of a percentage of
Outstanding Class B Units that will vary over time will be required for an
election to dissolve MCC, (xiii) upon a Required Vote and the written consent
of the General Partner, the term of MCC shall be extended on an annual basis
beyond December 31, 2005, (xiv) upon a Disinterested Required Vote, the
partners will be able to direct the General Partner to effect a Reorganization
(as defined below), provided that, prior to November 1, 1998, the percentage
vote required to approve a Reorganization shall be increased to 60% from 51%,
unless the Reorganization will result in holders of Class B LP Units (excluding
Employee Units) having received at least $3,500 per Class B LP Unit, in respect
of such Reorganization, and all other prior distributions, (xv) a Disinterested
Required Vote will be required to approve compensation for a liquidator's
services and to approve a successor liquidator and (xvi) any member of the
Information Committee may be removed with or without cause upon the affirmative
vote of holders of 90% or more of the Outstanding Class B Units, along with the
unanimous vote of the members of the Information Committee, excluding the
members subject to removal.
For purposes of the MCC Partnership Agreement, "Reorganization" is defined as
any one or more of the following transactions: (i) the incorporation of all or
substantially all of MCC's properties and assets; (ii) the contribution, sale,
exchange, lease, transfer, conveyance or other disposition to any other person
of all or substantially all of MCC's assets; (iii) the merger or consolidation
of MCC with or into any other person; or (iv) any other transaction involving
MCC (other than a dissolution of MCC) which, pursuant to a Disinterested
Required Vote, is deemed to have the effect of any of the transactions
described in (i), (ii) or (iii) above.
Capital Contributions. The General Partner is required under the MCC
Partnership Agreement to make such additional capital contributions to MCC as
are necessary to maintain at all times a minimum capital account balance equal
to either 1% of the aggregate positive capital account balances of all the
partners of MCC or $500,000, whichever is less. The Limited Partners are not
required to make additional capital contributions to MCC under the MCC
Partnership Agreement. The MCC Partnership
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Agreement provides that no partner of MCC shall have the right to withdraw or
demand return of its capital contribution during the term of the partnership.
Issuance and Sale of Units. Subject to receipt of a Required Vote, the
General Partner has the right, subject to certain conditions, to arrange for
the sale and issuance of additional Class B Units or other Units ("Additional
Units"), and rights, options or warrants to purchase Additional Units, on such
terms and for such consideration as the General Partner in its discretion may
determine; provided, however, that (i) the General Partner shall first give
written notice to the then existing Limited Partners, and (ii) the consent of
66 2/3% or more of the Outstanding Class B LP Units shall be required for
issuing any additional GP Profits Units or other Units having substantially
similar rights, powers and duties or to be issued solely to the General
Partner, Mr. Marcus or any of their affiliates.
The General Partner is required under the MCC Partnership Agreement to
classify Additional Units in accordance with the relative rights, powers and
duties associated with such Units; provided, however, that the consent of
holders of at least 75% of the Outstanding Class B Units is required for
issuing, effecting or validating any class of Additional Units (or rights,
options or warrants to purchase Additional Units) ranking prior to or in
preference to Class B LP Units. The MCC Partnership Agreement provides that the
General Partner may offer preemptive rights to the holders of Additional Units;
provided, however, that such preemptive rights shall be no more favorable than
the preemptive rights of the existing Limited Partners.
Under the MCC Partnership Agreement, so long as Goldman Sachs, together with
its affiliates, hold 30% or more of the sum of the total outstanding Units and
Units which would be outstanding upon the exercise of all outstanding rights,
options and warrants to purchase Units (without duplication for the conversion
of all outstanding Convertible Preference Units), MCC shall not, and the
General Partner shall not cause or permit MCC to, issue any Additional Units or
rights, options or warrants to purchase Additional Units without the prior
written approval of Goldman Sachs. However, the MCC Partnership Agreement
provides that, in connection with any approval of a proposed issuance of
Additional Units representing the equity portion of a proposed financing of an
Investment Opportunity (defined below) which the General Partner has determined
to pursue on behalf of MCC, Goldman Sachs shall commit to purchase, or cause
another person to commit to purchase: (i) a percentage of Additional Units to
be issued equal to its percentage interest in the total outstanding Units of
MCC, if at the time of such approval, Goldman Sachs, together with its
affiliates, hold Units with an aggregate initial issuance price of less than
$35,000,000 and (ii) 25% of the Additional Units to be issued, if at the time
of such approval, Goldman Sachs, together with its affiliates, hold Units with
an aggregate initial issuance price of $35,000,000 or more.
Additionally, under the MCC Partnership Agreement, the General Partner has
the authority, without the consent of any Limited Partners, to (i) cause MCC to
issue Class B Units designated as Employee Units to the General Partner or key
individuals serving MCC or any of its subsidiaries, subject to the terms of the
MCC Partnership Agreement, and (ii) issue Class B LP Units upon conversion of
Convertible Preference Units.
Preemptive Rights. The MCC Partnership Agreement provides that, if at any
time MCC proposes to issue Additional Units (including rights, options or
warrants to purchase Additional Units, but excluding Employee Units and Class B
LP Units issuable upon conversion of Convertible Preference Units), the General
Partner must give written notice to the then existing Limited Partners setting
forth the purchase price of such Additional Units and the rights and
limitations thereof. Thereafter, the General Partner and each then existing
Limited Partner will have the right to acquire the percentage of such
Additional Units equal to the number of Units (assuming full conversion of
Convertible Preference Units) then held by such then existing partner divided
by the total number of Units (assuming full conversion of Convertible
Preference Units) held by all of the then existing partners.
Liability of the General Partner. Under the MCC Partnership Agreement,
neither the General Partner nor its affiliates will be liable, in damages or
otherwise, to MCC or to any Limited Partner and neither MCC nor any Limited
Partner shall take any action against the General Partner or any of its
affiliates, in respect of any loss arising out of any acts or omissions
performed or omitted by it pursuant to the authority granted by the MCC
Partnership Agreement, or otherwise performed on behalf of MCC, if the General
Partner or its affiliates, in good faith determined that such course of action
was in the best interests of MCC. Under the MCC Partnership Agreement, MCC
will indemnify the General Partner and its affiliates against losses, damages,
expenses (including attorneys' fees), judgments and settlement amounts actually
and reasonably incurred by such party with respect to
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activities performed on behalf of MCC and not constituting bad faith, willful
misconduct or fraud. The General Partner is not personally liable for the
return of the investment made by the Limited Partners.
Withdrawal or Removal of the General Partner. Under the MCC Partnership
Agreement, the General Partner may not voluntarily retire or withdraw as a
general partner of MCC. Upon a Required Vote (excluding therefrom Units
beneficially owned by the General Partner and its affiliates) and subject to
certain procedures, the General Partner shall be removed and a replacement
general partner shall be appointed; provided, however, that the General Partner
can only be removed for "cause," which is defined as one or more of the
following: (i) conviction of a felony, or plea of guilty to a charge of a
felony, by the General Partner or Mr. Marcus which reasonably could have an
adverse effect on the ability of the General Partner or Mr. Marcus to perform
its or his obligations under the MCC Partnership Agreement, (ii) a
determination that there has been malfeasance, criminal conduct or willful
neglect by the General Partner or Mr. Marcus or (iii) a determination that
there has been a violation by the General Partner or Mr. Marcus of any material
provision of the MCC Partnership Agreement. If such removal is based on (ii) or
(iii) above, the General Partner cannot be removed unless it has been
determined by an arbitrator, a court of law, an administrator or a regulatory
authority that a factor constituting "cause" exists. Upon the removal of the
General Partner, all of the GP Units held by the General Partner, other than
those representing 1% of MCC items of income or loss, shall be converted into
an equivalent number of Class B LP Units; provided, however, that so long as
such Class B LP Units are held by the General Partner or an affiliate of the
General Partner, such Class B LP Units shall not confer any voting rights or
rights to give or withhold consent or approval as a Limited Partner.
Put and Call Rights. The MCC Partnership Agreement provides that, upon the
occurrence of (i) the death or incapacity of Mr. Marcus and a written election
to convert by the General Partner or (ii) the later of the date on which the
partners (a) elect to reconstitute the business of MCC and (b) elect a new
general partner, in either case in connection with a Disabling Event (including
the death or incapacity of Mr. Marcus), the GP Units held by the General
Partner shall immediately convert into an equivalent number of Class B LP
Units. Such converted Class B LP Units have the relative rights, powers and
preferences provided to holders of Class B LP Units except to the extent set
forth in the MCC Partnership Agreement. Upon conversion of GP Units resulting
from the death or incapacity of Mr. Marcus, the holders of the converted Class
B LP Units, from and after January 1, 1999, shall have the right to cause MCC
to purchase all (but not less than all) of the converted Units owned by such
holders and any other Units held by the General Partner or its affiliates,
including any rights, options or warrants, at a price equal to their fair
market value, to the extent permitted by the Indentures governing the 13 1/2%
Notes, the 11 7/8% Debentures and the 14 1/4% Notes and the Senior Credit
Facility. In addition, MCC shall have the right, from and after January 1,
1999, to purchase from the General Partner, upon the affirmative vote of 51% or
more of the Outstanding Class B LP Units (excluding therefrom the converted
Units), all (but not less than all) of the converted Units and any other Units
held by the General Partner or its affiliates, including any rights, options or
warrants, at a price equal to their fair market value, to the extent permitted
by the Indentures governing the 13 1/2% Notes, the 11 7/8% Debentures and the
14 1/4% Notes and the Senior Credit Facility.
Under the MCC Partnership Agreement, in the event the General Partner fails
to timely dissolve MCC following the vote to dissolve the partnership by
holders of 51% or more of the Class B Units, then the holders of the Class B LP
Units (other than Class B Units held or beneficially owned by the General
Partner or its affiliates) shall have the right, exercisable upon written
notice to MCC from the holders of 51% or more of the Outstanding Class B LP
Units (other than Class B Units held or beneficially owned by the General
Partner or its affiliates), to cause MCC to purchase all (but not less than
all) of the Class B LP Units held by such holders at a price equal to the fair
market value thereof, to the extent permitted by the Indentures governing the
13 1/2% Notes, the 11 7/8% Debentures and the 14 1/4% Notes and the Senior
Credit Facility.
Liability of Limited Partners. Limited Partners of MCC are not personally
responsible for the liabilities of MCC except to the extent a Limited Partner
assumes or guarantees any debts of MCC under the MCC Partnership Agreement. A
Limited Partner will not be personally liable or obligated, except as otherwise
required by law to (i) pay to MCC or to any creditor of MCC or any other
partner any deficiency in such Limited Partner's capital account, or (ii)
return to MCC or to pay any creditor or any other partner the amount of any
return to him of his capital contribution or other distribution made to him.
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Assignment of Partnership Interests. Under the MCC Partnership Agreement,
the General Partner may not transfer any of its GP Units; provided, however,
that the General Partner may assign, in whole or in part, to affiliates
(including Mr. Marcus) and employees of the affiliates of the General Partner
and to immediate family of Mr. Marcus, the right to share in such profits and
losses, to receive distributions and to receive such allocations of income,
gain, loss, deduction or credit to which a holder of a GP Unit is entitled.
Further, a partner may transfer all or any part of such partner's LP Units
(subject in certain cases to rights of first offer and rights of first refusal
set forth in the MCC Partnership Agreement) to another person only if such
transfer meets the conditions set forth in the MCC Partnership Agreement;
provided, however, that each Limited Partner (or an affiliate thereof) shall be
entitled to transfer LP Units to any affiliate of such Limited Partner (or
affiliate thereof). Certain Limited Partners who purchased LP Units on or after
January 18, 1995 are prohibited from transferring such Units prior to January
18, 1998.
Information Committee. The MCC Partnership Agreement provides for the
establishment of an Information Committee to be informed of each cable
television system investment proposed by the General Partner for MCC. The MCC
Partnership Agreement does not require the approval of the Information
Committee to approve any cable television system acquisition. The General
Partner, by consent of Mr. Marcus and a designee of Mr. Marcus serving at Mr.
Marcus' sole discretion, has the authority to approve such investment after it
has informed the Information Committee thereof.
Conflicts of Interest and Investment Opportunities. The business and affairs
of MCC or any subsidiary thereof shall be the principal business of Mr. Marcus
and the General Partner; provided, however, that Mr. Marcus may devote time to
the ownership, management and operation of Marcus Investments (as defined
below). Pursuant to the MCC Partnership Agreement, Mr. Marcus, the General
Partner and any affiliates thereof cannot engage in, or render services to an
entity that engages in, the management, operation or ownership of any entity
which engages in the communications or voice or data transmission or video
programming business, including the business of operating a cable television
system, or any similar business. The following activities, however, will not
violate the provisions outlined above: (i) owning less than 5% of the equity
securities of any publicly traded entity which may be engaged in a competing
business, provided that the market value of all such equity securities of any
entity does not exceed $2,000,000, (ii) having investments (such as hedge
funds) in which the applicable entity or person is not an active manager of
such investment or (iii) making subsequent investments in a Marcus Investment,
relating to the maintenance or improvement of assets or properties thereof,
subject to the Investment Right (defined below) of the Limited Partners. Under
the MCC Partnership Agreement, a "Marcus Investment" is an Investment
Opportunity (as defined below) in which Mr. Marcus or any affiliate thereof
proposes to invest in through any person or entity other than MCC or any
subsidiary thereof. An "Investment Opportunity" is any investment opportunity
that (i) is within the partnership purpose of MCC, (ii) is under consideration
by Mr. Marcus, the General Partner or an affiliate thereof, and (iii) involves
an acquisition of cable television systems and franchises, which, when
aggregated with prior Marcus Investments, has a total number of customers that
does not exceed 175,000 customers.
If Mr. Marcus pursues an Investment Opportunity other than through MCC or its
subsidiaries, all Limited Partners have the right to invest in such investment
(the "Investment Right") on terms substantially identical to the terms given
other investors on a pro rata basis based on their respective ownership
(assuming full conversion of all outstanding Convertible Preference Units) in
MCC.
THE SENIOR CREDIT FACILITY
The Senior Credit Facility provides for a term loan facility, comprised of
two tranches, one having a final maturity of December 31, 2002 and the other
having a final maturity of April 30, 2004. In addition, the Senior Credit
Facility provides for a revolving credit facility and letter of credit
facility. As of February 28, 1997, Operating and its subsidiaries had
approximately $830,000,000 outstanding under the Senior Credit Facility, and
the weighted average interest rate per annum under the term loan and revolving
credit facilities was 7.42% per annum. Operating has an additional
$268,209,000 of borrowing capacity under the Senior Credit Facility's revolving
credit facility.
The Senior Credit Facility provides for a pledge of all partnership interests
or common stock in the Operating Partnerships. Any intercompany notes held by
Operating for loans to the Operating Partnerships are also pledged to the
Lenders. All borrowings outstanding under the Senior Credit Facility are
guaranteed by MCC on an unsecured basis.
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The Senior Credit Facility contains numerous restrictive financial and other
covenants, including (i) restrictions on indebtedness, distributions, liens,
sale/leaseback transactions, guarantees, mergers, dispositions of assets,
acquisitions, investments, transactions with affiliates, change in business
conducted and certain acquisitions by the Company and (ii) certain financial
maintenance tests. The Senior Credit Facility also provides that the
occurrence of a Change of Control (as defined in the Senior Credit Facility) of
the Company will constitute an event of default under the Senior Credit
Facility.
On March 14, 1997, Operating entered into an agreement to amend its Senior
Credit Facility. The amendment provides for, among other items, a reduction in
the interest rate margins under the Senior Credit Facility as well as increased
flexibility for the Company as it relates to investments, permitted lines of
businesses and the incurrence of unsecured indebtedness. In addition, the
availability under the Revolving Credit Facility was increased by $50,000,000.
DESCRIPTION OF THE 13 1/2% NOTES
The 13 1/2% Notes were issued under an indenture dated as of July 29, 1994
(the "Indenture"), among Operating, Capital II, MCC and U.S. Trust Company of
Texas, N.A., as Trustee (the "Trustee"). The Indenture is subject to and
governed by the Trust Indenture Act of 1939, as amended. The following summary
sets forth all of the material terms of the 13 1/2% Notes. The statements
under this caption relating to the 13 1/2% Notes and the Indenture are
summaries and do not purport to be complete. Where reference is made to
particular provisions of the Indenture, such provisions, including the
definition of certain terms, are incorporated by reference as a part of such
summaries, which are qualified in their entirety by such reference. Unless
otherwise indicated, references under this caption to sections, "Section " or
articles are references to sections and articles of the Indenture. A copy of
the Indenture has been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus is a part.
GENERAL
The 13 1/2% Notes are unsecured, joint and several obligations of Operating
and Capital II, are limited to $413,461,000 aggregate principal amount
($214,999,720 gross proceeds to the Issuers) and will mature on August 1, 2004.
(Section 301). In serving as a co-issuer of the 13 1/2% Notes, Capital II is
acting as an agent of Operating. See "Certain Federal Income Tax
Considerations" for important information concerning the federal income tax
considerations associated with the 13 1/2% Notes. The 13 1/2% Notes were
issued at a substantial discount to their principal amount at maturity. No
cash interest will be payable on the 13 1/2% Notes prior to February 1, 2000.
The 13 1/2% Notes will fully accrete to face value on August 1, 1999. From and
after August 1, 1999 cash interest on the 13 1/2% Notes shall accrue at a rate
of 13 1/2% per annum, and will be payable semiannually on each February 1 and
August 1, commencing on February 1, 2000, to the Holders of record on the
immediately preceding January 15 and July 15. Interest on the 13 1/2% Notes
shall be computed on the basis of a 360-day year of twelve 30-day months
(Section 310). At the option of the Issuers, principal of and premium, if
any, and interest on the 13 1/2% Notes may be paid at the corporate trust
office of the Trustee or by check mailed to the address of the Person entitled
thereto as it appears in the Security Register (Sections 301, 305 and 1002).
Payment of the principal of and premium (if any) and interest on the 13 1/2%
Notes has been unconditionally guaranteed, on a senior basis, by MCC.
The 13 1/2% Notes were issued only in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple thereof (Section 302).
No service charge will be made to the Holder for any registration of transfer
or exchange of 13 1/2% Notes, but the Issuers or the Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith (Sections 305 and 1002).
Currently, the Trustee is the Paying Agent and Registrar. The 13 1/2% Notes
may be presented for registration of transfer and exchange at the offices of
the Registrar (Section 305).
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REDEMPTION
The 13 1/2% Notes will be subject to redemption, at the option of the
Issuers, in whole or in part, at any time on or after August 1, 1999 and prior
to maturity, upon not less than 30 nor more than 60 days notice mailed to each
Holder of the 13 1/2% Notes to be redeemed at his address appearing in the
Security Register, in amounts of $1,000 or an integral multiple of $1,000, at
the following Redemption Prices (expressed as percentages of principal amount)
plus accrued interest to but excluding the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date): If redeemed during the 12-month period beginning August 1st of the
years indicated,
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ------------------
<S> <C>
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.0%
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.5%
2001 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . 100.0%
</TABLE>
In the event that on or before the third anniversary of the issuance
of the 13 1/2% Notes, Operating or MCC consummates a sale of any of its Capital
Stock pursuant to a registered public offering, resulting in net proceeds to
Operating of at least $25,000,000, the Issuers may, at the option of Operating,
apply the proceeds to redeem up to 25% of the 13 1/2% Notes then outstanding at
a Redemption Price of 110% of Accreted Value (Sections 203, 1101 and 1107).
If less than all of the 13 1/2% Notes are to be redeemed, the Trustee
shall select, in such manner as it shall deem fair and appropriate, the
particular 13 1/2% Notes to be redeemed or any portion thereof that is an
integral multiple of $1,000 (Section 1104).
The 13 1/2% Notes do not have the benefit of any sinking fund
obligations (Section 203).
SUBORDINATION
The payment of the principal of and premium, if any, and interest on
the 13 1/2% Notes, and any other obligations of the Issuers in respect of the
13 1/2% Notes (including any obligation to repurchase 13 1/2% Notes) will, to
the extent set forth in the Indenture, be subordinated in right of payment to
the prior payment in full of all Senior Debt. Upon any payment or distribution
of assets to creditors upon any liquidation, dissolution, winding-up,
reorganization, assignment for the benefit of creditors, marshaling of assets
or any bankruptcy, insolvency or similar proceedings of Operating, the holders
of all Senior Debt will first be entitled to receive payment in full in cash of
all amounts due or to become due thereon before the Holders of the 13 1/2%
Notes will be entitled to receive any payment in respect of the principal of or
premium, of any, or interest on the 13 1/2% Notes. No payments on account of
principal, premium, if any, or interest, or any other obligations (including
any obligation to repurchase), in respect of the 13 1/2% Notes may be made if
there shall have occurred and be continuing a Senior Payment Default. Upon the
occurrence of a Senior Nonmonetary Default and receipt of written notice by the
Company and the Trustee of the occurrence of such Senior Nonmonetary Default
from a holder of Senior Debt (or a trustee, agent or other representative for
such a holder) which is the subject of such Senior Nonmonetary Default, no
payments on account of principal, premium, if any, or interest, or any other
obligations (including any obligation to repurchase), in respect of the 13 1/2%
Notes may be made for a period (the "Payment Blockage Period") commencing on
the date of the receipt of such notice and ending on the earlier of (i) the
date on which such Senior Nonmonetary Default has been cured or waived or
ceases to exist or all Senior Debt that is the subject of such Senior
Nonmonetary Default has been discharged and (ii) the 179th day after the date
of the receipt of such notice; provided, however, that no more than one Payment
Blockage Period may be commenced during any 360-day period and there shall be a
period of at least 181 days during any such 360-day period when no Payment
Blockage Period is in effect; provided further, that no Senior Nonmonetary
Default which existed or was continuing on the date of the commencement of a
Payment Blockage Period may be made the basis of the commencement of a
subsequent Payment Blockage Period whether or not within a period of 360
consecutive days, unless such Senior Nonmonetary Default shall have been cured
for a period of not less than 90 consecutive days. "Senior Payment Default" is
defined in the Indenture as any default in the payment of any principal of or
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premium, if any, or interest or any other obligation on Senior Debt when due,
whether at the stated maturity of any such payment or by declaration of
acceleration, call for redemption or otherwise. "Senior Nonmonetary Default"
is defined in the Indenture as a default with respect to Senior Debt, other
than a Senior Payment Default, which with the giving of notice or the passage
of time, or both, gives the holders of the Senior Debt (or a trustee or agent
on behalf of the holders thereof) the right to declare the indebtedness under
the Senior Debt due and payable prior to the date on which it would otherwise
become due and payable.
