Filed pursuant to Rule 424(b)(3)
Registration Nos. 33-67390 and
33-67390-01
MARCUS CABLE COMPANY, L.P.
MARCUS CABLE CAPITAL CORPORATION
Supplement to Prospectus
Dated April 16, 1997, as supplemented by
Prospectus Supplements Dated May 15, 1997, August 14, 1997,
November 14, 1997, March 9, 1998 and March 10, 1998
The date of this Supplement is March 27, 1998
On March 27, 1998, Marcus Cable Company, L.P. filed the attached
Annual Report on Form 10-K for the year ended December 31, 1997.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Numbers: 33-67390 & 33-81088 & 33-93808, 33-81088-01,
33-67390-01, 33-81088-02 and 33-93808-01
MARCUS CABLE COMPANY, L.P.
MARCUS CABLE OPERATING COMPANY, L.P.
MARCUS CABLE CAPITAL CORPORATION
MARCUS CABLE CAPITAL CORPORATION II
MARCUS CABLE CAPITAL CORPORATION III
(Exact names of registrants as specified in their charters)
DELAWARE 75-2337471
DELAWARE 75-2546077
DELAWARE 75-2495706
DELAWARE 75-2546713
DELAWARE 75-2599586
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2911 TURTLE CREEK BOULEVARD, SUITE 1300
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip Code)
(214) 521-7898
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrants (1) have
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrants were
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of dilenquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by
reference in Part III or any amendment to this Form 10-K. X
There is no established trading market for any of the
registrants' voting securities. As of the date of this report,
there were 1,000 shares of common stock of Marcus Cable Capital
Corporation and 1,000 shares of common stock of Marcus Cable
Capital Corporation III outstanding, all of which are owned by
Marcus Cable Company, L.P., and 1,000 shares of common stock of
Marcus Cable Capital Corporation II outstanding, all of which
were owned by Marcus Cable Operating Company, L.P.
Documents incorporated by reference: NONE
<PAGE>
MARCUS CABLE COMPANY, L.P.
MARCUS CABLE OPERATING COMPANY, L.P.
MARCUS CABLE CAPITAL CORPORATION
MARCUS CABLE CAPITAL CORPORATION II
MARCUS CABLE CAPITAL CORPORATION III
1997 ANNUAL REPORT ON FORM 10-K
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Definitions 3
Part I
Item 1. Description of Business 6
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Part II
Item 5. Market for Registrants' Common Equity and
Related Stockholder Matters 27
Item 6. Selected Financial Data 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
Part III
Item 10. Directors and Executive Officers of the Registrants 36
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management 42
Item 13. Certain Relationships and Related Transactions 44
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 45
</TABLE>
2
<PAGE>
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward looking statements. Certain information included
in this Form 10-K contains statements that are forward looking, such
as statements relating to the effects of future regulation, future
capital commitments and future acquisitions. Such forward-looking
information involves important risks and uncertainties that could
significantly affect expected results in the future from those
expressed in any forward-looking statements made by, or on behalf of
the Company. These risks and uncertainties include, but are not
limited to, uncertainties relating to economic conditions,
acquisitions and divestitures, government and regulatory policies,
the pricing and availability of equipment, materials, inventories and
programming, technological developments and changes in the
competitive environment in which the Company operates. Investors are
cautioned that all forward-looking statements involve risks and
uncertainties.
<TABLE>
DEFINITIONS
When used herein, the following terms will have the meaning
indicated.
<CAPTION>
Term Definition
<S> <C>
11 7/8% Debentures 11 7/8%Senior Debentures, due October 1, 2005,
which are obligations of MCC and Capital
13 1/2% Notes 13 1/2% Senior Subordinated Guaranteed Discount
Notes, due August 1, 2004, which are obligations
of Operating and Capital II that are guaranteed
by MCC
14 1/4% Notes 14 1/4% Senior Discount Notes, due December 15, 2005,
which are obligations of MCC and Capital III
1984 Cable Act Cable Communications Policy Act of 1984
1992 Cable Act Cable Television Consumer
Protection and Competition Act of 1992
1996 Telecom Act Telecommunications Act of 1996
ASCAP American Society of Composers, Authors and Publishers
ATM Asynchronous Transport Mode
BMI Broadcast Music, Inc.