"Senior Debt" means the principal of (and premium, if any) and
interest (including interest accruing on or after the filing of any petition
in bankruptcy or for reorganization relating to Operating whether or not such
claim for post-petition interest is allowed in such proceeding) on, or other
amount of, or fees, costs and expenses incurred in connection with, (i) Debt
for money borrowed of Operating, whether incurred on or prior to the date of
the Indenture or thereafter Incurred, other than the 13 1/2% Notes, (ii) Debt
of Operating evidenced by bonds, debentures, notes or other similar
instruments, including Debt Incurred in connection with the acquisition of
property, assets or business, (iii) matured and unmatured reimbursement or
other obligations of Operating with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of the Company, (iv)
obligations of Operating under interest rate swaps, caps, collars and similar
arrangements, (v) Capital Lease Obligations of Operating, (vi) guarantees by
Operating of Debt for money borrowed and (vii) amendments, renewals,
extensions, modifications, refinancings and refundings of any such Debt;
provided, however, the following does not constitute Senior Debt: (A) any Debt
owed to a Person when such Person is a Subsidiary of Operating, (B) any Debt
which by the terms of the instrument creating or evidencing the same is not
superior in right of payment to the 13 1/2% Notes, (C) any Debt incurred in
violation of the Indenture or (D) any Debt which is subordinated in right of
payment in any respect to any other Debt of Operating.
COVENANTS OF THE ISSUERS
Limitation on Operating Consolidated Debt
The Issuers may not, and may not permit any Restricted Subsidiary of
Operating to, Incur any Debt unless, immediately after giving effect to the
Incurrence of such Debt and any other Debt Incurred since the date of the most
recent available quarterly or annual balance sheet and the receipt and
application of the proceeds thereof, the ratio of the aggregate principal
amount of consolidated Debt of Operating and its Restricted Subsidiaries
(excluding Debt permitted to be incurred pursuant to clause (iii) below)
outstanding as of the most recent available quarterly or annual balance sheet
to the product of (x) the Pro Forma Consolidated Cash Flow for the full fiscal
quarter immediately preceding the date of Incurrence, multiplied by (y) four,
determined on a pro forma basis as if any such Debt had been Incurred and the
proceeds thereof had been applied at the beginning of such preceding fiscal
quarter, would not exceed 7 to 1 for the period ending December 31, 1996 and
6.5 to 1 thereafter.
Notwithstanding the foregoing limitation, Operating and any Restricted
Subsidiary of Operating may Incur the following: (i) Debt under a working
capital facility in an aggregate principal amount at any one time not to exceed
$25 million; (ii) Debt owed by Operating to any Wholly Owned Restricted
Subsidiary of Operating or owed by any Subsidiary of Operating to Operating or
any Wholly Owned Restricted Subsidiary of Operating (but only so long as such
Debt is held by Operating or a Wholly Owned Restricted Subsidiary of
Operating); (iii) Debt owed by Operating to MCC in respect of the borrowing
from MCC of the proceeds of one or more Incurrences of Debt of MCC permitted
under the Indenture, provided that such Debt of Operating is by its terms
subordinated in right of payment to the 13 1/2% Notes; (iv) Debt Incurred to
renew, refund, refinance or extend (successively or otherwise) Debt referred to
in the foregoing clause (i) or the 13 1/2% Notes, in any case in an amount not
to exceed the principal amount of the Debt or 13 1/2% Notes so renewed,
refunded, extended or refinanced plus (1) the amount of any premium required to
be paid in connection with such refinancing pursuant to the terms of such Debt
or the 13 1/2% Notes or the amount of any premium and accrued interest
reasonably determined by the Issuers as necessary to accomplish such financing
by means of a tender offer or privately negotiated repurchase, plus (2) all
other fees and expenses of Operating or such Restricted Subsidiary of Operating
reasonably incurred in connection with such refinancing; provided that, (A) in
the case of any refinancing or refunding of Debt pari passu to the 13 1/2%
Notes, such refinancing or refunding Debt is made pari passu or subordinated to
the 13 1/2% Notes and, in the case of any refinancing or refunding of Debt
subordinated to the 13 1/2% Notes, such refinancing or refunding Debt is made
subordinate to the 13 1/2% Notes to substantially the same extent as the Debt
refinanced or refunded, and (B) in either case, such refinancing or refunding
Debt does not have an Average Life less than the Average Life of the Debt being
renewed, refunded, refinanced or extended; (v) Capital Lease Obligations not to
exceed $2 million in the
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aggregate at any one time; (vi) Debt not otherwise permitted to be Incurred
pursuant to clauses (i) through (v) above, which, together with any other
outstanding Debt Incurred pursuant to this clause (vi), has an aggregate
principal amount not in excess of $25 million at any time outstanding (Section
1007).
Limitation on Debt and Preferred Stock of Restricted Subsidiaries
Operating shall not cause, and shall not permit, any Restricted
Subsidiary of Operating to Incur any Debt or Preferred Stock except: (i) Debt
or Preferred Stock outstanding on the date of the Indenture; (ii) Debt or
Preferred Stock issued to and held by Operating or a Wholly Owned Restricted
Subsidiary of Operating (provided that such Preferred Stock is at all times
held by Operating or a Person which is a Wholly Owned Restricted Subsidiary of
Operating); (iii) Debt or Preferred Stock Incurred by a Person prior to the
time (A) such Person became a Restricted Subsidiary of Operating, (B) such
Person merges into or consolidates with a Restricted Subsidiary of Operating or
(C) another Restricted Subsidiary of Operating merges into or consolidates with
such Person (in a transaction in which such Person becomes a Restricted
Subsidiary of Operating), which Debt or Preferred Stock was not Incurred or
issued in anticipation of such transaction and was outstanding prior to such
transaction; or (iv) Debt Incurred or Preferred Stock issued by a Restricted
Subsidiary of Operating (other than the Restricted Subsidiaries of Operating
existing on the date of the Indenture or any Restricted Subsidiary carrying on
any of the businesses of any such Restricted Subsidiary) in connection with and
to finance Operating's acquisition of such Restricted Subsidiary or the
business of such Restricted Subsidiary (Section 1008).
Limitation on Certain Senior Debt
Operating shall not Incur any Debt which by its terms is both (i)
subordinated in right of payment to any Senior Debt and (ii) senior in right
of payment to the 13 1/2% Notes. In addition, at any time that any Outstanding
Debt of Operating is secured by a Lien on any assets of MCC, Operating or any
other Restricted Subsidiary of MCC, Operating shall not Incur or suffer to
exist any Debt of Operating that is senior in right of payment to the 13 1/2%
Notes and that is not also so secured (Section 1009).
Limitation on Liens Securing Subordinated Debt
Operating shall not, and shall not permit any Restricted Subsidiary
to, Incur any Lien on or with respect to any property or assets of Operating or
any such Restricted Subsidiary now owned or hereafter acquired to secure Debt
which is pari passu or subordinated in right of payment to the 13 1/2% Notes
without making, or causing such Restricted Subsidiary to make, effective
provision for securing the 13 1/2% Notes (and, if Operating shall so determine,
any other Debt of Operating which is not subordinate to the 13 1/2% Notes or of
such Restricted Subsidiary) (x) equally and ratably with such Debt as to such
property or assets for so long as such Debt shall be so secured or (y) in the
event such Debt is Debt of Operating which is subordinate in right of payment
to the 13 1/2% Notes, prior to such Debt as to such property for so long as
such Debt will be so secured. The foregoing restrictions shall not apply to
Liens in respect of Debt existing at the date of the Indenture or to: (i) Liens
securing only the 13 1/2% Notes; (ii) Liens in favor of Operating or a Wholly
Owned Restricted Subsidiary; or (iii) Liens to secure Debt incurred to extend,
renew, refinance or refund (or successive extensions, renewals, refinancings or
refundings), in whole or in part, any Debt secured by Liens referred to in the
foregoing clause (i) so long as such Lien does not extend to any other property
and the principal amount of Debt so secured is not increased except as
otherwise permitted under clause (iii) of the "Limitation on Operating
Consolidated Debt" (Section 1010).
Limitation on Operating Restricted Payments
Each of the Issuers (i) may not, and Operating may not permit any
Restricted Subsidiary to, directly or indirectly, purchase, redeem or otherwise
acquire or retire for value (a) any Capital Stock of either of the Issuers or
any Related Person of either of the Issuers or (b) any options, warrants or
rights to purchase or acquire shares of Capital Stock of either of the Issuers
or any Related Person of either of the Issuers, (ii) may not make, and
Operating may not permit any Restricted Subsidiary to make, any loan, advance,
capital contribution to or investment in, or payment on a Guarantee of any
obligation of, any Unrestricted Subsidiary or any Affiliate or any Related
Person of Operating, other than MCC or a Restricted Subsidiary of MCC which is
a Restricted Subsidiary prior to such Investment (provided that if, at any time
thereafter, such Subsidiary becomes an
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Unrestricted Subsidiary, such investment will be deemed to have been made in an
Unrestricted Subsidiary at such time), and (iii) may not, and Operating may not
permit any Restricted Subsidiary to, redeem, defease, repurchase or otherwise
acquire or retire for value prior to any scheduled maturity, repayment or
sinking fund payment, Debt of either of the Issuers (other than Debt owing to
MCC or one of its Restricted Subsidiaries) that is subordinate in right of
payment to the 13 1/2% Notes (each of clauses (i) through (iii) being a
"Restricted Payment"), if:
(1) an Event of Default, or an event that with the lapse of time
or the giving of notice, or both, would constitute an Event of Default, shall
have occurred and be continuing;
(2) upon giving effect to such Restricted Payment the aggregate of
all Restricted Payments from the date of the Indenture exceeds the sum of: (a)
the remainder of (x) 100% of cumulative Consolidated Cash Flow after December
31, 1993 through the last day of the last full fiscal quarter immediately
preceding such Restricted Payment for which quarterly or annual financial
statements of Operating are available minus (y) the product of 1.4 times
cumulative Consolidated Interest Expense after December 31, 1993 through the
last day of the last full fiscal quarter immediately preceding such Restricted
Payment for which quarterly or annual financial statements of Operating are
available; and (b) the sum of (x) 100% of the aggregate net proceeds after the
date of the Indenture from the issuance of Capital Stock (other than Redeemable
Stock) of each of the Issuers and options, warrants or other rights to purchase
or acquire shares of Capital Stock (other than Redeemable Stock) of each of the
Issuers and (y) the principal amount of Debt of each of the Issuers that has
been converted into Capital Stock (other than Redeemable Stock) of an Issuer
after the date of the Indenture; less (c) the aggregate, since the date of the
Indenture, of all dividends or distributions in respect of Operating's Capital
Stock or to the holders thereof (including pursuant to a merger or
consolidation of Operating and excluding any dividends or distributions payable
solely in shares of its Capital Stock (other than Redeemable Stock) or in
options, warrants or other rights to acquire its Capital Stock (other than
Redeemable Stock)), and of all loans, advances, capital contributions to or
investments in, or payments on Guarantees of any obligations of MCC or any
Restricted Subsidiary of MCC that is not also a Restricted Subsidiary of
Operating; or
(3) immediately after giving effect to such Restricted Payment,
the Issuers could not Incur at least $1.00 of additional Debt pursuant to the
provisions of the first paragraph under "Limitation on Operating Consolidated
Debt."
The foregoing provisions will not be violated by reason of (i) the
refinancing of Debt that is subordinated to the 13 1/2% Notes (including
premium, if any, accrued interest, fees and expenses) pursuant to clause (iv)
of "Limitation on Operating Consolidated Debt"; (ii) so long as no Event of
Default shall have occurred and be continuing, and so long as Operating is
treated as a partnership for U.S. Federal Income Tax purposes, distributions in
respect of partners' income tax liability in an amount not to exceed the Tax
Amount; (iii) Investments in Unrestricted Subsidiaries engaged in business
related to that of Operating and its Restricted Subsidiaries in an aggregate
amount not in excess of $10 million; or (iv) the purchase, redemption or other
acquisition or retirement for value of Capital Stock or options, warrants or
rights to purchase or acquire shares of Capital Stock or the acquisition or
retirement of Debt that is subordinated to the 13 1/2% Notes, in each case, in
exchange for or solely out of the proceeds of a substantially concurrent
offering of Capital Stock (other than Redeemable Stock). Any payment made
pursuant to clause (ii), (iii) or (iv) of this paragraph shall be a Restricted
Payment for purposes of calculating aggregate Restricted Payments under the
preceding paragraph (Section 1011).
Limitations Concerning Distributions by and Transfers to Subsidiaries
Each Issuer may not, and Operating may not permit any Restricted
Subsidiary to, suffer to exist any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary of Operating (i) to pay, directly or
indirectly, dividends or make any other distributions in respect of its Capital
Stock or pay any Debt or other obligation owed to such Issuer or any other
Restricted Subsidiary; (ii) to make loans or advances to such Issuer or any
Restricted Subsidiary; or (iii) to transfer any of its property or assets to
such Issuer. Notwithstanding the foregoing, such Issuer may, and Operating may
permit any Restricted Subsidiary to, suffer to exist any such encumbrance or
restriction (a) pursuant to any agreement in effect on the date of the
Indenture, (b) pursuant to an agreement relating to any Debt Incurred by such
Restricted Subsidiary prior to the date on which such Restricted Subsidiary was
acquired by Operating and outstanding on such date and not Incurred in
anticipation of becoming a Restricted Subsidiary, (c) pursuant to an agreement
relating to any Debt Incurred or Preferred Stock issued by a Restricted
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Subsidiary of Operating (other than the Restricted Subsidiaries of Operating
existing on the date of the Indenture or any Restricted Subsidiary carrying on
any of the businesses of any such Restricted Subsidiary) in connection with
Operating's acquisition of such Restricted Subsidiary or the business of such
Restricted Subsidiary, provided that such encumbrance or restriction applies
solely to such Restricted Subsidiary and not to Operating or any other
Restricted Subsidiary of Operating or (d) pursuant to an agreement effecting a
renewal, refunding, refinancing or extension of Debt Incurred pursuant to an
agreement referred to in clause (a), (b) or (c) above or effecting an amendment
to such agreement; provided, however, that the provisions contained in such
renewal, refunding, refinancing or extension agreement relating to such
encumbrance or restriction are no more restrictive in any material respect than
the provisions contained in the agreement which is the subject thereof in the
reasonable judgment of the Board of Directors of MCPI as evidenced by a
resolution of the Board of Directors of MCPI filed with the Trustee (Section
1012).
Limitations on Conduct of Business of Capital II
Capital II will not hold any operating assets or other properties or
conduct any business other than to serve as an Issuer and co-obligor with
respect to the 13 1/2% Notes and will not own any Capital Stock of any Person
to the extent that such ownership would deem such Person a Subsidiary of
Capital II (Section 1013).
COVENANTS OF MCC
Limitation on MCC Consolidated Debt
MCC may not, and may not permit any Restricted Subsidiary of MCC to,
Incur any Debt unless, immediately after giving effect to the Incurrence of
such Debt and any other Debt Incurred since the date of the most recent
available quarterly or annual balance sheet and the receipt and application of
the proceeds thereof, the ratio of the aggregate principal amount of
consolidated Debt of MCC and its Restricted Subsidiaries outstanding as of the
most recent available quarterly or annual balance sheet to the product of (x)
the Pro Forma Consolidated Cash Flow for the full fiscal quarter immediately
preceding the date of Incurrence, multiplied by (y) four, determined on a pro
forma basis as if any such Debt had been Incurred and the proceeds thereof had
been applied at the beginning of such preceding fiscal quarter, would not
exceed 8 to 1 for the period ending December 31, 1996 and 7 to 1 thereafter.
Notwithstanding the foregoing limitation, MCC and any Restricted
Subsidiary of MCC may Incur the following: (i) Debt under a working capital
facility in an aggregate principal amount at any one time not to exceed $25
million; (ii) Debt owed by MCC to any Wholly Owned Restricted Subsidiary of MCC
or owed by any Subsidiary of MCC to MCC or any Wholly Owned Restricted
Subsidiary of MCC (but only so long as such Debt is held by MCC or a Wholly
Owned Restricted Subsidiary of MCC); (iii) Debt Incurred to renew, refund,
refinance or extend (successively or otherwise) the 11 7/8% Debentures or the
13 1/2% Notes, in any case in an amount not to exceed the principal amount of
the 11 7/8% Debentures or the 13 1/2% Notes so renewed, refunded, extended or
refinanced plus (1) the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the 11 7/8% Debentures or the 13
1/2% Notes or the amount of any premium and accrued interest reasonably
determined by the Issuers as necessary to accomplish such financing by means of
a tender offer or privately negotiated repurchase, plus (2) all other fees and
expenses of MCC or such Restricted Subsidiary of MCC reasonably incurred in
connection with such refinancing, provided that, (A) in the case of any
refinancing or refunding of Debt pari passu to the 13 1/2% Notes, such
refinancing or refunding Debt is made pari passu or subordinated to the 13 1/2%
Notes and, in the case of any refinancing or refunding of Debt subordinated to
the 13 1/2% Notes, such refinancing or refunding Debt is made subordinate to
the 13 1/2% Notes to substantially the same extent as the Debt refinanced or
refunded, and (B) in either case, such refinancing or refunding Debt does not
have an Average Life less than the Average Life of the Debt being renewed,
refunded, refinanced or extended; (iv) Capital Lease Obligations not to exceed
$2 million in the aggregate at any one time; and (v) Debt not otherwise
permitted to be Incurred pursuant to clauses (i) through (iv) above which,
together with any other outstanding Debt Incurred pursuant to this clause (v),
has an aggregate principal amount not in excess of $25 million at any time
outstanding (Section 1014).
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Limitation on MCC Restricted Payments
MCC (i) may not, directly or indirectly, declare or pay any dividend,
or make any distribution, in respect of its Capital Stock or to the holders
thereof (including pursuant to a merger or consolidation of MCC and excluding
any dividends or distributions payable solely in shares of its Capital Stock
(other than Redeemable Stock) or in options, warrants or other rights to
acquire its Capital Stock (other than Redeemable Stock)), (ii) may not, and may
not permit any Restricted Subsidiary to, directly or indirectly, purchase,
redeem or otherwise acquire or retire for value (a) any Capital Stock of MCC or
any Related Person of MCC or (b) any options, warrants or rights to purchase or
acquire shares of Capital Stock of MCC or any Related Person of MCC, (iii) may
not make, and may not permit any Restricted Subsidiary to make, any loan,
advance, capital contribution to or investment in, or payment on a Guarantee of
any obligation of, any Unrestricted Subsidiary or any Affiliate or any Related
Person of MCC, other than a Wholly Owned Restricted Subsidiary of MCC which is
a Wholly Owned Restricted Subsidiary prior to such Investment (provided that
if, at any time thereafter, such Subsidiary becomes an Unrestricted Subsidiary,
such investment will be deemed to have been made in an Unrestricted Subsidiary
at such time), and (iv) may not, and may not permit any Restricted Subsidiary
to, redeem, defease, repurchase or otherwise acquire or retire for value prior
to any scheduled maturity, repayment or sinking fund payment, any Debt of MCC
or any Debt of either of the Issuers (other than Debt owing to MCC or one of
its Restricted Subsidiaries) that is subordinate in right of payment to the 13
1/2% Notes (each of clauses (i) through (iv) being an "MCC Restricted
Payment"), if: (1) an Event of Default, or an event that with the lapse of time
or the giving of notice, or both, would constitute an Event of Default, shall
have occurred and be continuing; (2) upon giving effect to such MCC Restricted
Payment the aggregate of all MCC Restricted Payments from the date of the
Indenture exceeds the sum of: (a) the remainder of (x) 100% of cumulative
Consolidated Cash Flow after December 31, 1993 through the last day of the last
full fiscal quarter immediately preceding such MCC Restricted Payment for which
quarterly or annual financial statements of MCC are available minus (y) the
product of 1.4 times cumulative Consolidated Interest Expense after December
31, 1993 through the last day of the last full fiscal quarter immediately
preceding such MCC Restricted Payment for which quarterly or annual financial
statements of MCC are available; and (b) the sum of (x) 100% of the aggregate
net proceeds after the date of the Indenture from the issuance of Capital Stock
(other than Redeemable Stock) of MCC and options, warrants or other rights to
purchase or acquire shares of Capital Stock (other than Redeemable Stock) of
MCC and (y) the principal amount of Debt of MCC that has been converted into
Capital Stock (other than Redeemable Stock) of MCC after the date of the
Indenture; or (3) immediately after giving effect to such MCC Restricted
Payment, MCC could not incur at least $1.00 of additional Debt pursuant to the
provisions of the first paragraph under "Limitation on MCC Consolidated Debt."
The foregoing provisions will not be violated by reason of (i) the
payment of any dividend or distribution on partnership interests within 60 days
after declaration thereof if at the declaration date such payment would have
complied with the foregoing provision; (ii) the refinancing of any Debt
(including premium, if any, accrued interest, fees and expenses) pursuant to
clause (iii) of "Limitation on MCC Consolidated Debt"; (iii) payments in
redemption of Capital Stock of MCC or a Related Person of MCC, or options,
warrants or rights to purchase or acquire shares of Capital Stock of MCC or a
Related Person of MCC, to officers or employees or former officers or employees
(or their estates or their estate beneficiaries) upon death, disability,
retirement or termination of employment from MCC or its Subsidiaries not to
exceed $2.5 million in any 12-month period; (iv) so long as no Event of Default
shall have occurred and be continuing, and so long as MCC is treated as a
partnership for U.S. Federal Income Tax purposes, distributions in respect of
partners' income tax liability in an amount not to exceed the Tax Amount; (v)
Investments in Unrestricted Subsidiaries engaged in business related to that of
MCC and its Restricted Subsidiaries in an aggregate amount not in excess of $10
million; or (vi) the purchase, redemption or other acquisition or retirement
for value of Capital Stock or options, warrants or rights to purchase or
acquire shares of Capital Stock or the acquisition or retirement of Debt of
MCC, in each case, in exchange for or solely out of the proceeds of a
substantially concurrent offering of Capital Stock (other than Redeemable
Stock). Any payment made pursuant to clause (i), (iii), (iv), (v) or (vi) of
this paragraph shall be an MCC Restricted Payment for purposes of calculating
aggregate MCC Restricted Payments under the preceding paragraph (Section
1015).
Limitation on Transactions with Affiliates and Related Persons
MCC may not, and may not permit any Restricted Subsidiary to, directly
or indirectly, enter into any transaction or series of transactions after the
date of the Indenture resulting in aggregate consideration of $1,000,000 or
more within any 12-month period with any Affiliate or Related Person (other
than MCC or a Wholly Owned Restricted Subsidiary of MCC), unless (1) the
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Board of Directors of MCPI determines in its good faith judgment evidenced by a
Board Resolution that the terms of such transaction are in the best interests
of MCC or such Restricted Subsidiary; and (2) such transaction is, in the good
faith judgment of the Board of Directors of MCPI evidenced by a Board
Resolution, on terms no less favorable to MCC, or such Restricted Subsidiary,
than those that could be obtained in a comparable arm's-length transaction with
an entity that is not an Affiliate or a Related Person; provided that the
foregoing shall not apply to (i) the Management Agreements and the Investment
Banking Agreement as currently in effect as of the date of the Indenture
(including any extensions of such agreements on terms substantially the same as
those in existence on the date of the Indenture), (ii) any management agreement
entered into with respect to cable television systems acquired by MCC or its
Subsidiaries which has terms substantially the same as those of the existing
Management Agreements or (iii) Restricted Payments permitted under "Limitation
on MCC Restricted Payments" or "Limitation on Operating Restricted Payments"
(Section 1016).