BST Basic Service Tier
Cable Acts The 1984 Cable Act and the 1992 Cable Act
Cable System Cash Flow System cash flow before corporate expenses and
depreciation and amortization
CALP Cencom of Alabama, L.P.
CALP Acquisition The August 31, 1995
acquisition of remaining CALP ordinary
limited partnership interests, redemption
of all CALP special limited partnership
interests and retirement of CALP's senior
bank debt
CALP Agreement The management agreement
between Operating and CALP, which
terminated on August 31, 1995
CALP Systems Certain cable systems in
areas surrounding Birmingham, Alabama
which were purchased in the CALP
Acquisition
Capital Marcus Cable Capital Corporation
Capital II Marcus Cable Capital Corporation II
Capital III Marcus Cable Capital Corporation III
Communications Act Communications Act of 1934
Company Marcus Cable Company, L.P. and subsidiaries
CPST Cable Programming Service Tier
Crown Crown Media, Inc.
Crown Acquisition The January 18, 1995 purchase of the Crown Systems
Crown Systems Certain cable television systems in Wisconsin and
Minnesota purchased from Crown
DBS Direct Broadcast Satellites
Delaware/Maryland Systems Certain cable television systems
located in and around Harrington,
Delaware and Cambridge, Maryland which
were purchased in 1992
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Term Definition
<S> <C>
EBITDA Earnings Before
Interest, Taxes, Depreciation and
Amortization
FCC Federal Communications Commission
Fiberlink Marcus Fiberlink, L.L.C.
Frankfort Acquisition The July 31, 1996 purchase of the Frankfort System
Frankfort System Certain cable television
system in and around Frankfort, Indiana
purchased from Frankfort Cable
Communications, Inc.
Futurevision Acquisition The July 8, 1996 purchase of the
Futurevision System
Futurevision System Certain cable television
system in and around Brookhaven,
Mississippi purchased from Futurevision
Cable Systems of Brookhaven
General Partner Marcus Cable Properties, L.P.
Goldman Sachs Goldman, Sachs & Co.
Harron Harron Communications, Corp. and certain of its
subsidiaries
Harron Systems Certain cable television
systems purchased from Harron
HFC Hybrid Fiber Coax
HSD Home Satellite Dish
JEDI Jefferson Eastern-Dane Interactive
KSCADE K-12 School/College
Alliance for Distance Education
LEC Local Exchange Carrier
LFA Local Franchising Authorities
LIBOR London InterBank Offered Rate
LMDS Local Multipoint Distribution Services
Management Company Marcus Cable Management, Inc.
Maryland Cable Maryland Cable Partners, L.P.
Maryland Cable Agreement The management agreement
between Operating and Maryland Cable
Maryland Cable System Cable system owned by
Maryland Cable (also the "Managed
System")
MCC Marcus Cable Company, L.P.
MCA Marcus Cable Associates, L.P.
MCALP Marcus Cable of Alabama, L.P. (formerly "CALP")
MCDM Marcus Cable of Delaware and Maryland, L.P.
MCP Marcus Cable Partners, L.P.
MCPI Marcus Cable Properties, Inc.
MDU Multiple Dwelling Unit
MMDS Multichannel, Multipoint Distribution Service
Moses Lake System Certain cable system in
the state of Washington which was sold on
October 11, 1996
Mountain Brook Mountain Brook Cablevision, Inc.
Mountain Brook and Pending acquisition of the assets of Mountain Brook
Shelby Cable Acquisition and Shelby Cable
Mountain Brook and Cable television system
Shelby Cable System serving the Mountain Brook and Shelby
County area in and around Birmingham,
Alabama to be purchased from Mountain
Brook and Shelby Cable
MSO Multiple System Operator
MPEG Motion Picture Expert Group
MPTC Morain Park Technical College
MVPD Multichannel Video Programming Distributors
NPT New Product Tier
NVOD Near Video On Demand
Operating Marcus Cable Operating Company, L.P.