Limitation on Liens
MCC may not Incur any Lien on or with respect to any property or
assets of MCC to secure Debt without making effective provision for securing
the MCC Guarantee of the 13 1/2% Notes (and, if MCC shall so determine, any
other Debt of MCC which is not subordinate to the Guarantee of the 13 1/2%
Notes) equally and ratably with such Debt or, in the event such Debt is
subordinate in right of payment to the Guarantees of the 13 1/2% Notes, prior
to such Debt, as to such property or assets for so long as such Debt shall be
so secured. The foregoing restrictions shall not apply to (i) Liens in respect
of Debt that exists on the date of the Indenture; (ii) Liens securing only the
Guarantee of the 13 1/2% Notes; (iii) Liens on property existing at the time of
acquisition thereof (and not Incurred in anticipation of the financing of such
acquisition); (iv) Liens on property of a Person existing at the time such
Person is merged into or consolidated with MCC; (v) Liens on property of MCC in
favor of any governmental authority to secure certain payments pursuant to any
contract or statute; (vi) Liens to secure Debt Incurred for the purpose of
financing all or any part of the purchase price or the cost of construction or
improvement of the property subject to such Liens; provided, however, that (a)
the principal amount of any Debt secured by such a Lien shall not exceed 100%
of such purchase price or cost, (b) such Lien shall not extend to or cover any
other property other than such item of property and any improvements on such
item and (C) the Incurrence of such Debt is permitted by the provisions
described under "Limitation on MCC Consolidated Debt"; (vii) Liens Incurred to
secure the performance of statutory obligations, surety or appeal bonds,
performance or return-of-money bonds or other obligations of a like nature
incurred in the ordinary course of business; (viii) Liens on Capital Stock of a
Subsidiary and Liens on intercompany notes issued by such Subsidiary to MCC to
secure Debt incurred by such Subsidiary in connection with the Company's
acquisition of such Subsidiary or the business of such Subsidiary; and (ix)
Liens to secure any extension, renewal, refunding or refinancing (or successive
extensions, renewals, refundings or refinancings), in whole or in part, of any
Debt secured by Liens referred to in the foregoing clauses (i) through (viii)
so long as such Lien does not extend to any other property and the Debt so
secured is not increased (Section 1017).
Limitation on Certain Asset Dispositions
MCC may not, and may not permit any Restricted Subsidiary to, make any
Asset Disposition in one or more transactions in which the aggregate
consideration in any 12-month period exceeds $1,000,000, unless: (i) MCC (or
the Restricted Subsidiary of MCC, as the case may be) receives consideration at
the time of such sale or other disposition at least equal to the fair market
value of the assets sold or disposed of as determined by the Board of Directors
of MCPI; (ii) except in the case of an exchange of assets qualifying as a
like-kind exchange under Section 1031 of the Internal Revenue Code (or
successor provisions), not less than 75% of the consideration for such
disposition consists of cash or readily marketable cash equivalents or the
assumption of Debt of Operating or a Restricted Subsidiary of Operating; and
(iii) all Net Available Proceeds, less any amounts invested within one year of
such disposition in accordance with the following sentence in assets related to
the business of MCC, of such disposition and from the sale of any marketable
cash equivalents received therein are applied within one year of such
disposition, (1) first, within 180 days of such disposition, to repay Senior
Debt then outstanding, the terms of which require such repayment or prohibit
payments pursuant to clause (2) below; and (2) second, to the extent of
remaining Net Available Proceeds, to purchase Outstanding Notes pursuant to an
Offer to Purchase at a purchase price equal to their Accreted Value on the date
of purchase (if such Offer to Purchase is consummated on or before August 1,
1999) and 100% of their principal amount plus accrued interest to the date of
purchase (if such Offer to Purchase is consummated thereafter) and other pari
passu Debt, on a pro rata basis according to their respective principal amounts
then outstanding (or accreted value in the case of original issue discount
debt),
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at 100% of the principal amount (or accreted value in the case of original
issue discount debt) plus accrued interest to the date of the purchase.
Notwithstanding the foregoing, MCC shall not be required to repurchase or
redeem the 13 1/2% Notes pursuant to clause (2) above if the Net Available
Proceeds from any Asset Disposition, less any amounts invested within one year
of such disposition in assets related to the business of MCC and any amounts
applied to repay Senior Debt pursuant to clause (1) above, are less than
$5,000,000. MCC shall not be entitled to any credit against such obligation to
purchase the 13 1/2% Notes for the principal amount of any of the 13 1/2% Notes
acquired by MCC or any of its Restricted Subsidiaries otherwise than pursuant
to such Offer to Purchase. To the extent that the aggregate principal amount
of the 13 1/2% Notes pursuant to clause (2) above tendered pursuant to an Offer
to Purchase Outstanding Notes is less than the amount of remaining Net
Available Proceeds, MCC may use an amount of Net Available Proceeds equal to
the amount that Net Available Proceeds exceed the amount of such tendered 13
1/2% Notes for general business purposes. These provisions will not apply to a
transaction that is permitted under the provisions described under "Mergers,
Consolidations and Certain Sales of Assets" (Section 1018).
Limitation on Issuances and Sale of Capital Stock of Subsidiaries
Subject to the provisions of the Indenture described under "Mergers,
Consolidations and Certain Sales of Assets", MCC shall not, and shall not
permit any Restricted Subsidiary to, transfer, convey, sell, lease or otherwise
dispose of any Capital Stock of such or any other Restricted Subsidiary to any
Person (other than MCC or a Wholly Owned Restricted Subsidiary of MCC) unless
such transfer, conveyance, sale, lease or other disposition is of all the
Capital Stock of such Restricted Subsidiary and the Net Available Proceeds from
such transfer, conveyance, sale, lease or other disposition are applied in
accordance with "Limitation on Certain Asset Dispositions." MCC shall not
permit any Restricted Subsidiary to issues shares of its Capital Stock (other
than directors' qualifying shares), or securities convertible into, or
warrants, rights or options to subscribe for or purchase shares of, its Capital
Stock to any Person other than to MCC or a Wholly Owned Restricted Subsidiary
of MCC. The foregoing provision shall not be violated by the transfer,
conveyance, issuance or sale by a Wholly Owned Restricted Subsidiary of shares
of its Capital Stock provided that, upon consummation of any such transfer,
conveyance, issuance or sale, such Wholly Owned Restricted Subsidiary remains a
Wholly Owned Restricted Subsidiary (Section 1019).
Provision of Financial Information
So long as any of the 13 1/2% Notes are outstanding, the Issuers and
MCC will file with the SEC, to the extent permitted by the SEC or the Exchange
Act, the annual reports, quarterly reports and other documents that the Issuers
and MCC would have been required to file with the SEC pursuant to Section 13(a)
or 15(d) of the Exchange Act if the Issuers and MCC were subject to such
Sections and will also provide to all Holders and file with the Trustee copies
of such reports. (Section 1020). To the extent that Operating is not
required pursuant to Section 13(a) or 15(d) of the Exchange Act to file
separate annual reports, quarterly reports and other documents, MCC will
include in each annual report, quarterly report and such other document that it
is required to file pursuant to Section 13(a) or 15(d) consolidating financial
information (including balance sheet, income statement and statement of cash
flows) for Operating and each of MCC's other subsidiaries.
UNRESTRICTED SUBSIDIARIES
MCC may designate any Subsidiary of MCC to be an "Unrestricted
Subsidiary", as set forth below, whereupon (and until such Person ceases to be
an Unrestricted Subsidiary) such Person and each other Person that is then or
thereafter becomes a Subsidiary of such Person will be deemed to be an
Unrestricted Subsidiary. An "Unrestricted Subsidiary" means (1) any Subsidiary
of MCC designated as such by MCC as set forth below where (a) neither MCC nor
any of its other Subsidiaries (other than another Unrestricted Subsidiary) (i)
provides credit support for, or Guarantee of, any Debt of such Subsidiary
(including any undertaking, agreement or instrument evidencing such Debt) or
(ii) is directly or indirectly liable for any Debt of such Subsidiary, and (b)
no default with respect to any Debt of such Subsidiary (including any right
which the holders thereof may have to take enforcement action against such
Subsidiary) would permit (upon notice, lapse of time or both) any holder of any
other Debt of MCC and its other Subsidiaries (other than another Unrestricted
Subsidiary) to declare a default on such other Debt or cause the payment
thereof to be accelerated or payable prior to its final scheduled maturity or
(2) any Subsidiary of an Unrestricted Subsidiary. MCC may designate any
Subsidiary to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, any other
Subsidiary of MCC, which is not a Subsidiary of the
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Subsidiary to be so designated or otherwise an Unrestricted Subsidiary,
provided, that either (a) the Subsidiary to be so designated has total assets
of $1,000 or less or (b) immediately after giving effect to such designation,
the Issuer could Incur at least $1.00 of additional Debt pursuant to (i) the
provisions of the Indenture described in the first paragraph under "Limitation
on MCC Consolidated Debt" and (ii) in the case of any Subsidiary of Operating
to be so designated, the provisions of the Indenture described in the first
paragraph under "Limitation on Operating Consolidated Debt." MCC may designate
any Unrestricted Subsidiary to be a Restricted Subsidiary, provided that,
immediately after giving effect to such designation, (i) MCC could Incur at
least $1.00 of additional Debt pursuant to the provisions of the Indenture
described in the first paragraph under "Limitation on MCC Consolidated Debt"
and (ii) in the case of any Subsidiary of Operating to be so designated,
Operating could Incur at least $1.00 of additional Debt pursuant to the
provisions of the Indenture described under the first paragraph under
"Limitation on Operating Consolidated Debt." Any such designation by MCC will
be evidenced to the Trustee by filing with the Trustee an officers' certificate
certifying that such designation complied with the conditions described above.
Each Person that is or becomes a Subsidiary of MCC will be deemed to
be a Restricted Subsidiary at all times when it is a Subsidiary of MCC and has
not been duly designated an Unrestricted Subsidiary. Each Person that is or
becomes a Wholly Owned Subsidiary of MCC shall be deemed to be a Wholly Owned
Restricted Subsidiary at all times when it a Wholly Owned Subsidiary of MCC and
has not been duly designated an Unrestricted Subsidiary (Section 101).
Each Unrestricted Subsidiary of MCC that is a Subsidiary of Operating
shall be an Unrestricted Subsidiary of Operating and each Restricted Subsidiary
of MCC shall be a Restricted Subsidiary of Operating. MCC will covenant in the
Indenture that (i) Operating shall at all times be a Restricted Subsidiary of
MCC, and (ii) all other Restricted Subsidiaries of MCC shall at all times be
Subsidiaries of Operating (Section 1021).
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
Each Issuer (i) may not consolidate with or merge into any other
Person or permit any other Person to consolidate with or merge into such Issuer
or any Restricted Subsidiary of Operating (in a transaction in which such
Restricted Subsidiary remains a Subsidiary); and (ii) may not, directly or
indirectly, transfer, convey, sell, lease or otherwise dispose of all or
substantially all of its assets unless: (1) immediately before and after
giving effect to such transaction and treating any Debt Incurred by such Issuer
or a Restricted Subsidiary of Operating as a result of such transaction as
having been Incurred by such Issuer or such Restricted Subsidiary at the time
of the transaction, no Event of Default or event that with the passing of time
or the giving of notice, or both, shall constitute an Event of Default shall
have occurred and be continuing; (2) in a transaction in which such Issuer does
not survive or in which such Issuer conveys, sells, leases or otherwise
disposes of all or substantially all of its assets, the successor entity of
such Issuer is a corporation, partnership, limited liability company or trust
and is organized and validly existing under the laws of the United States or
any State thereof or the District of Columbia and expressly assumes, by a
supplemental indenture executed and delivered to the Trustee in form
satisfactory to the Trustee, all of such Issuer's obligations under the
Indenture; and (3) immediately after giving effect to such transaction, such
Issuer or the successor entity to such Issuer could incur at least $1.00 of
additional Debt pursuant to the provisions of the Indenture described in the
first paragraph of "Limitation on Operating Consolidated Debt" above; provided,
however, that the provisions of this clause (3) shall not apply to transactions
described in clauses (i) and (ii) above which are (x) between such Issuer and
one or more Wholly Owned Restricted Subsidiaries of MCC or (y) between two or
more Wholly Owned Restricted Subsidiaries of MCC; (4) if, as a result of any
such transaction, property or assets of such Issuer, the successor entity to
such Issuer or any Subsidiary would become subject to a Lien prohibited by the
provisions of the Indenture described under "Limitation on Liens Securing
Subordinated Debt" above, such Issuer or the successor entity to such Issuer
shall have secured the 13 1/2% Notes as required by said covenant; and (5)
certain other conditions are met. The provisions of this section shall be
applicable to any successor company which expressly assumes such Issuer's
obligations under the Indenture (Sections 801 and 802).
MCC (i) may not consolidate with or merge into any other Person or
permit any other Person to consolidate with or merge into MCC or any Restricted
Subsidiary of MCC (in a transaction in which such Restricted Subsidiary remains
a Subsidiary); and (ii) may not, directly or indirectly, transfer, convey,
sell, lease or otherwise dispose of all or substantially all of its assets
unless: (1) immediately after giving effect to such transaction, and treating
any Debt Incurred by MCC or a Restricted Subsidiary of MCC as a result of such
transaction as having been Incurred by MCC or such Restricted Subsidiary at the
time of
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the transaction, no Event of Default or event that with the passing of time or
the giving of notice, or both, shall constitute an Event of Default shall have
occurred and be continuing; (2) in a transaction in which MCC does not survive
or in which MCC conveys, sells, leases or otherwise disposes of all or
substantially all of its assets, the successor entity of MCC is a corporation,
partnership, limited liability company or trust and is organized and validly
existing under the laws of the United States or any State thereof or the
District of Columbia and expressly assumes, by a supplemental indenture
executed and delivered to the Trustee in form satisfactory to the Trustee, all
of MCC's obligations under the Indenture; and (3) immediately after giving
effect to such transaction, MCC or the successor entity to MCC could Incur at
least $1.00 of additional Debt pursuant to the provisions of the Indenture
described in the first paragraph of "Limitation on MCC Consolidated Debt"
above; provided, however, that the provisions of this clause (3) shall not
apply to transactions described in clauses (i) and (ii) above which are (x)
between MCC and one or more Wholly Owned Restricted Subsidiaries of MCC or (y)
between two or more Wholly Owned Restricted Subsidiaries of MCC; (4) if, as a
result of any such transaction, property or assets of MCC, the successor entity
to MCC or any Subsidiary would become subject to a Lien prohibited by the
provisions of the Indenture described under "Limitation on Liens" above, MCC or
the successor entity to MCC shall have secured the Guarantees of the 13 1/2%
Notes as required by said covenant; and (5) certain other conditions are met.
The provisions of this section shall be applicable to any successor company
which expressly assumes MCC's obligations under the Indenture (Sections 801
and 802).
CHANGE OF CONTROL
Within 30 days following the date of the consummation of a transaction
resulting in a Change of Control, the Issuers will commence an Offer to
Purchase the 13 1/2% Notes at a purchase price equal to 101% of the Accreted
Value on the date of purchase (if such Offer to Purchase is consummated on or
before August 1, 1999) and 101% of their aggregate principal amount plus
accrued interest to the date of purchase (if such Offer to Purchase is
consummated thereafter).
"Change of Control" will be deemed to have occurred at such time after
the date of the Indenture as any of the following occur:
(i) any issuance or transfer of any equity interest (or
any beneficial interest in any equity interest) in MCC, Properties or
MCPI, or any transfer of assets of any Person, or any merger,
consolidation or other transaction, or any other event or occurrence,
after which the Marcus Family Investors shall own not more than 51% of
the aggregate direct and indirect beneficial ownership interest in MCC
(if at any time after the date of the Indenture and before such
issuance, transfer or other event or occurrence, the Marcus Family
Investors shall have an aggregate direct and indirect beneficial
ownership interest of more than 51% in MCC), the Properties or MCPI or
the Marcus Family Investors shall no longer have the sole power to
direct or cause the direction of the management or policies of MCC,
Properties or MCPI;
(ii) a transfer or assignment of Properties's general
partnership interest in MCC, or of any portion thereof or of any
beneficial interest therein, if after giving effect to such assignment
or transfer, the aggregate direct or indirect beneficial ownership
interest of Properties in the general partnership interests of MCC is
less than 51% and after which Properties does not have the sole power
to take all of the actions which Properties is entitled or required to
take under the Partnership Agreement in its capacity as general
partner;
(iii) a transfer or assignment of MCC's general partnership
interest in Operating, or any portion thereof or of any beneficial
interest therein, if after giving effect to such assignment or
transfer, the aggregate direct or indirect beneficial ownership
interest of MCC in the general partnership interests of Operating is
less than 51% and after which MCC does not have the sole power to take
all of the actions which Operating is entitled or required to take
under the Operating Partnership Agreement in its capacity as the
general partner of Operating;
(iv) a merger, consolidation or similar transaction
involving either Issuer unless the surviving entity of such
transaction is a partnership or corporation of which Jeffrey A. Marcus
or an entity under the sole control of Jeffrey A. Marcus or the Marcus
Family Investors is the sole general partner or a stockholder having
the power to elect a majority of the Board of Directors of such
corporation, as the case may be, and with respect to which surviving
entity
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Jeffrey A. Marcus or an entity under the sole control of Jeffrey A.
Marcus or the Marcus Family Investors has the sole power to take all
actions with respect to such surviving entity which Properties is
entitled or required to take under the MCC Partnership Agreement in
its capacity as general partner;
(v) the admission of any Person as a general partner of
MCC after which Properties does not have the sole power to take all of
the actions which the Properties is entitled to or required to take
under the MCC Partnership Agreement, as in effect immediately
following the original issuance of the 13 1/2% Notes in its capacity
as the general partner of MCC; or
(vi) the admission of any Person as a general partner of
Operating after which the general partner of Operating does not have
the sole power to take all of the actions which the general partner of
Operating is entitled to or required to take under the Operating
Partnership Agreement as in effect immediately following the original
issuance of the 13 1/2% Notes in its capacity as the general partner
of Operating.
Notwithstanding the foregoing, no Change of Control will be deemed to
have occurred upon the occurrence of any of the events specified in clause (i),
(ii), (iv), (v) or (vi) above if any such event shall have occurred as a result
of (1) the death or disability of Mr. Marcus and subsequent to such death or
disability and upon consummation of such event specified in clause (i), (ii),
(iii), (iv), (v) or (vi), the Goldman Sachs Investors and the Marcus Family
Investors shall own at least 51% of the aggregate direct and indirect ownership
MCC interests in MCC or (2) the removal of Properties for cause pursuant to the
terms of the Partnership Agreement and subsequent to such removal and upon
consummation of such event specified in clause (i), (ii), (iii), (iv), (v) or
(vi), the Goldman Sachs Investors own at least 51% of the aggregate direct and
indirect ownership interests in MCC (Section 1022).
In the event that the Issuers are required to make an offer to
purchase the outstanding 13 1/2% Notes following the occurrence of a Change of
Control, the Issuers will comply, to the extent applicable, with any applicable
requirements relating to tender offers, including those arising under the
Exchange Act and Rule 14e-1 promulgated thereunder.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the Indenture. Reference is made to the Indenture for the full definition of
all such terms, as well as any other terms used herein for which no definition
is provided (Section 101).
"Accreted Value" of a Note means (i) as of any date of determination
prior to August 1, 1999, the sum of (a) the initial offering price of such Note
and (b) the portion of the excess of the principal amount of such Note over
such initial offering price which shall have been accreted thereon through such
date, such amount to be so accreted on a daily basis at the rate of 13 1/2% per
annum of the initial offering price of the 13 1/2% Notes, compounded semi-
annually on each January 31 and August 31 from the date of issuance of the 13
1/2% Notes through the date of determination, and (ii) as of any date of
determination on or after August 1, 1999, 100% of the principal amount at
maturity of each Note.
"Affiliate" of any Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control" when
used with respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance,
sale, lease or other disposition by such Person or any of its Restricted
Subsidiaries (including a consolidation or merger or other sale of any such
Restricted Subsidiary with, into or to another Person in a transaction in which
such Restricted Subsidiary ceases to be a Restricted Subsidiary, but excluding
a disposition by a Restricted Subsidiary of such Person to such Person or a
Wholly Owned Subsidiary of such Person or by such Person to a Wholly Owned
Subsidiary of such Person, and excluding the creation of a Lien, pledge or
security interest) of (i) shares of Capital Stock (other than directors'
qualifying shares) or other ownership interests of a Restricted Subsidiary of
such
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Person, (ii) substantially all of the assets of such Person or any of its
Restricted Subsidiaries representing a division or line of business or (iii)
other assets or rights of such Person or any of its Restricted Subsidiaries
outside of the ordinary course of business.
"Average Life" means, as of the date of determination, with respect to
any Debt or Preferred Stock, the quotient obtained by dividing (i) the sum of
the products of (A) the numbers of years from the date of determination to the
dates of each successive scheduled principal or liquidation value payments of
such Debt or Preferred Stock, respectively, and (B) the amount of such
principal or liquidation value payments, by (ii) the sum of all such principal
or liquidation value payments.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in The City of New York,
New York or Dallas, Texas are authorized or obligated by law or executive order
to close.
"Capital Lease Obligation" of any Person means the obligation to pay
rent or other payment amounts under a lease of (or other Debt arrangements
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability
on the face of a balance sheet of such Person in accordance with generally
accepted accounting principles. The stated maturity of such obligation shall
be the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity interests of such Person, including without limitation,
partnership interests.
"Common Stock" of any Person means Capital Stock of such Person that
does not rank prior, as to the payment of dividends or as to the distribution
of assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
"Consolidated Cash Flow" of any Person means for any period the
Consolidated Net Income of such Person for such period increased by (i)
Consolidated Interest Expense of such Person for such period, plus (ii)
Consolidated Income Tax Expense of such Person for such period, plus (iii) the
consolidated depreciation and amortization expense included in the income
statement of such Person and its Consolidated Subsidiaries for such period,
plus (iv) other consolidated non- cash charges deducted from consolidated
revenues in determining Consolidated Net Income for such period, minus (v) non-
cash items increasing consolidated revenues for such period.
"Consolidated Income Tax Expense" of any Person means for any period
the consolidated provision for income taxes of such Person and its Consolidated
Subsidiaries for such period.
"Consolidated Interest Expense" of any Person means for any period the
consolidated interest expense included in a consolidated income statement
(without deduction of interest income) of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments or fees with respect to letters of credit,
bankers' acceptances or similar facilities; (iii) fees with respect to interest
rate swap or similar agreements or foreign currency hedge, exchange or similar
agreements, other than fees or charges related to the acquisition or
termination thereof which are not allocable to interest expense in accordance
with generally accepted accounting principles; and (iv) Preferred Stock
dividends declared and payable in cash.
"Consolidated Net Income" of any Person means for any period the
Consolidated Net Income (or loss) of such Person and its Consolidated
Subsidiaries for such period determined in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom (a) the
net income (or loss) of any Person acquired by such Person or a Subsidiary of
such Person in a pooling-of-interests transaction for any period prior to the
date of such transaction, (b) the net income (or loss) of any Person that is
not a Consolidated Subsidiary of such Person except to the extent of the amount
of dividends or other
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distributions actually paid to such Person by such other Person during such
period, (c) gains or losses on Asset Dispositions by such Person or its
Consolidated Subsidiaries and (d) all extraordinary gains and extraordinary
losses.
"Consolidated Subsidiaries" of any Person means all other Persons that
would be accounted for as consolidated Persons in such Person's financial
statements in accordance with generally accepted accounting principles;
provided that, for any particular period during which any Subsidiary was an
Unrestricted Subsidiary, "Consolidated Subsidiaries" will exclude such
Subsidiary for such period (or portion thereof) during which it was an
Unrestricted Subsidiary.
"Debt" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person, and
whether or not contingent, (i) every obligation of such Person for money
borrowed, (ii) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, (iii) every reimbursement obligation of
such Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person (but excluding trade letters
of credit in support of Trade Accounts Payable arising in the ordinary course
of business and letters of credit and performance bonds issued in favor of
Franchisors as a term of the cable television franchises held by such Person or
its Subsidiaries), (iv) every obligation of such Person issued or assumed as
the deferred purchase price of property or services (but excluding Trade
Accounts Payable or accrued liabilities arising in the ordinary course of
business and accrued management fees), (v) every Capital Lease Obligation of
such Person, (vi) the maximum fixed redemption or repurchase price of
Redeemable Stock of such Person at the time of determination and (vii) every
obligation of the type referred to in clauses (i) through (vi) of another
Person and all dividends of another Person the payment of which, in either
case, such Person has Guaranteed or for which such Person is responsible or
liable, directly or indirectly, as obligor, Guarantor or otherwise; provided,
however, Debt shall not include (A) with respect to MCC or any Subsidiary
thereof, any obligation of MCC or such Subsidiary in respect of any Interest
Rate Agreement to the extent such Interest Rate Agreement is entered into in
connection with Debt outstanding on the date of the Indenture or Debt permitted
to be Incurred pursuant to the covenants set forth under "Limitation on
Operating Consolidated Debt", "Limitation on MCC Debt" and "Limitation on Debt
and Preferred Stock of Restricted Subsidiaries" and to the extent that the
notional amount of debt specified in such Interest Rate Agreement does not
exceed the amount of such Debt and (B) any Trade Accounts Payable.
"Guaranty" by or "Guarantee of" any Person means any obligation,
contingent or otherwise, of such Person guaranteeing or having the economic
effect of guaranteeing any Debt of any other Person (the "primary obligor") in
any manner, whether directly or indirectly, and including, without limitation,
any obligation of such Person (i) to purchase or pay (or advance or supply
funds for the purchase or payment of) such Debt or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such Debt,
(ii) to purchase property, securities or services for the purpose of assuring
the holder of such Debt of the payment of such Debt, or (iii) to maintain
working capital, equity capital or other financial statement condition or
liquidity of the primary obligor so as to enable the primary obligor to pay
such Debt (and "Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings
correlative to the foregoing); provided, however, that the Guaranty by any
Person shall not include endorsements by such Person for collection or deposit,
in either case, in the ordinary course of business.
"Incur" means, with respect to any Debt or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other
obligation or the recording, as required pursuant to generally accepted
accounting principles or otherwise, of any such Debt or other obligation on the
balance sheet of such Person (and "Incurrence," "Incurred" "Incurrable" and
"Incurring" shall have meanings correlative to the foregoing); provided,
however, that a change in generally accepted accounting principles that results
in an obligation of such Person that exists at such time becoming Debt shall
not be deemed an Incurrence of such Debt.
"Interest Rate Agreement" means, with respect to any Person, any
interest rate protection agreement, interest rate future agreement, interest
rate option agreement, interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate hedge agreement or
similar agreement or arrangement entered into for hedging purposes and designed
to protect such Person or any of its Subsidiaries against fluctuations in
interest rates to or under which such Person or any of its Subsidiaries is a
party or a beneficiary on the date of the Indenture or becomes a party or
beneficiary thereafter.
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"Investment" by any Person means any direct or indirect loan, advance
or other extension of credit or capital contribution to (by means of transfers
of cash or other property to others or payments for property or services for
the account or use of others, or otherwise), or purchase or acquisition of
Capital Stock, bonds, notes, debentures or other securities or evidence of Debt
issued by, any other Person.
"Lien" means, with respect to any property or assets, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"Management Agreements" mean, collectively, (i) the agreement dated as
of January 17, 1990 and as amended as of July 31, 1990, by and between Marcus
Cable Partners, L.P. and Marcus Cable Management, Inc., (ii) the agreement
dated as of February 10, 1992, by and between Marcus Cable of San Angelo, L.P.
and Marcus Cable Management, Inc., (iii) the agreement dated as of October 1,
1992, by and between Marcus Cable of Delaware and Maryland, L.P. and Marcus
Cable Management, Inc., (iv) the Compensation Agreement, dated as of January
17, 1990 and as amended as of August 1, 1990, between the Company and Marcus
Management, Inc. and (v) management agreements to be entered into with Cencom
of Alabama, L.P. and Maryland Cable Partners, L.P.
"Marcus Family Investors" means Jeffrey A. Marcus and his wife, Nancy
C. Marcus, and their respective estates, lineal descendants, adoptive children,
heirs, executors, personal representatives, administrators and trusts for any
of their benefit or the benefit of their respective spouses, estates, lineal
descendants, adoptive children or heirs and corporations and partnerships in
which one or more of the foregoing own more than 50% of the voting stock.
"MCPI" means Marcus Cable Properties, Inc., a Delaware corporation.
"Net Available Proceeds" from any Asset Disposition by any Person
means cash or readily marketable Cash Equivalents received (including by way of
sale or discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiree of Debt or other obligations relating to such properties or assets or
received in any other noncash form) therefrom by such Person, net of (i) all
legal, title and recording tax expenses, commissions and other fees and
expenses Incurred and all federal, state, provincial, foreign and local taxes
required to be accrued as a liability as a consequence of such Asset
Disposition, (ii) all payments made by such Person or its Subsidiaries on any
Debt which is secured by such assets in accordance with the terms of any Lien
upon or with respect to such assets or which must by the terms of such Lien, or
in order to obtain a necessary consent to such Asset Disposition or by
applicable law be repaid out of the proceeds from such Asset Disposition, and
(iii) all distributions and other payments made to minority interest holders in
Subsidiaries of such Person or joint ventures as a result of such Asset
Disposition, and (iv) appropriate amounts to be provided by such Person or any
Restricted Subsidiary thereof, as the case may be, as a reserve in accordance
with generally accepted accounting principles against any liabilities
associated with such assets and retained by such Person or any Restricted
Subsidiary thereof, as the case may be, after such Asset Disposition,
including, without limitation, liabilities under any indemnification
obligations and severance and other employee termination costs associated with
such Asset Disposition, in each case as determined by the board of directors or
general partner or applicable governing body of such Person or Restricted
Subsidiary, in its reasonable good faith judgment evidenced by a resolution of
such board of directors or general partner or applicable governing body filed
with the Trustee; provided, however, that any reduction in such reserve within
12 months following the consummation of such Asset Disposition will be treated
for all purposes of the Indenture and the 13 1/2% Notes as a new Asset
Disposition at the time of such reduction with Net Available Proceeds equal to
the amount of such reduction.
"Offer to Purchase" means a written offer (the "Offer") sent by the
Issuers by first class mail, postage prepaid, to each Holder at its address
appearing in the Note Register on the date of the Offer offering to purchase up
to the principal amount of 13 1/2% Notes specified in such Offer at the
purchase price specified on such Offer. Unless otherwise required by
applicable law, the Offer shall specify an expiration date (the "Expiration
Date") of the Offer to Purchase which shall be, subject to any contrary
requirements of applicable law, not less than 30 days or more than 60 days
after the date of such Offer and a settlement date (the
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"Purchase Date") for the purchase of the 13 1/2% Notes within five Business
Days after the Expiration Date. The Issuers shall notify the Trustee at least
15 Business Days (or such shorter period as is acceptable to the Trustee) prior
to the mailing of the Offer of the Issuers' obligation to make an Offer to
Purchase, and the Offer shall be mailed by the Issuers or, at the Issuers'
request, by the Trustee in the name and at the expense of the Issuers. The
Offer shall contain information concerning the business of the Issuers and
their Subsidiaries which the Issuers in good faith believe will enable such
Holders to make an informed decision with respect to the Offer to Purchase
(which at a minimum will include (i) the most recent annual and quarterly
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the documents required to be
filed with the Trustee pursuant to the provisions described under "Provision of
Financial Information" (which requirements may be satisfied by delivery of such
documents together with the Offer), (ii) a description of material developments
in the Issuers' business subsequent to the date of the latest of such financial
statements referred to in clause (i) (including a description of the events
requiring the Issuers to make the Offer to Purchase), (iii) if applicable,
appropriate pro forma financial information concerning the Offer to Purchase
and the events requiring the Issuers to make the Offer to Purchase and (iv) any
other information required by applicable law to be included therein). The
Offer shall contain all instructions and materials necessary to enable such
Holders to tender the 13 1/2% Notes pursuant to the Offer to Purchase. The
Offer shall also state:
(1) the Section of the Indenture pursuant to which the
Offer to Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding
Notes offered to be purchased by the Issuers pursuant to the Offer to
Purchase (including, if less than 100%, the manner by which such
amount has been determined pursuant to the Section of the Indenture
requiring the Offer to Purchase) (the "Purchase Amount");
(4) the purchase price to be paid by the Issuers for each
$1,000 aggregate principal amount of the 13 1/2% Notes accepted for
payment (as specified pursuant to the Indenture);
(5) that the Holder may tender all or any portion of the
13 1/2% Notes registered in the name of such Holder and that any
portion of a Note tendered must be tendered in an integral multiple of
$1,000 principal amount;
(6) the place or places where the 13 1/2% Notes are to be
surrendered for tender pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered
but not purchased by the Issuers pursuant to the Offer to Purchase
will continue to accrue;
(8) that on the Purchase Date the purchase price will
become due and payable upon each Debenture accepted for payment
pursuant to the Offer to Purchase and that interest thereon shall
cease to accrue on and after the Purchase Date;
(9) that each Holder electing to tender a Note pursuant
to the Offer to Purchase will be required to surrender such Note at
the place or places specified in the Offer prior to the close of
business on the Expiration Date (such Note being, if the Issuers or
the Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Issuers and the
Trustee duly executed by, the Holder thereof or his attorney duly
authorized in writing and bearing appropriate signature guarantees);
(10) that Holders will be entitled to withdraw all or any
portion of the 13 1/2% Notes tendered if the Issuers (or their Paying
Agent) receives, not later than the close of business on the
Expiration Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of the Note
the Holder tendered, the certificate number of the Note the Holder
tendered and a statement that such Holder is withdrawing all or a
portion of such tender;
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(11) that (a) if the 13 1/2% Notes in an aggregate
principal amount less than or equal to the Purchase Amount are duly
tendered and not withdrawn pursuant to the Offer to Purchase, the
Issuers shall purchase all such 13 1/2% Notes and (b) if the 13 1/2%
Notes in an aggregate principal amount in excess of the Purchase
Amount are tendered and not withdrawn pursuant to the Offer to
Purchase, the Issuers shall purchase the 13 1/2% Notes having an
aggregate principal amount equal to the Purchase Amount on a pro rata
basis (with such adjustments as may be deemed appropriate so that only
the 13 1/2% Notes in denominations of $1,000 or integral multiples
thereof shall be purchased); and
(12) that in case of any Holder whose Note is purchased
only in part, the Issuers shall execute, and the Trustee shall
authenticate and deliver to such Holder at the expense of the Issuers,
a new Note or Notes, of any authorized denomination as requested by
such Holder, in an aggregate principal amount equal to and in exchange
for the unpurchased portion of the Note so tendered.
"pari passu," when used with respect to the ranking of any Debt of any
Person in relation to other Debt of such Person, means that such Debt (a)
either (i) is not subordinate in right of payment to any other Debt of such
Person or (ii) is subordinate in right of payment to the same Debt of such
Person as is the other and is so subordinate to the same extent and (b) is not
subordinate in right of payment to the other or to any Debt of such Person as
to which the other is not so subordinate.
"Preferred Stock," as applied to the Capital Stock of any Person,
means Capital Stock of such Person of any class or classes (however designated)
that ranks prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Pro Forma Consolidated Cash Flow" of any Person means for any period
the Consolidated Cash Flow of such Person for such period calculated on a pro
forma basis to give effect to any Asset Disposition or acquisition of assets
not in the ordinary course of business (including acquisitions of other Persons
by merger, consolidation or purchase of Capital Stock) during such period as if
such Asset Disposition or acquisition of assets had taken place on the first
day of such period.
"Redeemable Stock" means any equity security that by its terms or
otherwise is required to be redeemed prior to the Stated Maturity of the 13
1/2% Notes, or is redeemable at the option of the holder thereof at any time
prior to the Stated Maturity of the 13 1/2% Notes.
"Related Person" of any Person means, without limitation, any other
Person owning (a) 5% or more of the outstanding Capital Stock of such Person or
(b) 5% or more of the Voting Stock of such Person.
"Stated Maturity", when used with respect to any Security or any
installment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Subsidiary" of any Person means (i) a corporation more than 50% of
the outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person, or by such Person
and one or more other Subsidiaries thereof or (ii) any other Person (other than
a corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and power to direct the policies,
management and affairs thereof.
"Tax Amount" means for each fiscal year of any Person (a) the
aggregate amount of income or gain of such Person over the aggregate amount of
loss, deduction or expense of such Person multiplied by (b) the aggregate of
the maximum marginal federal, New York State and New York City income tax
rates.
"Trade Accounts Payable" means, with respect to any Person, any
customer advance payments and deposits, trade payables and accounts payable
created, assumed or guaranteed by such Person or any of its Subsidiaries
arising in the ordinary course of business that would be accounted for as an
account payable under generally accepted accounting principles.
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"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such
Person 99% or more of the outstanding Capital Stock or other ownership interest
of which (other than directors' qualifying shares) shall at the time be owned
by such Person or by one or more Wholly Owned Subsidiaries of such Person or by
such Person and one or more Wholly Owned Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a)
failure to pay any interest on any Note when due, continued for 30 days; (b)
failure to pay (whether or not prohibited by the subordination provisions of
the Indenture) principal of (or premium, if any, on) any Note when due; (c)
default in the payment of principal and interest (whether or not prohibited by
the subordination provisions of the Indenture) on the 13 1/2% Notes required to
be purchased pursuant to an Offer to Purchase as described under "Limitation on
Certain Asset Dispositions" and "Change of Control" when due and payable; (d)
failure to perform or comply with the provisions described under "Mergers,
Consolidations and Certain Sales of Assets"; (e) failure to perform or breach
of any other covenant or warranty of MCC or the Issuers in the Indenture,
continued for 60 days after written notice from the Trustee or Holders of at
least 25% in principal amount of the Outstanding Notes as provided in the
Indenture; (f) a default under any bonds, debentures, notes or other evidences
of Debt of MCC or any Restricted Subsidiary of MCC or under any mortgages,
indentures or instruments under which there may be issued or by which there may
be secured or evidenced any Debt by MCC or any Restricted Subsidiary of MCC,
with a principal amount then outstanding, individually or in the aggregate, in
excess of $5 million, whether such Debt now exists or shall hereafter be
created, which default or defaults shall constitute a failure to pay any
portion of the principal of such Debt when due and payable after the expiration
of any applicable grace period (including any extension thereof granted prior
to the expiration of such grace period) with respect thereto or shall have
resulted in such Debt becoming or being declared due and payable prior to the
date on which it would otherwise have become due and payable; (g) the rendering
of a final judgment or judgments against MCC or any of its Restricted
Subsidiaries in an aggregate amount (not otherwise covered by insurance) in
excess of $5 million which remains unstayed, in effect and unpaid for a period
of 60 consecutive days after the right to appeal all such judgments has
expired; (h) certain events in bankruptcy, insolvency or reorganization
affecting MCC or any of its Restricted Subsidiaries; and (i) except as
otherwise permitted in the Indenture, the cessation of effectiveness of any of
the MCC Guarantees or the finding by any judicial proceeding that any MCC
Guarantees are unenforceable or invalid, or the denial or disaffirmation by MCC
of its obligations under the MCC Guarantees (Section 501).
Subject to the provisions of the Indenture relating to the duties of
the Trustee in case an Event of Default (as defined) shall occur and be
continuing, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Holders, unless such Holders shall have offered to the Trustee reasonable
indemnity. (Section 603). Subject to such provisions for the indemnification
of the Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee (Section 512).
If an Event of Default (as defined) (other than Events of Default with
respect to certain events of bankruptcy, insolvency or reorganization affecting
the Issuers or any Restricted Subsidiary) shall occur and be continuing, either
the Trustee or the Holders of at least 25% in aggregate principal amount of the
Outstanding Notes may accelerate the maturity of all of the 13 1/2% Notes;
provided, however, that after such acceleration, but before a judgment or
decree based on acceleration, the Holders of a majority in aggregate principal
amount of Outstanding Notes may, under certain circumstances, rescind and annul
such acceleration if all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Indenture.
If a specified Event of Default with respect to certain events of bankruptcy,
insolvency or reorganization affecting the Issuers or any Restricted Subsidiary
occurs, the principal of the 13 1/2% Notes then Outstanding shall ipso facto
become immediately due and payable without any declaration or other Act on the
part of the Trustee or any Holder of the 13 1/2% Notes. (Section 502). For
information as to waiver of defaults, see "Modification and Waiver."
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No Holder of any Note will have any right to institute any proceeding
with respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing Event
of Default (as defined) and unless also the Holders of at least 25% in
aggregate principal amount of the Outstanding Notes shall have made written
request, and offered reasonable indemnity, to the Trustee to institute such
proceeding as trustee, and the Trustee shall not have received from the Holders
of a majority in aggregate principal amount of the Outstanding Notes a
direction inconsistent with such request and shall have failed to institute
such proceeding within 60 days (Section 507). However, such limitations do
not apply to a suit instituted by a Holder of a Note for enforcement of payment
of the principal of (and premium, if any) or interest on such Note on or after
the respective due dates expressed in such Note (Section 508).
The Issuers and MCC will be required to furnish to the Trustee
annually a statement as to the performance by the Issuers and MCC of certain of
their obligations under the Indenture and as to any default in such performance
(Section 1023).
DEFEASANCE
The Indenture will provide that, at the Issuers' and MCC's option, (A)
if applicable, the Issuers and MCC will be discharged from any and all
obligations in respect of the Outstanding Notes (including the provisions
described under subordination) or (B) if applicable, the Issuers and MCC may
omit to comply with certain restrictive covenants and the provisions described
under "Subordination" from the Indenture, and that such omission shall not be
deemed to be an Event of Default under the Indenture and the 13 1/2% Notes, in
either case (A) or (B) upon irrevocable deposit with the Trustee, in trust, of
money and/or U.S. government obligations which will provide money in an amount
sufficient in the opinion of a nationally recognized firm of independent
certified public accountants to pay the principal of and premium, if any, and
each installment of interest, if any, on the Outstanding Notes. With respect
to clause (B), the obligations under the Indenture other than with respect to
such covenants and the Events of Default other than the Events of Default
relating to such covenants above shall remain in full force and effect. Such
trust may only be established if, among other things (i) with respect to clause
(A), the Issuers have received from, or there has been published by, the
Internal Revenue Service a ruling or there has been a change in law, which in
the Opinion of Counsel provides that Holders of the 13 1/2% Notes will not
recognize gain or loss for Federal income tax purposes as a result of such
deposit, defeasance and discharge and will be subject to Federal income tax on
the same amount, in the same manner and at the same times as would have been
the case if such deposit, defeasance and discharge had not occurred; or, with
respect to clause (B), the Issuers have delivered to the Trustee an Opinion of
Counsel to the effect that the Holders of the 13 1/2% Notes will not recognize
gain or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount, in the
same manner and at the same times as would have been the case if such deposit
and defeasance had not occurred; (ii) no Event of Default or event that with
the passing of time or the giving of notice or both, shall constitute an Event
of Default shall have occurred or be continuing; (iii) the Issuers have
delivered to the Trustee an Opinion of Counsel to the effect that such deposit
shall not cause the Trustee or the trust so created to be subject to the
Investment Company Act of 1940; and (iv) certain other customary conditions
precedent are satisfied (Article Twelve).
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the
Issuers and MCC and the Trustee with the consent of the Holders of a majority
in aggregate principal amount of the Outstanding Notes; provided, however, that
no such modification or amendment may, without the consent of the Holder of
each Outstanding Note affected thereby, (a) change the Stated Maturity of, the
principal of, or any installment of interest on, any Note, or modify the
provisions relating to the subordination or guarantee of the 13 1/2% Notes in a
manner adverse to the Holders, (b) reduce the principal amount of (or the
premium) or interest on, any Note, (c) change the place or currency of payment
of, principal of (or the premium) or interest on, any Note, (d) impair the
right to institute suit for the enforcement of any payment on or with respect
to any Note, (e) reduce the above-stated percentage of Outstanding Notes
necessary to modify or amend the Indenture, (f) reduce the percentage of
aggregate principal amount of Outstanding Notes necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults, (g) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults or
covenants, except as otherwise specified, or (h) following the mailing of an
offer with respect to an Offer to Purchase the 13 1/2% Notes as described under
"Limitation on Certain Asset Dispositions," "Limitation on Issuances
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and Sale of Capital Stock of Subsidiaries" and "Change of Control," modify the
Indenture with respect to such Offer to Purchase in a manner adverse to such
Holder (Section 902).
The Holders of a majority in aggregate principal amount of the
Outstanding Notes may waive compliance by the Issuers with certain restrictive
provisions of the Indenture. (Section 1024). The Holders of a majority in
aggregate principal amount of the Outstanding Notes may waive any past default
under the Indenture, except a default in the payment of principal, premium, if
any, or interest (Section 513).
THE TRUSTEE
U.S. Trust Company of Texas, N.A. is the Trustee under the Indenture
unless or until a successor Trustee is subsequently appointed pursuant to the
provisions of the Indenture. The Indenture provides that, except during the
continuance of an Event of Default, the Trustee will perform only such duties
as are specifically set forth in the Indenture. During the existence of an
Event of Default, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise
as a prudent person would exercise under the circumstances in the conduct of
such person's own affairs (Sections 601 and 603).
The Indenture and provisions of the Trust Indenture Act incorporated
by reference therein contain limitations on the rights of the Trustee, should
it become a creditor of the Issuers, to obtain payment of claims in certain
cases or to realize on certain property received by it in respect of any such
claim as security or otherwise (Section 613).
The Trustee is permitted to engage in other transactions with the
Issuers or any Affiliate; provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign (Section 608).
RELEASE FROM LIABILITY
The 13 1/2% Notes are being issued solely by Operating and Capital II.
The Guarantee is being made solely by MCC. The Indenture provides that none of
Properties, MCPI, any of the limited partners of any of MCC, Operating or the
Operating Partnerships or the Goldman Sachs Investors, or any of their
respective directors, officers, partners, stockholders and employees, will be
an obligor under the 13 1/2% Notes, and the Indenture expressly provides that
Properties, MCPI, any of the limited partners of any of MCC, Operating or the
Operating Partnerships and the Goldman Sachs Investors together with their
respective directors, officers, partners, stockholders, employees and
affiliates, shall not have any liability for any obligations of Operating or
Capital II under the 13 1/2% Notes or the Indenture or any claim based on, in
respect of, or by reason of, such obligations, and that by accepting the 13
1/2% Notes, each Holder of the 13 1/2% Notes waives and releases all such
liability, which waiver and release are part of the consideration for issuance
of the 13 1/2% Notes (Section 203). Such waiver may not be effective to waive
liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the federal income tax consequences
relevant to the purchase, ownership and disposition of the 13 1/2% Notes by the
holders acquiring the 13 1/2% Notes on their original issuance for cash but
does not purport to be a complete discussion of all potential tax effects. The
discussion is based upon provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed Treasury regulations, rulings and
judicial decisions thereunder as of the date hereof, all of which may be
repealed, revoked or modified retroactively in a manner that could adversely
affect a holder of the 13 1/2% Notes.
The summary deals only with the 13 1/2% Notes held as capital assets
(generally property held for investment and not for sale to customers in the
ordinary course of a trade or business) by holders who or which are (i)
citizens or residents of the United States, (ii) domestic corporations,
partnerships or other entities or (iii) otherwise subject to U.S. federal
income taxation on a net income basis in respect of income and gain from the 13
1/2% Notes. It does not address all aspects of the U.S. federal
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income tax consequences of holding the 13 1/2% Notes that may be relevant to a
holder's particular circumstances or to holders with special situations, such
as dealers in securities, financial institutions, life insurance companies,
tax- exempt organizations or persons holding the 13 1/2% Notes as a position in
a "straddle" or "conversion transaction" for tax purposes. The summary does
not address tax consequences of holding the 13 1/2% Notes under state, local or
foreign tax laws.
Jenkens & Gilchrist, a Professional Corporation, counsel to the
Company, has opined that the following discussion, based on the assumptions and
subject to the qualifications set forth therein, accurately describes the
material U.S. federal income tax consequences of the purchase, ownership and
disposition of the 13 1/2% Notes by holders who acquire the 13 1/2% Notes on
their original issuance as a capital asset. The opinion is not binding on the
Internal Revenue Service (the "IRS") or the courts. The Company has not sought
and will not seek any rulings from the IRS with respect to the positions of the
Company discussed below. There can be no assurance that the IRS will not take
a different position concerning the matters discussed below and that such
positions would not be sustained.
EACH PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR
TAX CONSEQUENCES TO HIM OF PURCHASING, OWNING AND DISPOSING OF THE 13 1/2%
NOTES, INCLUDING THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
ISSUER; CLASSIFICATION OF NEW 13 1/2% NOTES; DEDUCTIBILITY OF ORIGINAL ISSUE
DISCOUNT
The Company intends to take the positions (unless an adverse
determination dictates otherwise) that the 13 1/2% Notes are indebtedness for
tax purposes and that the 13 1/2% Notes represent the indebtedness of Operating
(rather than of Capital II). If, however, it is determined for tax purposes
that the 13 1/2% Notes represent an equity investment or that the 13 1/2% Notes
represent indebtedness of Capital II, a substantial portion of the discussion
set forth below will be inapplicable, and the tax consequences to the holders
of the 13 1/2% Notes will change, possibly with adverse tax consequences. The
remainder of the discussion assumes that for tax purposes the 13 1/2% Notes
represent indebtedness of Operating.
ORIGINAL ISSUE DISCOUNT ON THE 13 1/2% NOTES
The 13 1/2% Notes will bear original issue discount ("OID"), and the
holders of the 13 1/2% Notes (including cash basis holders) will be required to
include such OID in income as interest income on a constant yield to maturity
method basis, in advance of the receipt of the cash payments to which such
income is attributable and generally in increasing amounts over the life of the
Note.
The total amount of OID with respect to a Note will be equal to the
excess of the "stated redemption price at maturity" of such Note over the
"issue price" of such Note. The "stated redemption price at maturity" of a
Note will be equal to the sum of all payments, whether denominated as interest
or principal, required to be made on such Note other than payments of
"qualified stated interest." A qualified stated interest payment is generally
any one of a series of stated interest payments on a Note that are
unconditionally payable at least annually at a single fixed rate (with certain
exceptions for lower rates paid during some periods) applied to the outstanding
principal amount of the Note. Because interest is not payable on the 13 1/2%
Notes until February 1, 2000, none of the interest payments will be payments of
qualified stated interest and all such payments will be included in stated
redemption price at maturity. The "issue price" of a Note will be equal to its
initial offering price (i.e., the price to the public (not including bond
houses, brokers, or similar persons or organizations acting in the capacity of
underwriters or wholesalers) at which a substantial portion of the 13 1/2%
Notes are initially sold to the public).
The amount of OID required to be included in a holder's income for any
taxable year (regardless of whether the holder uses the cash or accrual method
of accounting) is the sum of the daily portions of OID with respect to the 13
1/2% Notes for each day during the taxable year or portion of the taxable year
in which the holder holds such Note ("accrued original issue discount"). The
daily portion is determined by allocating to each day in any "accrual period" a
pro rata portion of the OID allocable to that accrual period. Accrual periods
with respect to a Note may be of any length selected by the holder and may vary
in length over the term of the Note as long as (i) no accrual period is longer
than one year and (ii) each scheduled payment of interest or principal on the
Note occurs on either the first or final day of an accrual period. The amount
of OID allocable to each accrual
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period will be equal to the excess of (a) the product of the adjusted issue
price of the Note at the beginning of an accrual period and the yield to
maturity of such Note (determined on the basis of a compounding assumption that
reflects the length of the accrual period) over (b) the sum of the payments of
qualified stated interest on the Note allocable to the accrual period. The
adjusted issue price of a Note at the beginning of an accrual period will be
equal to its original issue price increased by all previously accrued OID
(disregarding any reduction on account of acquisition premium described below)
and reduced by the amount of all previous cash payments on the Note. The yield
to maturity is that interest rate, expressed as a constant annual interest
rate, that when used in computing the present value of all payments of
principal and interest to be paid in connection with the 13 1/2% Notes produces
an amount equal to the issue price of the 13 1/2% Notes.
The Issuers will provide certain information to the IRS, and will
furnish annually to record holders of the 13 1/2% Notes information with
respect to OID accruing during the calendar year. Because this information is
based upon the adjusted issue price of the Note as if the holder were the
original holder of the instrument, subsequent holders who purchase the 13 1/2%
Notes for an amount other than the adjusted issue price and/or on a date other
than the end of an accrual period will be required to determine for themselves
the amount of OID.
A subsequent purchaser of a Note having OID also will be required to
include annual accruals of OID in income, but the amount of the OID may vary
depending upon the amount paid for the instrument. See "Premium and Market
Discount."
EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON OID
The Company will be required to offer to redeem any Note prior to
maturity by virtue of certain provisions. In the event of a Change of Control
other than by an initial public offering, the Company will be required to offer
to redeem all of the 13 1/2% Notes. The Regulations do not expressly address
the computation of "yield to maturity" and OID in the cases of debt instruments
that are issued subject to mandatory redemption provisions. Although it is
unclear under the Regulations, it is possible that the IRS might take the
position that the mandatory redemption provisions of the 13 1/2% Notes should
cause the yield to maturity to exceed the amount that will be reported by the
Company, thereby resulting in an acceleration in the recognition of OID.
The Company may redeem the 13 1/2% Notes, in whole or in part, at any
time on or after August 1, 1999, at the redemption price specified herein plus
accrued interest to the date of redemption. In addition, in the event that the
Crown Acquisition is not consummated and the Board of Directors of MCPI
determines that the Crown Acquisition will not be consummated within 12 months
of the date of such determination, the issuers may on 30 days' notice delivered
on or before March 31, 1995, redeem up to 50% of the aggregate principal amount
of the 13 1/2% Notes then outstanding at a Redemption Price of 105% of the
Accreted Value thereof. Further, in the event of certain registered offerings
of Capital Stock prior to August 1, 1997, the Company at its option may redeem
up to twenty-five percent of the aggregate principal amount of the 13 1/2%
Notes at a redemption price equal to 110% of the Accreted Value thereof on the
Redemption Date. The Regulations contain rules for determining the "maturity
date" and the stated redemption price at maturity of an instrument that may be
redeemed prior to its stated maturity date at the option of the issuer. It is
assumed for purposes of the OID rules that the issuer will exercise any option
to redeem a debt instrument if such exercise will lower the yield to maturity
of the debt instrument. If it is presumed that the Company will exercise its
option to redeem, then the maturity date of the 13 1/2% Notes for the purpose
of calculating yield to maturity will be the exercise date of the call option
and the stated redemption price at maturity for each Note will equal the amount
payable upon such exercise. If subsequently the call option is not exercised
then for purposes of the OID rules, the issuer is treated as having issued on
the presumed exercise date of the call option a new debt instrument in exchange
for the existing instrument. The new debt instrument deemed issued will have
an issue price equal to the call price. As a result, another OID computation
would have to be made with respect to the constructively issued new debt
instrument. Operating believes that it would not be presumed to redeem the 13
1/2% Notes prior to their stated maturity under these rules.
PREMIUM AND MARKET DISCOUNT
A holder who purchases a Note for an amount that is greater than its
adjusted issue price as of the purchase date and less than the sum of all
amounts payable on the instrument after its purchase by the holder will be
considered to have purchased such
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Note at an "acquisition premium." The amount of OID that such holder must
include in its gross income with respect to such Note for any taxable year is
generally reduced by the portion of such acquisition premium properly allocable
to such year.
A Note is purchased at a premium if its adjusted basis, immediately
after its purchase by the holder, exceeds the sum of all amounts payable on the
instrument after its purchase by the holder. A holder who purchases a Note at
a premium is not required to include any OID in gross income and may elect to
amortize such premium, using a constant yield method, generally over the
remaining term of the Note. Such premium generally shall be deemed to be an
offset to interest otherwise includable in income in respect of a Note. Any
election to amortize bond premium shall apply to all debt instruments (other
than debt instruments the interest on which is excludable from gross income)
held by the holder at the beginning of the first taxable year to which the
election applies or thereafter acquired by the holder, and is irrevocable
without the consent of the IRS. Amortizable bond premium on a Note held by a
holder that does not make such an election will decrease the gain or increase
the loss otherwise recognized on disposition of the Note. See "--Election to
Treat All Interest as OID."
If a holder purchases, subsequent to its original issuance, a Note for
an amount that is less than its "revised issue price" as of the purchase date,
the amount of the difference generally will be treated as "market discount,"
unless such difference is less than a specified de minimis amount. The Code
provides that the revised issue price of a Note equals its issue price plus the
amount of OID includable in the income of all holders for periods prior to the
purchase date (disregarding any deduction for acquisition premium). Under the
market discount rules generally, a holder will be required to treat any gain
recognized on the maturity disposition of, a Note as ordinary income to the
extent of the accrued market discount that has accrued while the instrument was
held by such holder and that has not previously been included in income. In
addition, the holder may be required to defer, until the maturity date of the
Note or its earlier disposition in a taxable transaction, the deduction of all
or a portion of the interest expense on any indebtedness incurred or continued
to purchase or carry such Note.
The 13 1/2% Notes provide for optional and mandatory redemption, in
whole or part, prior to maturity. If the 13 1/2% Notes were redeemed, a holder
generally would be required to include in gross income as ordinary income the
portion of the gain recognized on the redemption to the extent of the accrued
market discount on the 13 1/2% Notes, if any.
Any market discount will be considered to accrue ratably during the
period from the date of acquisition to the maturity date of the Note, unless
the holder elects to accrue market discount on a constant interest method. A
holder of a Note may elect to include market discount in income currently as it
accrues (under either the ratable or constant interest method). This election
to include currently, once made, applies to all market discount obligations
acquired in or after the first taxable year to which the election applies and
may not be revoked without the consent of the IRS. If a holder of 13 1/2%
Notes makes such an election, the foregoing rules with respect to the
recognition of ordinary income on sales and other dispositions of such
instruments, and with respect to the deferral of interest deductions on debt
incurred or maintained to purchase or carry such debt instruments, would not
apply.
ELECTION TO TREAT ALL INTEREST AS OID
A holder of a Note may elect to include all interest that accrues on
the Note in gross income on a constant- yield basis. For purposes of this
election, interest includes stated interest, OID, market discount, de minimis
market discount and unstated interest, as adjusted by any amortizable bond
premium or acquisition premium.
In applying the constant-yield method to a Note with respect to which
this election has been made, the issue price of the Note will equal the
holder's basis in the Note immediately after its acquisition, the issue date of
the Note will be the date of its acquisition by the holder, and no payments on
the Note will be treated as payments of qualified stated interest. The
election will generally apply only to the Note with respect to which it is made
and may not be revoked without the consent of the IRS.
If this election is made with respect to a Note with amortizable bond
premium, the electing holder will be deemed to have elected to apply
amortizable bond premium against interest with respect to all debt instruments
with amortizable bond premium (other than debt instruments the interest on
which is excludable from gross income) held by the electing holder as of
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the beginning of the taxable year in which the Note with respect to which the
election is made is acquired or thereafter acquired. The deemed election with
respect to amortizable bond premium may not be revoked without the consent of
the IRS.
If the election to apply the constant-yield method to all interest on
a Note is made with respect to a Note on which there is market discount, the
electing holder will be treated as having made the election described above
under "--Premium and Market Discount" to include market discount in income
currently over the life of all debt instruments held or thereafter acquired by
such holder.
SALE, EXCHANGE AND RETIREMENT OF 13 1/2% NOTES
A holder's adjusted tax basis in a Note will, in general, equal the
holder's cost for the Note, increased by any amounts included in income as OID,
market discount or de minimis market discount which the holder has previously
elected to accrue in gross income on an annual basis and reduced by any
amortized premium which the holder has previously elected to offset against
interest on the 13 1/2% Notes and any cash payments in respect of the Note.
Upon the sale, exchange or retirement of a Note, a holder will recognize gain
or loss equal to the difference between the amount realized on such sale,
exchange or retirement (except to the extent of accrued OID on the 13 1/2%
Notes, which will be taxable as such) and the holder's tax basis in the Note.
Except as described above regarding market discount, or attributable to accrued
but unpaid interest, gain or loss recognized by a holder on the sale, exchange
or retirement of a Note will be a capital gain or loss and will be a long-term
capital gain or loss if the Note had been held for more than one year at the
time of such disposition.
BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments
of principal, the proceeds of a sale before maturity, and the accrual and
payment of OID on a Note with respect to, non-corporate holders. "Backup
withholding" at a rate of 31% will apply to such payments if the holder fails
to provide an accurate taxpayer identification number, to report all interest
and dividends required to be shown on its federal income tax returns, or
otherwise establish an exemption. Backup withholding tax is not an additional
tax and may be credited against a holder's regular U.S. federal income tax
liability or refunded, provided appropriate proof is provided under rules
established by the IRS. The amount of OID reported by the Issuers in respect
of a Note may not equal the amount of OID required to be included in income by
a holder who or which is not an initial purchaser of such Note.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
DOES NOT CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR PROSPECTIVE
PURCHASER'S SITUATION OR STATUS. THE SUMMARY IS BASED ON THE PROVISIONS OF THE
CODE, REGULATIONS, PROPOSED REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN
EFFECT, ALL OF WHICH ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS.
EACH PURCHASER OF 13 1/2% NOTES SHOULD CONSULT HIS OWN TAX ADVISOR WITH RESPECT
TO THE TAX CONSEQUENCES TO HIM, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS, OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE 13 1/2% NOTES.
PLAN OF DISTRIBUTION
This Prospectus is to be used by Goldman Sachs in connection with
offers and sales of the 13 1/2% Notes in market-making transactions effected
from time to time. Goldman Sachs may act as principal or agent in such
transactions including as agent for the counterparty when acting as principal
or as agent for both counterparties, and may receive compensation in the form
of discounts and commissions, including from both counterparties when it acts
as agent for both. Such sales will be made at prevailing market prices at the
time of sale, at prices related thereto or at negotiated prices.
Affiliates of Goldman Sachs collectively comprise the largest holder
of Class B LP Units of MCC. See "Principal Security Holders." Goldman Sachs
has informed the Company that it does not intend to confirm sales of the 13
1/2% Notes to any
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accounts over which it exercises discretionary authority without the prior
specific written approval of such transactions by the customer.
Goldman Sachs has provided investment banking services to the Company
in the past and may provide such services and financial advisory services to
the Company in the future. Goldman Sachs acted as underwriter in connection
with the original offering of the 13 1/2% Notes and received underwriting
discounts totaling $5,039,056 in connection therewith. See "Certain
Relationships and Related Transactions".
The Issuers have not and do not intend to apply for listing of the 13
1/2% Notes on any security exchange. The Company has been advised by Goldman
Sachs that Goldman Sachs intends to make a market in the 13 1/2% Notes but are
not obligated to do so and may discontinue market-making at any time without
notice. In addition, such market-making activity will be subject to the limits
imposed by the Act and the Exchange Act. Because of the affiliation of Goldman
Sachs with the Issuers, Goldman Sachs has determined that they should deliver a
current prospectus to any purchaser in connection with secondary transactions in
the securities. No assurance can be given as to the liquidity of the trading
market for the 13 1/2% Notes. See "Risk Factors -- Absence of Public Market for
the 13 1/2% Notes".
Pursuant to the Underwriting Agreement , the Company agreed to bear
all registration expenses incurred under such agreement, and the Company agreed
to indemnify Goldman Sachs against certain liabilities, including liabilities
under the Securities Act.
VALIDITY OF THE 13 1/2% NOTES
The validity of the 13 1/2% Notes has been passed upon for the Issuers
by Jenkens & Gilchrist, a Professional Corporation, Dallas, Texas, and for the
underwriters by Sullivan & Cromwell, New York, New York.
EXPERTS
The consolidated financial statements of MCC and subsidiaries as of
December 31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996, the financial statements of Capital II as of December
31, 1996 and 1995, and for each of the years in the two-year period ended
December 31, 1996 and the period from June 29, 1994 (date of inception) to
December 31, 1994 and the balance sheets of Properties as of December 31, 1996
and 1995 have been included herein and in the Registration Statement in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The combined financial statements of the Sammons Systems as of
December 31, 1994 and 1993 and for each of the years in the three-year period
ended December 31, 1994 included herein and in the Registration Statement have
been included herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, appearing elsewhere herein, given on the authority of
that firm as experts in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Marcus Cable Company, L.P. and Subsidiaries:
Independent Auditors' Report ................................................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 ................................. F-3
Consolidated Statements of Operations for the three years ended December 31, 1996 ............ F-4
Consolidated Statements of Partners' Capital (Deficit) for the three years ended
December 31, 1996 ......................................................................... F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1996 ............ F-6
Notes to Consolidated Financial Statements ................................................... F-7
Marcus Cable Capital Corporation II:
Independent Auditors' Report ................................................................. F-20
Balance Sheets as of December 31, 1996 and 1995 .............................................. F-21
Statements of Operations for the two years ended December 31, 1996 and for the period of
June 28, 1994 (date of inception) to December 31, 1994 .................................... F-22
Statements of Shareholder's Equity for the three years ended December 31, 1996 and for the
period from June 28, 1994 (date of inception) to December 31, 1994 ........................ F-23
Statements of Cash Flows for the two years ended December 31, 1996 and for the period of
June 28, 1994 (date of inception) to December 31, 1994 .................................... F-24
Notes to Financial Statements ................................................................ F-25
Marcus Cable Properties, L.P.:
Independent Auditors' Report ................................................................. F-26
Balance Sheets as of December 31, 1996 and 1995 .............................................. F-27
Notes to Balance Sheets ...................................................................... F-28
The Sammons Systems:
Report of Independent Accountants ............................................................ F-30
Combined Balance Sheets as of December 31, 1994 and 1993 and
September 30, 1995 (unaudited) ............................................................ F-31
Combined Statements of Income for the three years ended December 31, 1994 and the nine
months ended September 30, 1995 and 1994 (unaudited) ...................................... F-32
Combined Statements of Changes in Equity (Deficit) Investment for the three years ended
December 31, 1994 and the nine months ended September 30, 1995 (unaudited) ................ F-33
Combined Statements of Cash Flows for the three years ended December 31, 1994 and the
nine months ended September 30, 1995 and 1994 (unaudited) ................................. F-34
Notes to Combined Financial Statements ....................................................... F-35
</TABLE>
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<PAGE> 87
INDEPENDENT AUDITORS' REPORT
The Partners
Marcus Cable Company, L.P.:
We have audited the accompanying consolidated balance sheets of Marcus Cable
Company, L.P. and subsidiaries as of December 31, 1996 and 1995, and the
related statements of operations, partners' capital (deficit) and cash flows
for each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marcus Cable
Company, L.P. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 21, 1997, except for note 12,
which is as of March 14, 1997
F-2
<PAGE> 88
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Assets 1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,034 $ 17,409
Accounts receivable, net of allowance of $1,900 in 1996 and
$1,564 in 1995 17,043 16,946
Prepaid expenses 2,432 1,860
----------- -----------
Total current assets 25,509 36,215
Property and equipment, net (notes 2 and 3) 578,507 538,452
Other assets, net (note 4) 1,083,534 1,185,387
----------- -----------
$ 1,687,550 $ 1,760,054
=========== ===========
Liabilities and Partners' Capital
Current liabilities:
Current maturities of long-term debt (note 6) $ 41,819 $ 339
Accrued liabilities (note 5) 49,405 50,350
Accrued interest 10,664 12,734
----------- -----------
Total current liabilities 101,888 63,423
Long-term debt (note 6) 1,396,652 1,407,551
Subsidiary limited partner interests (note 7) (246) (246)
Partners' capital - redeemable partner interests (note 8) 189,256 289,326
Commitments and contingencies (notes 6, 8 and 11)
$ 1,687,550 $ 1,760,054
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 89
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Cable services $ 432,172 $ 195,004 $ 63,629
Management fees 2,335 3,290 1,118
--------- --------- ---------
Total revenues 434,507 198,294 64,747
--------- --------- ---------
Operating expenses:
Selling, service and system management 157,197 68,753 21,660
General and administrative 73,017 33,271 9,793
Management fees and expenses (note 9) - - 2,165
Depreciation and amortization 166,429 83,723 37,412
--------- --------- ---------
396,643 185,747 71,030
--------- --------- ---------
Operating income (loss) 37,864 12,547 (6,283)
--------- --------- ---------
Other (income) expense:
Interest expense 144,681 82,911 28,105
Gain on sale of cable systems (note 2) (6,442) (26,409) -
Interest income (305) (768) (407)
Other, net - 1,234 356
--------- --------- ---------
137,934 56,968 28,054
--------- --------- ---------
Loss before subsidiary limited partner
interests and extraordinary item (100,070) (44,421) (34,337)
Subsidiary limited partner interests (note 7) - - 6,034
--------- --------- ---------
Loss before extraordinary item (100,070) (44,421) (28,303)
Extraordinary item - loss on early retirement of debt - (8,395) (2,307)
--------- --------- ---------
Net loss $(100,070) $ (52,816) $ (30,610)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 90
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidated Statements of Partners' Capital (Deficit)
Years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
Redeemable Partner Interests
----------------------------
Class B
General Limited Class A
Partners Partners Partner Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ (7,361) $ - $ (4,309) $ (11,670)
Distribution of preference
returns on Class A units
redeemed (7) (721) - (728)
Redemption of Class A units (25) (2,519) 1,272 (1,272)
Conversion of Class A units (3,844) (166) 4,010 -
Issuance of partnership units - 22,990 - 22,990
Net loss (10,053) (19,584) (973) (30,610)
---------- ---------- ---------- ----------
Balance at December 31, 1994 (21,290) - - (21,290)
Excess of purchase price over
carrying value of certain CALP
assets acquired (note 2) - (14,183) - (14,183)
Issuance of partnership units - 385,000 - 385,000
Syndication costs - (7,385) - (7,385)
Net loss (106) (52,710) - (52,816)
---------- ---------- ---------- ----------
Balance at December 31, 1995 (21,396) 310,722 - 289,326
Net loss (200) (99,870) - (100,070)
---------- ---------- ---------- ----------
Balance at December 31, 1996 $ (21,596) $ 210,852 $ - $ 189,256
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 91
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (100,070) $ (52,816) $ (30,610)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Extraordinary item - loss on early retirement of debt - 8,395 2,307
Gain on sale of assets (6,442) (26,409) -
Depreciation and amortization 166,429 83,723 37,412
Accretion of discount on notes 63,278 43,739 12,264
Subsidiary limited partner interests - - (6,034)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (70) (2,610) (2,411)
Prepaid expenses (574) (474) (222)
Other assets (502) 1,721 495
Accrued liabilities (3,063) 30,761 2,688
------------ ------------ ------------
Net cash provided by operating activities 118,986 86,030 15,889
------------ ------------ ------------
Cash flows from investing activities:
Escrow deposit on acquisition of cable systems - - (5,000)
Acquisition of cable systems and franchises, net of
cash acquired (10,272) (1,455,718) (139,130)
Net proceeds from sale of assets 20,638 65,037 -
Additions to property and equipment (110,639) (42,219) (6,592)
------------ ------------ ------------
Net cash used in investing activities (100,273) (1,432,900) (150,722)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 65,338 1,280,003 215,000
Repayment of long-term debt (95,052) (245,000) (95,000)
Contributions by limited partners, net of syndication costs - 362,615 22,990
Payment of debt issuance costs - (38,307) (9,666)
Payments on capital leases (374) (360) -
Redemption of Class A partner units - - (2,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities (30,088) 1,358,951 131,324
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (11,375) 12,081 (3,509)
Cash and cash equivalents at beginning of year 17,409 5,328 8,837
------------ ------------ ------------
Cash and cash equivalents at end of year $ 6,034 $ 17,409 $ 5,328
============ ============ ============
Supplemental disclosure of cash flow information - interest paid $ 83,473 $ 27,591 $ 15,868
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 92
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
(a) General
Marcus Cable Company, L.P. ("MCC" or the "Partnership"), a
Delaware limited partnership, and subsidiaries (collectively, the
"Company") was formed on January 17, 1990 for the purpose of
acquiring, operating and developing cable television systems. The
Company derives its primary source of revenues by providing
various levels of cable television programming and services to
residential and business customers. Other revenues are derived by
providing management services to cable systems owned by third
parties. The Company's operations are conducted through
subsidiary partnerships. In July 1994, the Company formed Marcus
Cable Operating Company, L.P. ("Operating"), a wholly-owned
subsidiary. Operating acts as a holding company and as general
partner for its subsidiary operating partnerships.
(b) Basis of Presentation
The consolidated financial statements include the accounts of MCC
and its subsidiary partnerships and corporations. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior
years' consolidated balances to conform to the current year
presentation.
(c) Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid investments with original maturities
of three months or less at inception to be cash equivalents. At
December 31, 1996 and 1995, the Company had cash equivalents of
$6,233,000 and $21,114,000, respectively, consisting of
certificates of deposit and money market funds.
(d) Property and Equipment
Property and equipment are recorded at cost, including all direct
costs and certain indirect costs associated with the construction
of cable television transmission and distribution systems, and
the cost of new customer installations. Maintenance and repairs
are charged to expense as incurred and equipment replacements and
betterments are capitalized.
Property and equipment are depreciated using the straight-line
method based on estimated useful lives as follows: buildings, 15
years; cable systems, 3 to 10 years; and vehicles and other, 3 to
10 years.
(e) Other Assets
Franchise rights and going concern value of acquired cable
systems are amortized on a straight-line basis over ten to
fifteen years. The cost of noncompetition agreements is amortized
by the straight-line method over the periods of the respective
agreements. Deferred debt issuance costs are amortized to
interest expense using the interest method over the term of the
related debt.
The Company assesses the recoverability of goodwill and other
intangible assets as well as the related amortization lives by
determining whether the carrying value of the intangible assets
can be recovered over the remaining lives through projected
undiscounted future cash flows. To the extent that such
projections indicate that undiscounted future cash flows are not
expected to be adequate to recover the carrying amounts of the
related goodwill and other intangible assets, such carrying
amounts are adjusted for impairment to a level commensurate with
the estimated fair value of the underlying assets.
(f) Revenues
Revenues from basic and premium service are recognized when the
service is provided.
F-7
<PAGE> 93
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Installation revenues are recognized to the extent of direct
selling costs incurred. The remainder, if any, is deferred and
amortized to income over the estimated average period that
customers are expected to remain connected to the cable
television system.
Management fee revenues are recognized concurrently with the
recognition of revenues by the managed cable system.
(g) Income Taxes
The Company has not provided for federal income taxes since such
taxes are the responsibility of the individual partners. The
Company's subsidiary corporations are subject to federal income
tax but either have no operations or have experienced net losses
and, therefore, had no taxable income since their inception.
(h) Subsidiary Limited Partner Interests
Limited partner interests of subsidiary partnerships which are
not directly held by the Company are accounted for in a manner
similar to minority interests. Net income or loss and preference
returns related to the limited partner interests of subsidiary
partnerships are reflected in the accompanying statements of
operations as "subsidiary limited partner interests."
(i) Derivative Financial Instruments
The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes.
Any derivative financial instruments are used to manage
well-defined interest rate risk related to the Company's
outstanding debt.
As interest rates change under interest rate swap agreements, the
differential to be paid or received is recognized as an
adjustment to interest expense. The Company is not exposed to
credit loss as its interest rate swap agreements are with certain
of the participating banks under the Company's Senior Credit
Facility. The fair value of long-term debt was $1,511,233,000 and
$1,511,875,000 at December 31, 1996 and 1995, respectively.
(j) Disclosure of Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of, on January 1, 1996. This Statement requires
that long-lived assets and intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value
less costs to sell. The adoption of this Statement did not have a
material impact on the Company's financial position, results of
operations, or liquidity.
F-8
<PAGE> 94
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Acquisitions and Dispositions
On January 11, 1996, the Company completed the purchase of cable
television systems in Texas for $875,000. On July 8, 1996, the Company
acquired cable television systems in Mississippi for an aggregate
purchase price of $2,600,000. On July 31, 1996, the Company acquired
cable television systems in Indiana for a purchase price of $6,700,000.
Combined acquisition costs for these systems were approximately $97,000.
On January 18, 1995, the Company acquired cable television systems in
Wisconsin and Minnesota owned and operated by Crown Media, Inc.
("Crown") and Cencom of Alabama, L.P. ("CALP") limited partner units
held by Crown for an aggregate purchase price of $331,717,000. On August
31, 1995, the Company acquired all remaining CALP ordinary limited
partner interests held by outside parties in exchange for convertible
preference units of MCC with a $15,000,000 distribution preference and
caused the redemption of all outstanding CALP special limited
partnership interests and the retirement of all outstanding bank
indebtedness of CALP for $138,280,000 in cash. On November 1, 1995, the
Company acquired certain cable television systems owned and operated by
Sammons Communications, Inc. ("Sammons") for a purchase price of
$961,701,000 plus direct acquisition costs of $31,187,000 and less
assumed liabilities of $4,524,000. Other miscellaneous acquisitions of
cable television systems were also completed in 1995 for $2,357,000.
On July 29, 1994, the Company acquired cable television systems in
Wisconsin and Minnesota from Star Cablevision Group ("Star"), an
unaffiliated third party, for $139,232,000. On September 1, 1994, the
Company acquired from Crown the general partner interest in CALP, the
management contract pursuant to which the Company provided management
services to CALP, and accrued and unpaid management fees, for total cash
consideration of $2,878,000. Management fees earned by the Company under
the management contract during the years ended December 31, 1995 and
1994 were $1,082,000 and $532,000, respectively.
The acquisitions discussed above were accounted for as purchases and,
accordingly, the purchase prices were allocated to tangible and
intangible assets based on estimated fair market values at the dates of
acquisition. Fair market values were determined using independent
appraisers, or in the case of the smaller acquisitions, estimated based
on previous acquisitions. Operating results of the acquired companies
are included in the accompanying financial statements from the dates of
acquisition except for operating results of Crown, which are included as
of January 1, 1995. In connection with the acquisitions, the Company
also assumed responsibility for settling outstanding receivables and
payables of the cable television systems acquired. Net assets acquired
as a result of these acquisitions are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Working capital deficit $ - $ (15,900) $ -
Property and equipment 5,004 485,410 34,147
Franchise rights 4,861 959,651 94,437
Going concern value - 33,055 10,412
Noncompetition agreements 383 12,160 100
Other assets 24 1,342 3,014
----------- ----------- -----------
Total purchase price (1995 includes $5,000
from escrow paid in 1994 and 1994
includes $2,980 from escrow paid in 1993) $ 10,272 $ 1,475,718 $ 142,110
=========== =========== ===========
</TABLE>
Prior to the final CALP acquisition, certain partners in MCC who hold a
controlling interest in MCC also held an interest in CALP. Because of
this common ownership interest, the predecessor cost was used to value
the assets acquired to the extent of the investment held in CALP by the
partners in MCC. A charge of $14,183,000
F-9
<PAGE> 95
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
which was made to partners' capital represents the excess of the
consideration paid over the carrying value of the investment in CALP
held by partners in MCC. For accounting purposes, such excess is
reflected as a reduction in the partners' capital accounts of MCC.
On October 11, 1996, the Company sold the cable television systems
operating in Washington for a cash purchase price of $20,638,000, net of
selling costs. The sale resulted in a gain of $6,442,000.
On June 30, 1995, the Company sold the cable television systems
operating in and around San Angelo, Texas to TeleService Corporation of
America for a cash purchase price of $65,037,000, net of selling costs.
The sale resulted in a gain of $26,409,000. Net proceeds from the sale
were used to retire outstanding borrowings under Operating's then
existing senior credit facility.
Unaudited pro forma financial information for the years ended December
31, 1996 and 1995 as though the acquisitions and dispositions discussed
above had occurred at January 1, 1995 follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Revenues $ 432,698 $ 398,141
Operating income 37,310 11,263
Net loss (100,624) (140,186)
</TABLE>
(3) Property and Equipment
Property and equipment consists of the following at December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cable systems $ 670,829 $ 567,542
Vehicles and other 26,008 19,826
Land and buildings 13,256 10,362
--------- ---------
710,093 597,730
Accumulated depreciation (131,586) (59,278)
--------- ---------
$ 578,507 $ 538,452
========= =========
</TABLE>
F-10
<PAGE> 96
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Other Assets
Other assets consist of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Franchise rights $ 1,175,009 $ 1,181,243
Going concern value of acquired cable systems 45,969 45,856
Noncompetition agreements 31,914 32,633
Debt issuance costs 43,500 43,246
Other 1,069 1,071
----------- -----------
1,297,461 1,304,049
Accumulated amortization (213,927) (118,662)
----------- -----------
$ 1,083,534 $ 1,185,387
=========== ===========
</TABLE>
(5) Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accrued property taxes $ 3,830 $ 3,552
Accrued acquisition costs 2,838 3,438
Accrued programming costs 8,301 8,371
Accrued franchise fees 9,429 8,730
Accrued operating liabilities 20,377 18,916
Other accrued liabilities 4,630 7,343
------- -------
$49,405 $50,350
======= =======
</TABLE>
(6) Long-term Debt
The Company has outstanding borrowings on long-term debt arrangements at
December 31, 1996 and 1995 as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Senior Credit Facility $ 855,000 $ 885,000
13 1/2% Senior Subordinated Discount Notes 295,119 258,979
14 1/4% Senior Discount Notes 185,862 162,027
11 7/8% Senior Debentures 100,000 100,000
Capital leases and other notes 2,490 1,884
---------- ----------
1,438,471 1,407,890
Less current maturities 41,819 339
---------- ----------
$1,396,652 $1,407,551
========== ==========
</TABLE>
On August 31, 1995, the Company entered into the Senior Credit Facility,
which provides for two term loan facilities, one of which is in the
principal amount of $490,000,000 and matures on December 31, 2002
("Tranche A") and the other of which is in the principal amount of
$300,000,000 and matures on April 30, 2004 ("Tranche
F-11
<PAGE> 97
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
B"). The Senior Credit Facility provides for scheduled amortization of
the two term loan facilities beginning in September 1997. The Senior
Credit Facility also provides for a $310,000,000 Revolving Credit
Facility, with a maturity date of December 31, 2002. At December 31,
1996, there were borrowings of $790,000,000 under the two term loan
facilities and $65,000,000 under the Revolving Credit Facility. Amounts
outstanding under the Senior Credit Facility bear interest at either the
i) Eurodollar rate, ii) prime rate or iii) CD base rate, in each case
plus a margin of up to 2.75% subject to certain adjustments based on the
ratio of Operating's total debt to annualized operating cash flow, as
defined. At December 31, 1996, borrowings under the Senior Credit
Facility bore interest at rates ranging from 6.75% to 8.25% under the
Eurodollar rate option. The Senior Credit Facility, among other things,
provides for (i) a pledge by Operating of all partnership interests in
the subsidiary operating partnerships and (ii) a pledge by Operating of
intercompany notes payable to it by the subsidiary operating
partnerships. All borrowings outstanding under the Senior Credit
Facility are guaranteed by MCC on an unsecured basis. The Company pays a
commitment fee of .250% to .375% on the unused commitment under the
facilities. Commitment fees on the unused portion of credit facilities
amounted to $866,000, $788,000 and $225,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
On June 9, 1995, MCC issued $299,228,000 of 14 1/4% Senior Discount
Notes due December 15, 2005 (the "14 1/4% Notes") for net proceeds of
$150,003,000. The 14 1/4% Notes are unsecured and rank pari passu to the
11 7/8% Debentures (defined below). The 14 1/4% Notes are redeemable at
the option of MCC at amounts decreasing from 107% to 100% of par
beginning on June 15, 2000. No interest is payable until December 15,
2000. Thereafter interest is payable semi annually until maturity. The
discount on the 14 1/4% Notes is being accreted using the interest
method. The unamortized discount was $113,366,000 and $137,201,000 at
December 31, 1996 and 1995, respectively. Proceeds from the 14 1/4%
Notes were used to retire outstanding borrowings under Operating's then
existing senior credit facility.
On July 29, 1994, the Company, through Operating, issued $413,461,000
face amount of 13 1/2% Senior Subordinated Discount Notes due August 1,
2004 (the "13 1/2% Notes") for net proceeds of approximately
$215,000,000. The 13 1/2% Notes are unsecured, are guaranteed by MCC and
are redeemable, at the option of Operating, at amounts decreasing from
105% to 100% of par beginning on August 1, 1999. No interest is payable
on the 13 1/2% Notes until February 1, 2000. Thereafter, interest is
payable semiannually until maturity. The discount on the 13 1/2% Notes
is being accreted using the interest method. The unamortized discount
was $118,342,000 and $154,482,000 at December 31, 1996 and 1995,
respectively. Proceeds from the 13 1/2% Notes were used to retire
outstanding borrowings under the Company's then existing senior credit
facility and to fund the 1994 acquisitions.
On October 13, 1993, the Company issued $100,000,000 principal amount of
11 7/8% Senior Debentures due October 1, 2005 (the "11 7/8%
Debentures"). The 11 7/8% Debentures are unsecured and are redeemable at
the option of the Company on or after October 1, 1998 at amounts
decreasing from 105.9% to 100% of par at October 1, 2002, plus accrued
interest, to the date of redemption. Interest on the 11 7/8% Debentures
is payable semiannually each April 1 and October 1 until maturity.
Proceeds from the 11 7/8% Debentures, together with borrowings under the
Company's then existing senior credit facility, were used to repay
indebtedness of subsidiary operating partnerships and to redeem certain
MCC preference units.
The 14 1/4% Notes, 13 1/2% Notes, 11 7/8% Debentures and Senior Credit
Facility all require the Company and/or its subsidiaries to comply with
various financial and other covenants, including the maintenance of
certain operating and financial ratios. These debt instruments also
contain substantial limitations on, or prohibitions of, distributions,
additional indebtedness, liens, asset sales and certain other items.
The Company entered into certain interest rate swap agreements with
certain of the participating banks under the Company's Senior Credit
Facility in order to reduce the impact of changes in interest rates on
its floating rate long-term debt. At December 31, 1996, interest rate
swap agreements covering a notional balance of
F-12
<PAGE> 98
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
$650,000,000 are outstanding. These outstanding swap agreements mature
during 1997 and 1998 and require the Company to pay a fixed rate of
5.77% to 5.81% while the counterparty pays a floating rate based on the
one or three-month London Interbank Borrowing Offered Rate ("LIBOR").
Extensions for additional periods are available at the option of the
counterparties. During the year ended December 31, 1996, the Company
recognized additional expenses under its interest rate swap agreements
of $130,000. During the year ended December 31, 1995, the Company
recognized benefits of $95,000 under its interest rate swap agreements.
There are no significant differences between the fair value and carrying
value of the interest rate swaps.
A summary of the future maturities of long-term debt follows (in
thousands):
<TABLE>
<S> <C>
1997 $ 41,819
1998 68,124
1999 78,134
2000 89,405
2001 106,255
Thereafter 1,054,734
----------
$1,438,471
==========
</TABLE>
(7) Subsidiary Limited Partner Interests
Subsidiary limited partner interests represent limited partner units of
the subsidiary partnerships held by entities affiliated with, but not a
part of, the Company. These limited partner units have voting rights and
share in the profit or loss of the respective partnerships. Certain of
the subsidiary limited partner interests receive preference returns on
their capital contributions. A summary of transactions in subsidiary
limited partner interests during the three years ended December 31, 1996
follows (in thousands):
F-13
<PAGE> 99
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ (246) $ (246) $ 5,788
Accrued preference returns (through July 29, 1994) - - 764
Net loss - - (6,798)
------- ------- -------
Balance at end of year $ (246) $ (246) $ (246)
======= ======= =======
</TABLE>
Certain subsidiary limited partner interests were allocated losses in
excess of their contributed capital to the extent that the fair value of
assets contributed by the subsidiary limited partners exceeded the book
value at the date of contribution. As of July 29, 1994, preference
returns are no longer accrued on subsidiary limited partner interests.
(8) Partners' Capital - Redeemable Partner Interests
(a) Classes of Partnership Interests
The MCC partnership agreement (the "partnership agreement")
requires the dissolution of the Partnership no later than
December 31, 2005, unless extended on an annual basis by the
affirmative vote of holders of 51% or more of the outstanding
Class B Units and the written consent of the General Partner.
Class B Units consist of General Partner Units ("GP Units") and
Limited Partner Units ("LP Units"). GP Units include GP Profits
Units, DCA Class B Units and Class B Units, and LP Units consist
of Class B LP Units. To the extent that GP Units have the right
to vote, GP Units vote as Class B Units together with Class B LP
Units. Voting rights of Class B LP Units are limited to items
specified under the partnership agreement including, but not
limited to, certain amendments to the partnership agreement, the
issuance of additional GP Profits Units or Class B LP Units,
dissolution of the Partnership or removal of the General Partner.
At December 31, 1996, 294,937.67 Class B LP Units and 18,848.19
GP Units were outstanding.
The partnership agreement also provides for the issuance of a
class of Convertible Preference Units. These units are entitled
to a general distribution preference over the Class B LP Units
and are convertible into Class B LP Units. The Convertible
Preference Units vote together with Class B Units as a single
class, and the voting percentage of each Convertible Preference
Unit, at a given time, will be based on the number of Class B LP
Units into which such Convertible Preference Unit is then
convertible. In connection with the acquisition of CALP in August
1995, MCC issued 7,500 Convertible Preference Units with a
distribution preference and conversion price of $2,000 per unit.
The partnership agreement permits the General Partner, at its
sole discretion, to issue up to 31,517 Employee Units (classified
as Class B Units) to key individuals providing services to the
Company. Employee Units are not entitled to distributions until
such time as all units have received certain distributions as
calculated under provisions of the partnership agreement
("subordinated thresholds"). At December 31, 1996 and 1995,
27,758.2 and 27,705.2 Employee Units, respectively, were
outstanding with a subordinated threshold ranging from $1,600 to
$1,750 per unit. The Company believes that the Employee Units
issued have no current value.
(b) Redemption Rights
Upon the occurrence of certain key events (as defined in the
partnership agreement), the GP Units held by the General Partner
shall be immediately converted into an equivalent number of Class
B LP Units. The holders of the converted Class B LP Units, from
and after January 1, 1999, have the right to cause MCC to
purchase all units held by such holders, and MCC has the right to
purchase from the General Partner, upon affirmative vote of 51%
or more of the outstanding Class B LP Units, all such units held
by
F-14
<PAGE> 100
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the General Partner, at a price equal to their fair market value,
to the extent permitted by the 14 1/4% Notes, 11 7/8% Debentures,
13 1/2% Notes and the Senior Credit Facility. In addition, in the
event the General Partner fails to timely dissolve the
Partnership following the vote by holders of 51% or more of the
Class B Units, then the holders of the Class B LP Units (other
than Class B Units held by the General Partner) shall have the
right to require MCC to purchase all of the Class B Units held by
such holders at a price equal to their fair market value, to the
extent permitted by the 14 1/4% Notes, 11 7/8% Debentures, 13
1/2% Notes and the Senior Credit Facility.
(c) General Partner and Class A Partner
Marcus Cable Properties, L.P. ("Properties") is the General
Partner of the Company and was also a Class A partner through
July 29, 1994. On that date, the Company redeemed 1,272.126 Class
A partnership units with a face value of $1,000 per unit and
cumulative unpaid preference returns of $727,875 for cash of
$2,000,000. Also on that date, the remaining 3,405.944 Class A
units with a face value of $1,000 per unit and cumulative unpaid
preference returns of $1,971,474 were converted into 3,934.53
Class B Units and 201.95 Class B LP units of MCC, each with a
face value of $1,300 per unit.
(d) Allocation of Income and Loss to Partners
Income and loss are allocated in accordance with the partnership
agreement. Generally, income is allocated as follows:
(1) First, among the partners whose unreturned capital
contributions exceed their capital accounts in proportion
to such excesses until each partner's capital account
equals such partner's unreturned capital contributions;
(2) Next, to the holders of Class B Units in the same
proportions, and in the same amounts, as distributions are
or would be made as discussed below; and
(3) Finally, to the holders of Class B Units in accordance with
their Class B percentage interests.
Generally, losses are allocated as follows:
(1) If any of the partners have capital accounts that exceed
their unreturned capital contributions, among the partners
whose capital accounts exceed their unreturned capital
contributions in proportion to such excesses until each
such partner's capital account equals its unreturned
capital contribution; and
(2) Next, to the holders of Class B Units in accordance with
their unreturned capital contribution percentages.
The General Partner is allocated a minimum of .2% to 1% of income
or loss at all times, depending on the level of capital
contributions made by the partners.
(e) Distributions
The amount of distributions is at the discretion of the General
Partner, subject to the restrictions in the 14 1/4% Notes, 11
7/8% Debentures, 13 1/2% Notes and Senior Credit Facility (see
note 6). The manner of distribution is as follows:
(1) First, to each partner in an amount sufficient to pay
income taxes on net taxable income allocated to each
partner;
(2) Next, to the holders of Convertible Preference Units in
accordance with their unpaid preference amount (currently
$15,000,000) until each partner's unpaid preference amount
is reduced to zero;
F-15
<PAGE> 101
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Next, to the holders of Class B Units in accordance with
their unreturned capital contribution percentages until
each partner's unreturned capital contribution is reduced
to zero;
(4) Next, to the holders of Class B Units (exclusive of all or
certain Employee Units), in accordance with their Class B
percentage interests until a defined threshold has been
met.
(5) Finally, to the holders of Class B Units in accordance with
the Class B percentage interests.
(f) Capital Contributions
The partnership agreement requires the General Partner to make
such additional contributions to MCC as are necessary to maintain
at all times a minimum capital account balance equal to either 1%
of the aggregate positive capital account balances of all the
partners of MCC or $500,000, whichever is less. The limited
partners are not required to make additional capital
contributions, and no partner has the right to withdraw its
capital contribution during the term of the Partnership.
(g) Issuance of Partnership Units
During the year ended December 31, 1994, MCC issued Class B LP
Units for cash of $22,990,000 to partially fund the purchase of
cable television systems from Star. During the year ended
December 31, 1995, MCC issued Class B LP Units for cash of
$362,615,000, net of equity syndication fees of $7,385,000 paid
to certain limited partners, and Convertible Preference Units
with a distribution preference of $15,000,000 to partially fund
the purchases of Sammons, CALP and Crown.
(9) Related Party Transactions
Through July 29, 1994, each subsidiary partnership had a management
agreement with Marcus Cable Management, Inc. ("MMI"), an affiliated
entity, whereby MMI provided various general, administrative and
operating services to the partnerships. The management fee paid by each
subsidiary for these services was 5.5% of revenues. The Company and its
subsidiary partnerships recorded management fees and expenses of
$2,165,000 for the year ended December 31, 1994, pursuant to this
agreement. The management fees were discontinued on July 29, 1994, and
the employees and related expenses of MMI became a part of the Company.
In connection with the acquisitions in 1995 and 1994, fees of $5,250,000
and $1,500,000, respectively, were paid to Properties for services
directly related to the Sammons, Crown and Star acquisitions. In
addition, strategic advisory fees of $18,309,000 were paid to certain
limited partners in connection with the acquisition of Sammons in 1995.
The fees were capitalized as part of the cost of acquiring the cable
television systems.
(10) Employee Benefit Plan
The Company sponsors a 401(k) plan for its employees whereby employees
that qualify for participation under the plan can contribute up to 15%
of their salary, on a before tax basis, subject to a maximum
contribution limit as determined by the Internal Revenue Service. The
Company matches participant contributions up to a maximum of 2% of a
participant's salary. For the years ended December 31, 1996, 1995 and
1994, the Company made contributions to the plan of approximately
$480,000, $247,000 and $83,000, respectively.
(11) Commitments and Contingencies
The Company rents pole space from various companies under agreements
which are generally cancelable on short notice and leases office space
for system and corporate offices. Lease and rental costs charged to
expense for the years ended December 31, 1996, 1995 and 1994 were
approximately $6,775,000, $3,093,000 and $461,000, respectively.
F-16
<PAGE> 102
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In October 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). During
May 1993, pursuant to authority granted to it under the 1992 Cable Act,
the Federal Communications Commission ("FCC") issued its rate regulation
rules which became effective September 1, 1993. These rate regulation
rules required certain cable systems in franchise areas which receive
certification and are not subject to effective competition, as defined,
to set rates for basic and cable programming services, as well as
related equipment and installations, pursuant to general cost-of-service
standards or FCC prescribed benchmarks. These FCC benchmarks were based
on an average 10% competitive differential between competitive and
non-competitive systems. Effective September 1, 1993, regulated cable
systems not electing cost-of-service were required to reduce rates to
the higher of the prescribed benchmarks or rates that were 10% below
those in effect on September 1, 1992.
In February 1994, the FCC announced further changes in its rate
regulation rules and announced its interim cost- of-service standards.
In connection with these changes, the FCC issued revised benchmark
formulas, based on a revised competitive differential of 17%, which
became effective on May 15, 1994 or if certain conditions were met, on
July 14, 1994. Regulated cable systems were required to reduce rates to
the higher of the new FCC prescribed benchmarks or rates that were 17%
below those in effect on September 1, 1992.
On February 1, 1996 Congress passed S.652, "The Telecommunications Act
of 1996" (the "Act"), which was subsequently signed into law on February
8, 1996. This new law altered federal, state and local laws and
regulations for telecommunications providers and services, including the
Company. There are numerous rulemakings to be undertaken by the FCC
which will interpret and implement the Act. It is not possible at this
time to predict the outcome of such rulemakings. Several aspects of the
Act impact cable television, including the elimination of regulation of
the cable programming service tier as of March 31, 1999.
The Company believes that it has complied with all provisions of the
1992 Cable Act, including the rate setting provisions promulgated by the
FCC. However, in jurisdictions which have chosen not to certify, refunds
covering a one-year period of basic service may be ordered upon
certification if the Company is unable to justify its rates. The amount
of refund liability, if any, to which the Company could be subject in
the event that these systems' rates are successfully challenged by
franchising authorities is not currently estimable.
During the year ended December 31, 1994, the Company paid rate refunds
of approximately $944,000 to its cable customers as a result of rate
orders issued by certain franchise authorities within certain cable
systems which have subsequently been sold.
The Company is involved in various claims and lawsuits which are
generally incidental to its business. The Company is vigorously
contesting all such matters and believes that their ultimate resolution
will not have a material adverse effect on its consolidated financial
position, results of operations or cash flows.
(12) Subsequent Event
On March 14, 1997, the Company entered into an agreement to amend its
Senior Credit Facility. The amendment provides for, among other items, a
reduction in the interest rate margins under the Senior Credit Facility
as well as increased flexibility for the Company as it relates to
investments, permitted lines of businesses and the incurrence of
unsecured indebtedness. In addition, the availability under the
Revolving Credit Facility was increased from $310,000,000 to
$360,000,000.
F-17
<PAGE> 103
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATING SCHEDULE - BALANCE SHEET INFORMATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCUS CABLE CONSOLIDATED
COMBINED MARCUS CABLE OPERATING MARCUS CABLE
OPERATING CAPITAL COMPANY, OPERATING
ASSETS PARTNERSHIPS CORPORATION II L.P. ELIMINATIONS COMPANY, L.P.
------ ------------ -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ............ $ 8,126 $ 1 $ (2,849) $ - $ 5,278
Accounts receivable, net ............. 26,649 - (12,966) 3,360 17,043
Prepaid expenses ..................... 1,896 - 536 - 2,432
----------- ----------- ----------- ----------- -----------
Total current assets ........ 36,671 1 (15,279) 3,360 24,753
Property and equipment, net .......... 572,990 - 5,517 - 578,507
Other assets, net .................... 1,084,284 - 1,536,473 (1,527,515) 1,093,242
Investment in subsidiaries ........... - - 189,573 (189,573) -
----------- ----------- ----------- ----------- -----------
Total assets ................ $ 1,693,945 $ 1 $ 1,716,284 $(1,713,728) $ 1,696,502
=========== =========== =========== =========== ===========
Liabilities and Partners'
Capital (Deficit)
Current liabilities:
Current maturities of
long-term debt .............. $ 183 $ - $ 41,636 $ - $ 41,819
Accrued liabilities ......... 60,179 - 76,520 (80,626) 56,073
Accrued interest ............ 10,664 - 7,695 (10,664) 7,695
----------- ----------- ----------- ----------- -----------
Total current liabilities ... 71,026 - 125,851 (91,290) 105,587
Long-term debt ....................... 1,433,347 - 1,110,308 (1,432,865) 1,110,790
Subsidiary limited partner
interests ............................ - - (246) - (246)
Partners' capital - redeemable
partner interests .................... 189,572 1 480,371 (189,573) 480,371
----------- ----------- ----------- ----------- -----------
Total liabilities and
partners' capital ........... $ 1,693,945 $ 1 $ 1,716,284 $(1,713,728) $ 1,696,502
=========== =========== =========== =========== ===========
<CAPTION>
MARCUS
MARCUS CABLE MARCUS CONSOLIDATED
CABLE CAPITAL CABLE MARCUS
CAPITAL CORPORATION COMPANY, CABLE
CORPORATION III L.P. ELIMINATIONS COMPANY
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents ............ $ 1 $ 1 $ 754 $ - $ 6,034
Accounts receivable, net ............. - - - - 17,043
Prepaid expenses ..................... - - - - 2,432
----------- ----------- ----------- ----------- -----------
Total current assets ........ 1 1 754 - 25,509
Property and equipment, net .......... - - - - 578,507
Other assets, net .................... - - (3,040) (6,668) 1,083,534
Investment in subsidiaries ........... - - 480,373 (480,373) -
----------- ----------- ----------- ----------- -----------
Total assets ................ $ 1 $ 1 $ 478,087 $ (480,041) $ 1,687,550
=========== =========== =========== =========== ===========
Liabilities and Partners'
Capital (Deficit)
Current liabilities:
Current maturities of
long-term debt .............. $ - $ - $ - $ - $ 41,819
Accrued liabilities ......... - - - (6,668) 49,405
Accrued interest ............ - - 2,969 - 10,664
----------- ----------- ----------- ----------- -----------
Total current liabilities ... - - 2,969 (6,668) 101,888
Long-term debt ....................... - - 285,862 - 1,396,652
Subsidiary limited partner
interests ............................ - - - - (246)
Partners' capital - redeemable
partner interests .................... 1 1 189,256 (480,373) 189,256
----------- ----------- ----------- ----------- -----------
Total liabilities and
partners' capital ........... $ 1 $ 1 $ 478,087 $ (487,041) $ 1,687,550
=========== =========== =========== =========== ===========
</TABLE>
F-18
<PAGE> 104
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
CONSOLIDATING SCHEDULE - STATEMENT OF OPERATING INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCUS CABLE CONSOLIDATED
COMBINED MARCUS CABLE OPERATING MARCUS CABLE
OPERATING CAPITAL COMPANY, OPERATING
PARTNERSHIPS CORPORATION II L.P. ELIMINATIONS COMPANY, L.P.
------------ -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Cable services .............. $ 432,172 $ - $ - $ - $ 432,172
Management fees ............. - - 2,335 - 2,335
--------- -------- --------- --------- ---------
Total revenues ..... 432,172 - 2,335 - 434,507
--------- -------- --------- --------- ---------
Operating expenses:
Selling, service and
management system ........... 155,279 - 1,918 - 157,197
General and administrative .. 60,870 - 12,147 - 73,017
Allocated corporate
costs ..................... 12,150 - (12,150) - -
Depreciation and
amortization ................ 165,511 - 918 - 166,429
--------- -------- --------- --------- ---------
393,810 - 2,833 - 396,643
--------- -------- --------- --------- ---------
Operating income (loss) .............. 38,362 - (498) - 37,864
--------- -------- --------- --------- ---------
Other (income) expense:
Interest expense ............ 145,353 - 107,915 (145,272) 107,996
Interest income ............. 312 - (145,876) 145,272 (292)
Gain on sale of cable
system .................... (6,442) - - - (6,442)
Equity earnings of
subsidiaries ................ - - 100,861 (100,861) -
--------- -------- --------- --------- ---------
139,223 - 62,900 (100,861) 101,262
--------- -------- --------- --------- ---------
Net income (loss) .................... $(100,861) $ - $ (63,398) $ 100,861 $ (63,398)
========= ======== ========= ========= =========
<CAPTION>
MARCUS
MARCUS CABLE MARCUS CONSOLIDATED
CABLE CAPITAL CABLE MARCUS
CAPITAL CORPORATION COMPANY, CABLE
CORPORATION III L.P. ELIMINATIONS COMPANY
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Cable services .............. $ - $ - $ - $ - $ 432,172
Management fees ............. - - - - 2,335
-------- -------- --------- --------- ---------
Total revenues ..... - - - - 434,507
-------- -------- --------- --------- ---------
Operating expenses:
Selling, service and
management system ........... - - - - 157,197
General and administrative .. - - - - 73,017
Allocated corporate
costs ..................... - - - - -
Depreciation and
amortization ................ - - - - 166,429
-------- -------- --------- --------- ---------
- - - - 396,643
-------- -------- --------- --------- ---------
Operating income (loss) .............. - - - - 37,864
-------- -------- --------- --------- ---------
Other (income) expense:
Interest expense ............ - - 36,685 - 144,681
Interest income ............. - - (13) - (305)
Gain on sale of cable
system .................... - - - - (6,442)
Equity earnings of
subsidiaries ................ - - 63,398 (63,398) -
-------- -------- --------- --------- ---------
- - 100,070 (63,398) 137,934
-------- -------- --------- --------- ---------
Net income (loss) .................... $ - $ - $(100,070) $ 63,398 $(100,070)
======== ======== ========= ========= =========
</TABLE>
F-19
<PAGE> 105
INDEPENDENT AUDITORS' REPORT
The Shareholder
Marcus Cable Capital Corporation II:
We have audited the accompanying balance sheets of Marcus Cable Capital
Corporation II as of December 31, 1996 and 1995, and the related statements of
operations, shareholder's equity and cash flows for each of the years in the
two-year period ended December 31, 1996 and for the period from June 28, 1994
(date of inception) to December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
our opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Marcus Cable Capital
Corporation II as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the each of the years in the two-year period
ended December 31, 1996 and for the period from June 28, 1994 (date of
inception) to December 31, 1994, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
April 8, 1997
F-20
<PAGE> 106
MARCUS CABLE CAPITAL CORPORATION II
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------- -------
<S> <C> <C>
Cash $ 954 $ 954
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Payable to affiliate $ 50 $ -
Shareholder's equity:
Common stock, par value $1; authorized
and issued 1,000 shares in 1996 and 1995 1,000 1,000
Accumulated deficit (96) (46)
------- -------
Total shareholder's equity 904 954
------- -------
$ 954 $ 954
======= =======
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 107
MARCUS CABLE CAPITAL CORPORATION II
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
JUNE 28, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUE $ -- $ -- $ --
EXPENSE - MANAGEMENT EXPENSES 50 46 --
---- ---- ----
NET LOSS $(50) $(46) $ --
==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 108
MARCUS CABLE CAPITAL CORPORATION II
STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
JUNE 28, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
------- ------- -------
<S> <C> <C> <C>
Capital contribution $ 1,000 $ - $ 1,000
Net loss - - -
------- ------- -------
Balance at December 31, 1994 1,000 - 1,000
Net loss - (46) (46)
------- ------- -------
Balance at December 31, 1995 1,000 (46) 954
Net loss - (50) (50)
------- ------- -------
Balance at December 31, 1996 $ 1,000 $ (96) $ 904
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 109
MARCUS CABLE CAPITAL CORPORATION II
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
JUNE 28, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net loss $ (50) $ (46) $ -
Adjustment to reconcile net loss to net cash used in
operating activities -change in payable to affiliate 50 - -
------- ------- -------
Net cash used in operating activities - (46) -
------- ------- -------
Cash flows from financing activities - issuance
of common stock - - 1,000
------- ------- -------
Net increase (decrease) in cash - (46) 1,000
Cash at beginning of year 954 1,000 -
------- ------- -------
Cash at end of year $ 954 $ 954 $ 1,000
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 110
MARCUS CABLE CAPITAL CORPORATION II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Marcus Cable Capital Corporation II (the "Company"), a Delaware
corporation, is a wholly-owned subsidiary of Marcus Cable Operating
Company, L.P. ("MCOC"), and was organized on June 28, 1994 for the
purpose of acting as co-issuer with MCOC of $413,461,000 of 13 1/2%
Senior Subordinated Discount Notes, due August 1, 2004 (the "13 1/2%
Notes"), which yielded proceeds of $215,000,000. The Company has had
no operations.
(2) COMMITMENTS
The Company is a co-issuer with MCOC of $413,461,000 of 13 1/2% Notes
(accreted balance of $295,119,000 at December 31, 1996). The 13 1/2%
Notes are included in the consolidated financial statements of MCOC,
aND all interest and principal repayments will be made by MCOC.
F-25
<PAGE> 111
INDEPENDENT AUDITORS' REPORT
The Partners
Marcus Cable Properties, L.P.:
We have audited the accompanying balance sheets of Marcus Cable Properties,
L.P. as of December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audits of the balance sheets
provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Marcus Cable Properties, L.P. as
of December 31, 1996 and 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Dallas, Texas
April 8, 1997
F-26
<PAGE> 112
MARCUS CABLE PROPERTIES, L.P.
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
-------- --------
<S> <C> <C>
Cash $ - $ -
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Payable to affiliate $ 27 $ 27
Excess of accumulated losses over investment in Marcus Cable Company, L.P. (Note 2) 21,842 21,642
Partners' deficit (Note 3) (21,869) (21,669)
Contingency (Note 4) - -
-------- --------
$ - $ -
======== ========
</TABLE>
See accompanying notes to balance sheet.
F-27
<PAGE> 113
MARCUS CABLE PROPERTIES, L.P.
NOTES TO BALANCE SHEETS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
Marcus Cable Properties, L.P. ("Properties"), a Delaware limited
partnership, was formed on May 14, 1990 for the purpose of serving
as the general partner of Marcus Cable Company, L.P. ("MCC").
In 1990, Properties acquired 335 Class III limited partner units
of Marcus Cable Partners, L.P. ("Partners L.P.") for $205,000. In
1992, Properties acquired 100 Class B limited partner units of
Marcus Cable of San Angelo, L.P. ("San Angelo L.P.") for $100, and
100 Class B limited partner units of Marcus Cable of Delaware and
Maryland, L.P. ("Delaware/Maryland L.P.") for $100. San Angelo,
L.P. was dissolved in 1996 after the divestiture of the cable
system assets on June 30, 1995. In 1994, Properties acquired two
limited partner units of Marcus Cable Operating Company, L.P.
("MCOC") for $2. MCOC is the general partner of Partners L.P. and
Delaware/Maryland L.P.
Properties was the Class A partner of MCC through July 29, 1994.
On that date, MCC redeemed 1,272.126 Class A partnership units
with a face value of $1,000 per unit and cumulative unpaid
preference returns of $727,875 for cash of $2,000,000. Also on
that date, the remaining 3,405.944 Class A units with a face value
of $1,000 per unit and cumulative unpaid preference returns of
$1,971,474 were converted into 3,934.53 Class B units and 201.95
Class B LP units of MCC, each with a face value of $1,300 per
unit.
(b) Investments in Partnerships
Investments in partnerships are accounted for using the equity
method.
(2) INVESTMENT IN AFFILIATES
At December 31, 1996 and 1995, Properties owned 18,848.19 general
partner units in MCC with a negative carrying value of approximately
$21,842,000. Summarized financial information for MCC follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
----------- -----------
<S> <C> <C>
Current assets $ 25,509 $ 36,215
Net property and equipment 578,507 538,452
Other assets, net 1,083,534 1,185,387
----------- -----------
Total assets $ 1,687,550 $ 1,760,054
=========== ===========
Current liabilities 101,888 63,423
Long-term debt 1,396,652 1,407,551
Subsidiary limited partner interests (246) (246)
Partners' capital 189,256 289,326
----------- -----------
Total liabilities and partners' capital $ 1,687,550 $ 1,760,054
=========== ===========
</TABLE>
(Continued)
F-28
<PAGE> 114
MARCUS CABLE PROPERTIES, L.P.
NOTES TO BALANCE SHEETS
(3) PARTNERS' DEFICIT
(a) General Partner
Marcus Cable Properties, Inc. ("General Partner") is the general
partner for Properties.
(b) Limited Partners
The General Partner has issued limited partner units to certain
employees. The ownership of these limited partner units is based
upon a vesting schedule as set forth in the partnership agreement,
which is generally five years. The General Partner is entitled to
a cumulative 12% preference return on unrecovered capital
contributions, compounded annually, before any distribution can be
made to the limited partners.
In the event that a limited partner, who is an employee, ceases to
be employed by the General Partner or an affiliate thereof for any
reason other than for cause, then such affiliate, Properties or
the General Partner shall have the right to purchase all or any
portion of the Limited Partner Units held by such limited partner.
If the employment of the employee/limited partner is terminated
for cause, then the limited partner units owned by the
employee/limited partner are automatically cancelled by
Properties.
(c) Allocation of Income or Loss to Partners
Income is allocated to the General Partner and vested limited
partners as follows:
First, to eliminate any negative capital until no partner has
a negative capital account balance;
Next, to the General Partner in an amount equal to all prior
distributions of preference returns;
Next, to the vested limited partners in accordance with their
percentage interests.
Losses are allocated as follows:
First, to the General Partner until its capital account does
not exceed zero;
Next, to the limited partners until each holder's capital
account does not exceed zero;
Next, to the General Partner.
(d) Distributions
Distributions are made at the discretion of the General Partner as
follows:
First, to the General Partner in an amount equal to any
accrued but unpaid cumulative preference returns;
Next, to the General Partner in an amount equal to the
General Partner's unreturned capital contribution;
Next, to all partners in accordance with their respective
percentage interests in Properties.
(4) CONTINGENCY
As the general partner of MCC, Properties remains contingently liable
for any liabilities incurred by MCC in excess of its assets.
F-29
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS
The Boards of Directors
Sammons Communications, Inc. and
Marcus Cable Associates, L.P.:
We have audited the accompanying combined balance sheets of The Sammons Systems
(cable systems of Sammons Communications, Inc. purchased by Marcus Cable
Associates, L.P.--"The Sammons Systems") as of December 31, 1994 and 1993, and
the related combined statements of income, changes in equity (deficit)
investment and cash flows for each of the years in the three-year period ended
December 31, 1994. These combined financial statements are the responsibility
of Sammons Communications, Inc. management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of The Sammons Systems
as of December 31, 1994 and 1993, and the combined results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in the accompanying notes to the combined financial statements,
The Sammons Systems changed its methods of accounting for income taxes and
postretirement benefits other than pensions during 1992.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
May 5, 1995, except for Note 11
as to which the date is November 1, 1995
F-30
<PAGE> 116
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, SEPT. 30,
ASSETS 1994 1993 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash and cash equivalents ............................................................ $ 804 $ 600 $ 1,530
Accounts receivable:
Customers, net of allowance of $416 in 1994, $406 in 1993 and $514
in 1995 ........................................................................ 11,564 10,959 12,680
Other, less allowance for uncollectible receivables of $29 in 1994, $27 in 1993
and $13 in 1995 ................................................................ 615 491 937
Federal and state income taxes receivable ............................................ -- -- 2,667
Deferred federal and state income taxes .............................................. 597 844 101
Other ................................................................................ -- 18 --
--------- --------- ---------
Total current assets ........................................................... 13,580 12,912 17,915
Property and equipment:
Cable systems ..................................................................... 503,157 468,993 531,180
Vehicles and other ................................................................ 34,467 30,962 31,861
Land and buildings ................................................................ 9,365 9,366 9,475
--------- --------- ---------
546,989 509,321 572,516
Less accumulated depreciation ..................................................... (323,605) (292,797) (347,983)
--------- --------- ---------
Net property and equipment ..................................................... 223,384 216,524 224,533
Franchises and goodwill, net of accumulated amortization of $19,699 in
1994, $14,986 in 1993 and $23,183 in 1995 ......................................... 171,115 175,706 167,781
Other assets ......................................................................... 1,070 931 991
--------- --------- ---------
172,185 176,637 168,772
--------- --------- ---------
Total assets ................................................................... $ 409,149 $ 406,073 $ 411,220
========= ========= =========
LIABILITIES AND EQUITY INVESTMENT
Current liabilities:
Accounts payable, trade ........................................................... $ 6,382 $ 4,585 $ 2,297
Interest payable .................................................................. 1,211 1,287 736
Accrued expenses .................................................................. 16,626 16,177 13,422
Deferred revenue .................................................................. 8,006 5,512 8,785
Federal and state income taxes payable ............................................ 173 1,418 --
Current portion of notes payable--parent .......................................... 231,000 43,000 231,000
--------- --------- ---------
Total current liabilities ...................................................... 263,398 71,979 256,240
Accrued pensions and other ........................................................... 3,608 4,386 3,708
Customer advance payments and deposits ............................................... 1,703 1,966 1,693
Notes payable--parent ................................................................ -- 231,000 --
Deferred federal and state income taxes .............................................. 41,744 37,652 44,267
--------- --------- ---------
Total liabilities .............................................................. 310,453 346,983 305,908
Commitments and contingencies (Note 7)
Equity investment .................................................................... 98,696 59,090 105,312
--------- --------- ---------
Total liabilities and equity investment ........................................ $ 409,149 $ 406,073 $ 411,220
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
F-31
<PAGE> 117
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1994 1993 1992 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Basic revenue .............................................. $ 141,280 $ 129,790 $ 114,952 $ 116,388 $ 105,345
Premium revenue ............................................ 36,682 32,331 30,237 28,798 27,175
Installation and other ..................................... 28,637 21,181 13,728 23,423 21,274
--------- --------- --------- --------- ---------
206,599 183,302 158,917 168,609 153,794
Operating expenses:
Programming cost ........................................... 47,813 39,370 33,573 39,636 35,379
Selling, service and system management ..................... 35,142 30,521 28,324 24,754 25,950
General and administrative ................................. 41,315 36,649 33,966 30,660 31,943
Management fees ............................................ 4,909 3,967 3,273 3,965 3,665
Depreciation and amortization .............................. 36,471 31,452 27,022 28,037 26,650
--------- --------- --------- --------- ---------
165,650 141,959 126,158 127,052 123,587
--------- --------- --------- --------- ---------
Operating income ........................................ 40,949 41,343 32,759 41,557 30,207
Interest expense ............................................... (15,191) (12,075) (15,738) (9,711) (11,279)
--------- --------- --------- --------- ---------
Income before provision for federal and state income
taxes and cumulative effect of changes in
accounting principles ................................ 25,758 29,268 17,021 31,846 18,928
Provision for federal and state income taxes ................... (10,316) (13,174) (7,132) (12,589) (7,672)
--------- --------- --------- --------- ---------
Income before cumulative effect of changes in accounting
principles .............................................. 15,442 16,094 9,889 19,257 11,256
Cumulative effect of changes in accounting principles .......... -- -- (7,547) -- --
--------- --------- --------- --------- ---------
Net income ........................................... $ 15,442 $ 16,094 $ 2,342 $ 19,257 $ 11,256
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
F-32
<PAGE> 118
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
COMBINED STATEMENTS OF CHANGES IN EQUITY (DEFICIT) INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at January 1, 1992 ................................... $ (14,896)
Net income ............................................... 2,342
Increase in equity investment ............................ 32,503
---------
Balance at December 31, 1992 ................................. 19,949
Net income ............................................... 16,094
Increase in equity investment ............................ 23,047
---------
Balance at December 31, 1993 ................................. 59,090
Net income ............................................... 15,442
Increase in equity investment ............................ 24,164
---------
Balance at December 31, 1994 ................................. 98,696
Net income (unaudited) ................................... 19,257
Reduction in equity investment (unaudited) ............... (12,641)
---------
Balance at September 30, 1995 (unaudited) .................... $ 105,312
=========
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
F-33
<PAGE> 119
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1994 1993 1992 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................ $ 15,442 $ 16,094 $ 2,342 $ 19,257 $ 11,256
--------- --------- --------- --------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of changes in accounting
principles .................................... -- -- 7,547 -- --
Provision for uncollectible receivables ......... 2,493 2,479 2,189 2,077 1,927
Depreciation and amortization ................... 36,471 31,452 27,022 28,037 26,650
Provision for deferred income taxes ............. 4,339 1,881 (946) 3,019 4,714
(Gain) loss on sales of property, plant and
equipment ..................................... 110 (168) (116) (10) (64)
Changes in certain assets and liabilities:
Accounts receivable, customers ................ (3,098) (5,055) (3,155) (3,193) (2,705)
Accounts receivable, other .................... (124) (312) 152 (322) 295
Other assets .................................. (190) 47 1 40 (500)
Accounts payable, trade ....................... 1,797 728 (420) (4,085) (753)
Interest payable .............................. (76) 57 1,228 (475) (548)
Accrued expenses .............................. (329) 3,044 1,880 (3,104) (987)
Customer advance payments and deposits ........ (263) (37) (3) (10) (174)
Deferred revenue .............................. 2,494 418 804 779 2,632
Federal and state income taxes payable ........ (1,245) 60 1,210 (2,840) (915)
--------- --------- --------- --------- ---------
42,379 34,594 37,393 19,913 29,572
--------- --------- --------- --------- ---------
Net cash provided by operating activities ... 57,821 50,688 39,735 39,170 40,828
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of property and equipment ......... 208 964 372 126 116
Proceeds from sales of marketable securities .......... 18 1 -- -- 16
Cable system acquisitions ............................. (1,100) (185,067) (1,175) -- (1,100)
Purchases of property and equipment ................... (37,907) (33,462) (33,846) (25,929) (22,476)
--------- --------- --------- --------- ---------
Net cash used in investing activities ....... (38,781) (217,564) (34,649) (25,803) (23,444)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net change in equity investment ....................... 24,164 23,047 32,503 (12,641) (15,386)
Issuance of notes payable--parent ..................... -- 180,000 -- -- --
Payments of notes payable--parent ..................... (43,000) (36,000) (38,000) -- --
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing
activities ................................ (18,836) 167,047 (5,497) (12,641) (15,386)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents ..... 204 171 (411) 726 1,998
Cash and cash equivalents, beginning of period ........... 600 429 840 804 600
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period ................. $ 804 $ 600 $ 429 $ 1,530 $ 2,598
========= ========= ========= ========= =========
Supplemental information:
Interest paid ......................................... $ 15,267 $ 12,018 $ 14,510 $ 10,186 $ 11,827
========= ========= ========= ========= =========
Income taxes paid ..................................... $ 7,222 $ 11,233 $ 6,868 $ 12,675 $ 4,141
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
combined financial statements.
F-34
<PAGE> 120
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
The combined financial statements include the accounts of certain
cable television systems which are owned by Sammons Communications, Inc.
("SCI") (collectively, "The Sammons Systems"). SCI is a wholly-owned subsidiary
of Sammons Enterprises, Inc. ("SEI"). On April 5, 1995, SCI entered into an
asset purchase agreement (the "Agreement") to sell The Sammons Systems to
Marcus Cable Associates, L.P. ("Marcus") for $962,500,000 in cash, which is
subject to various conditions and approvals as defined in the agreement (See
Note 11). These combined financial statements include the historical basis of
assets, liabilities and operations of the cable television systems to be
acquired. In addition, these financial statements include allocations of
certain actual corporate administrative costs attributed to the cable systems
acquired. The methods by which such amounts are attributable or allocated are
based on gross revenues and are deemed reasonable by management of SCI. All
significant intersystem balances and transactions have been eliminated from the
combined financial statements. The following table identifies the cable
television systems included in the accompanying combined financial statements:
<TABLE>
<CAPTION>
SYSTEM Coverage Area
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Sammons Communications, Inc. Whittier, CA West Point, GA
Waynesville, NC University Park, TX
Tuskegee, AL Turlock, CA
Russellville, AL Natchez, MS
Middlesborough, KY Elk City, OK
Duncanville, TX Glendale, CA
Denton, TX Johnson City, TN
Black Mountain, NC Morristown, TN
Bristol, TN Logansport, IN
Brookhaven, MS McComb, MS
Clinton, OK Tarrant County, TX
Sammons Communications of Connecticut, Inc. Waterbury, CT
Sammons Communications of Washington, Inc. Moses Lake, WA
Sammons Communications of Texas, Inc. Borger, TX
Dumas, TX
Sammons Communications of Illinois, Inc. Jacksonville, IL
Ottawa, IL
Sammons Communication of Virginia, Inc. Petersburg, VA
Sammons Communication of Mississippi, Inc. Pascagoula, MS
Sammons of Indiana Columbus, IN Monticello, IN
Connersville, IN New Albany, IN
Crawfordsville, IN Peru, IN
Sammons of Fort Worth Fort Worth, TX
</TABLE>
Cash and Cash Equivalents
The Sammons Systems consider all current investment securities and
interest-bearing deposits purchased with original maturities of three months or
less to be cash equivalents.
F-35
<PAGE> 121
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property, plant and equipment is stated at cost. Depreciation is
computed on a straight-line basis over the estimated useful lives of the
related assets as follows:
<TABLE>
<S> <C>
Cable systems and equipment 5 to 15 years
Fixtures and equipment 5 to 10 years
Leasehold improvements Remaining life of lease
Transportation equipment 4 years
Buildings 15 to 25 years
</TABLE>
The material and labor costs for the initial connection of a residence
are capitalized and depreciated over ten years. The costs of subsequently
disconnecting and reconnecting a residence are charged to expense in the period
incurred.
Certain costs incurred during the period of cable system construction
are deferred and amortized over the estimated useful lives of the related cable
systems.
When property is retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the accounts and any resulting
gain or loss is reflected in income in the period incurred.
Franchises and Goodwill
Goodwill acquired prior to October 31, 1970 is not being amortized.
Goodwill acquired subsequent to October 31, 1970 is capitalized and amortized
on a straight-line basis over forty years.
The direct costs to acquire cable television franchises are
capitalized and amortized on a straight-line basis over the lives of the
franchises, not exceeding forty years.
The Sammons Systems continually reevaluate the propriety of the
carrying amount of goodwill and other intangibles as well as the amortization
period to determine whether current events and circumstances warrant
adjustments to the carrying value and/or revisions of the estimated useful
lives. At this time, The Sammons Systems believe that no significant impairment
of the goodwill and other intangibles has occurred and that no reduction of the
estimated useful lives is warranted.
Income Taxes
The Sammons Systems are members of SEI's consolidated United States
federal income tax group. The policy for intercompany allocation of federal
income taxes provides that The Sammons Systems compute the provision for
federal income taxes on a separate company basis. The Sammons Systems make
payments to, or receive payments from, SEI in the amount they would have paid
to or received from the Internal Revenue Service had they not been members of
the consolidated tax group. The separate company provisions and payments are
computed using the tax elections made by SEI. The Sammons Systems use the
"flow-through" method of accounting for the investment tax credit.
In 1992, The Sammons Systems adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires
recognition of deferred tax liabilities and assets based upon the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
Interim Financial Information
In the opinion of management, the unaudited interim combined financial
information of The Sammons Systems contains all adjustments, consisting only of
those of a normal recurring nature, necessary to present fairly The Sammons
Systems' financial position as of September 30, 1995 and the results of
operations and cash flows for the nine months ended September 30, 1995 and
1994, and changes in equity investment for the nine months ended September 30,
1995. The results of operations for the nine months ended September 30, 1995
and 1994 are not necessarily indicative of the results to be expected for the
full year.
F-36
<PAGE> 122
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. NOTES PAYABLE--PARENT:
During 1994, The Sammons Systems renewed a financing arrangement with
SEI which provided revolving lines of credit of $480,000,000. Borrowings
against these lines totaled $231,000,000 at December 31, 1994.
The principal terms of the agreement provide that interest is payable
quarterly at a weighted average rate of 5.4%, 5.7% and 9.0% for 1994, 1993 and
1992, respectively. Accrued interest was $1,211,000 at December 31, 1994. At
December 31, 1994 and 1993, the fair value of the notes payable was
$225,827,000 and $273,713,000, respectively, and was determined using the prime
rate.
The notes payable are scheduled to mature during the year ending
December 31, 1995.
3. INCOME TAXES:
The provision for income taxes consists of the following (amounts in
thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal ........................... $ 4,475 $ 9,171 $ 6,625
State ............................. 1,502 2,122 1,453
Deferred:
Federal ........................... 4,434 1,527 (806)
State ............................. (95) 354 (140)
-------- -------- --------
$ 10,316 $ 13,174 $ 7,132
======== ======== ========
</TABLE>
The Sammons Systems recognized a net increase of $7,242,000 to the net
deferred tax liability as of January 1, 1992, as a result of the adoption of
SFAS No. 109. Such amount has been reflected in the combined statements of
income as a cumulative effect of an accounting change.
The components of the net deferred tax liability are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Deferred tax liability:
Amortization ....................................... $ (8,609) $ (6,267)
Basis in property and equipment .................... (36,305) (33,719)
-------- --------
$(44,914) (39,986)
-------- --------
Deferred tax asset:
AMT carryforward ................................... 2,015 131
Accrued pension liability .......................... 624 1,021
Various accrued expenses not currently deductible .. 1,128 2,026
-------- --------
3,767 3,178
Valuation allowance .................................... -- --
-------- --------
Net deferred tax liability ............................. $(41,147) $(36,808)
======== ========
</TABLE>
F-37
<PAGE> 123
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The difference between the provision for income taxes attributable to
income before income taxes and the amounts that would be expected using the
U.S. federal statutory income tax rate of 35% in 1994 and 1993 and 34% in 1992
is as follows (amounts in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Federal income taxes at the statutory rate ................................ $ 9,015 $ 10,244 $ 5,787
State income taxes ........................................................ 915 1,609 867
Amortization of nondeductible intangibles ................................. 365 482 470
Effect of one percent federal tax rate increase on deferred tax balance
at January 1, 1993 ..................................................... -- 842 --
Other ..................................................................... 21 (3) 8
-------- -------- --------
Provision for income taxes ................................................ $ 10,316 $ 13,174 $ 7,132
======== ======== ========
</TABLE>
4. EMPLOYEE STOCK OWNERSHIP PLAN:
The Sammons Systems are participants in the Sammons Enterprises, Inc.
Employee Stock Ownership Plan ("ESOP"). The Sammons Systems' contribution to
the ESOP was approximately $1,755,000, $2,299,000 and $2,489,000 for 1994, 1993
and 1992, respectively.
5. EMPLOYEE BENEFIT PLANS:
The Sammons Systems are participants in the SEI's noncontributory
defined benefit pension plan (the "Pension Plan") covering certain full-time
employees. Pension benefits are generally based upon years of service and
include accruing pension cost currently, contributing the maximum amount
deductible for federal income taxes and meeting minimum funding standards of
the Employee Retirement Income Security Act of 1974 as determined by an
actuarial valuation. Pension Plan assets consist primarily of cash equivalents,
listed stocks and bonds, and group annuity contracts with an affiliated
insurance company.
The following table sets forth The Sammons Systems' respective
interest in the Pension Plan's funded status and amounts recognized in the
financial statements at December 31 (amounts in thousands):
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Accumulated benefit obligations:
Vested ......................... $ 6,444 $ 5,912
Nonvested ...................... 388 371
-------- --------
$ 6,832 $ 6,283
======== ========
Fair value of plan assets ........... $ 9,362 $ 6,919
Projected benefit obligation ........ 10,790 10,255
-------- --------
Funded status ....................... 1,428 3,336
Unrecognized net transition asset ... 393 404
Unrecognized prior service cost ..... (614) (638)
Unrecognized net gain (loss) ........ 392 (761)
-------- --------
Accrued pension liability ........... $ 1,599 $ 2,341
======== ========
</TABLE>
The Pension Plan had a settlement gain (loss) of approximately
$(18,000), $465,000 and $141,000 for 1994, 1993 and 1992, respectively.
F-38
<PAGE> 124
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Sammons Systems' respective interest in the components of net
pension cost are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Service cost ..................... $ 782 $ 563 $ 372
Interest cost .................... 906 734 502
Return on plan assets ............ (143) 237 221
Net amortization and deferrals ... 758 282 201
------- ------- -------
Net pension cost ................. $ 1,073 $ 778 $ 452
======= ======= =======
</TABLE>
For 1994 and 1993 the projected benefit obligation was determined
using an assumed discount rate of 8.50% and 7.75%, respectively, and an assumed
rate of compensation increase of 5.5%. The assumed long-term rate of return on
the plan assets was 8.0%, 8.5% and 8.5% in 1994, 1993 and 1992, respectively.
6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The Sammons Systems provide certain postretirement health care and
life insurance benefits for eligible active and retired employees through SEI's
defined benefit plan (the "Postretirement Plan"). Effective January 1, 1992,
The Sammons Systems adopted SFAS No. 106 "Employees Accounting for
Postretirement Benefits Other Than Pensions."
SEI allocated a portion of the initial transition obligation totaling
approximately $528,000 to The Sammons Systems, based on employee demographics,
including headcount, age and years of service. The effect on net income was
$305,000 after a deferred tax benefit of $223,000. The Sammons Systems'
respective interest in the components of periodic expense based on employee
demographics, including head count, age and years of service for these
postretirement benefits are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Service cost, benefits earned during year ............. $ 39 $ 34 $ 22
Interest cost on accumulated postretirement benefit
obligation .......................................... 116 97 46
Amortization of loss .................................. 8 -- --
---- ---- ----
Total expense ....................................... $163 $131 $ 68
==== ==== ====
</TABLE>
The Sammons Systems' respective interest in the actuarial and recorded
liabilities for these postretirement benefits, none of which have been funded,
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retiree ...................................... $ 830 $ 662
Fully eligible active plan participants ...... 167 224
Other active participants .................... 384 356
Unrealized loss .................................. (80) --
------- -------
Accrued postretirement benefit obligation .... $ 1,301 $ 1,242
======= =======
</TABLE>
F-39
<PAGE> 125
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The accumulated postretirement benefit obligation was determined using
the unit credit method and an assumed discount rate of 8.5% for 1994 and 1993.
The assumed health care cost trend rate and the assumed Medicare cost trend
rate used in 1994 and 1993 was 13%, grading down to 6% in the year 2001.
A one percent increase each year in the health care cost trend rate
used would have resulted in a $4,500 decrease in the aggregate service and
interest components of expense for the year 1994, and a $31,000 decrease in the
accumulated postretirement benefit obligation at December 31, 1994.
7. COMMITMENTS AND CONTINGENCIES:
The Sammons Systems generally act as a self-insurer with regard to
loss or damage to its cable distribution systems. No provision for future
losses has been provided.
At December 31, 1994 and 1993, The Sammons Systems have made purchase
commitments of approximately $1,734,000 and 3,911,000, respectively, for
property, plant and equipment.
The Sammons Systems maintain a $100,000 standby letter of credit
related to the provisions of a franchise agreement regarding installation of
cable communication facilities.
The Sammons Systems pay pole use, vehicle, office space, land and
plant facilities rentals under various agreements. Rental expense for 1994,
1993 and 1992 was approximately $3,369,000, $2,999,000 and $4,372,000,
including amounts paid to a related party of approximately $355,000, $276,000
and $268,000, respectively.
Approximate minimum future rentals under noncancelable operating
leases are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1995.................................. $ 638
1996.................................. 528
1997.................................. 477
1998.................................. 411
1999.................................. 337
Thereafter............................ 1,157
---------
$ 3,548
=========
</TABLE>
8. ACQUISITIONS:
During 1993, The Sammons Systems acquired the assets of several cable
television systems for an aggregate purchase price of $185,067,000 including
franchise agreements and goodwill of $139,370,000. The acquisitions were
accounted for as purchases, and accordingly, the results of operations have
been included in the combined financial statements from their respective dates
of acquisition, principally July 1993.
The pro forma results below are unaudited and reflect purchase price
accounting adjustments assuming the acquisition occurred at the beginning of
1992 and 1993 (amounts in thousands):
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Operating revenues .........................................................$ 200,826 $ 186,464
Operating income ........................................................... 45,599 37,731
Income before provision for federal and state income taxes and cumulative
effect on prior years of changes in accounting principles .............. 28,543 12,993
Net income ................................................................. 15,969 (162)
</TABLE>
F-40
<PAGE> 126
THE SAMMONS SYSTEMS
(CABLE SYSTEMS OF SAMMONS COMMUNICATIONS, INC.
PURCHASED BY MARCUS CABLE ASSOCIATES, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS:
The Sammons Systems pay SCI and other related parties for various
services. In addition, The Sammons Systems reimburse SCI for certain general
and operating expenses. These amounts are as follows (amounts in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- --------- --------
<S> <C> <C> <C>
Management fee expense.......................... $ 4,909 $ 3,967 $ 3,273
Reimbursement of general and administrative
expenses.................................... 5,274 4,453 4,178
</TABLE>
10. LITIGATION:
In the course of conducting its business, The Sammons Systems are from
time to time named as a defendant in litigation actions. The Sammons Systems
are currently involved as a defendant in certain legal issues. Management
currently believes the disposition of all claims and disputes, individually or
in the aggregate, should not have a material adverse effect on The Sammons
Systems' combined financial position.
11. SUBSEQUENT EVENT:
On November 1, 1995, Marcus acquired substantially all of the assets
of The Sammons Systems for a purchase price of $961,701,000, subject to certain
post-closing working capital adjustments.
F-41
<PAGE> 127
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Recent Transactions . . . . . . . . . . . . . . . . . . . . . . . 19
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 22
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . 25
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Principal Security Holders . . . . . . . . . . . . . . . . . . . 51
Certain Relationships and Related Transactions . . . . . . . . . 53
The Partnership Agreements . . . . . . . . . . . . . . . . . . . 54
The Senior Credit Facility . . . . . . . . . . . . . . . . . . . 60
Description of The 13 1/2% Notes . . . . . . . . . . . . . . . . 61
Certain Federal Income Tax Consequences . . . . . . . . . . . . . 80
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . 84
Validity of the 13 1/2% Notes . . . . . . . . . . . . . . . . . . 85
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Index to Financial Statements . . . . . . . . . . . . . . . . . . F-1
</TABLE>
================================================================================
================================================================================
MARCUS CABLE OPERATING
COMPANY, L.P.
MARCUS CABLE
CAPITAL CORPORATION II
13 1/2% SENIOR SUBORDINATED
GUARANTEED DISCOUNT NOTES
DUE AUGUST 1, 2004
GUARANTEED BY MARCUS CABLE
COMPANY, L.P.
-------------------------
MARCUS CABLE
-------------------------
GOLDMAN, SACHS & CO.
================================================================================