Operating Partnerships MCP, MCDM, MCALP and MCA
OVS Open Video System
PCS Personal Communications Services
RBOC's Regional Bell Operating Companies
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Term Definition
<S> <C>
Sammons Sammons Communications, Inc. and certain of its
subsidiaries
Sammons Acquisition The November 1, 1995 purchase of the Sammons
Systems
Sammons Systems Certain cable television systems purchased from
Sammons
San Angelo Systems Certain cable television
systems in and around San Angelo, Texas
which were divested on June 30, 1995
Senior Credit Facility $1,150,000,000 Credit
Agreement among Operating, MCC, Banque
Paribas, Chase Manhattan Bank, Citibank,
N.A., The First National Bank of Boston,
Goldman Sachs, Union Bank and certain
other lenders referred to therein, dated
as of August 31, 1995 and as amended on
March 14, 1997
SFAS Statement of Financial Accounting Standard
Shelby Cable Shelby Cable, Inc.
SMATV Satellite Master Antenna Television
Star Acquisition The July 29, 1994 purchase of the Star Systems
Star Star Cablevision Group
Star Systems Certain cable television systems purchased from Star
Systems Cable television systems owned by the Company
Time Warner Time Warner Entertainment Company, L.P. and certain
of its subsidiaries
Time Warner Systems Certain cable television systems received in trade
with Time Warner
Weatherford Acquisition The January 11, 1996 purchase of the Weatherford System
Weatherford System Certain cable television
system in Weatherford, Texas purchased
from C & R Investments Corporation
</TABLE>
5
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
a) General Development of Business
General
MCC is a Delaware limited partnership formed for the purpose of
acquiring, operating and developing cable television systems within
suburban and exurban markets. MCC derives its main source of
revenues from providing various levels of cable television
programming and services to residential and business customers. Other
revenues, during the three years ended December 31, 1997, were also
derived from providing management services to cable systems owned by
third parties. Since its formation in 1990, MCC has increased in
size through internal growth and acquisitions, and is now the tenth
largest cable system operator in the United States, with Systems
serving approximately 1,232,300 basic customers in 18 states as of
December 31, 1997.
MCC's operations are conducted through Operating, an operating
holding company in which it serves as a general partner and in which
it owns a greater than 99.00% interest. Operating, in turn, conducts
its operations through the Operating Partnerships, in which it,
directly or indirectly, serves as a general partner and owns a
greater than 99.00% interest.
Owned Systems
The Company began acquiring cable television systems in 1990
primarily in the state of Wisconsin. Since such time, the Company
has continued to expand through additional acquisitions. In 1995,
the Company expanded in size four-fold through the completion of
several acquisitions of cable television system assets serving
approximately 950,000 customers. The Company's cable television
systems are operated in 18 states and organized into six geographical
regions. As of December 31, 1997, its Systems passed approximately
1,950,300 homes and served approximately 1,232,300 basic customers,
who subscribed for approximately 583,600 premium units.
Managed System
Affiliates of Goldman Sachs own limited partnership interests in
MCC. Maryland Cable, which is controlled by an affiliate of Goldman
Sachs, owned the Maryland Cable System which served customers in and
around Prince Georges County, Maryland. Operating managed the
Maryland Cable System under the Maryland Cable Agreement, which was
entered into in September of 1994. Operating earned a management
fee, payable monthly, equal to 4.7% of the revenues of Maryland
Cable, and was reimbursed for certain expenses.
Effective January 31, 1997, the Maryland Cable System was sold
to Jones Communications of Maryland, Inc. Pursuant to the Maryland
Cable Agreement, Operating recognized incentive management fees of
$5,069,000 during 1997 in conjunction with the sale. Additional
incentive management fees may be recognized upon dissolution of
Maryland Cable, anticipated to occur during 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 nominal monthly fee. Including the
incentive management fees noted above, Operating earned total
management fees of $5,614,200 during 1997.
Marcus Fiberlink
Fiberlink, a wholly-owned subsidiary of the Company, is an
entity formed for the purpose of developing the infrastructure
necessary to foster distance education networks and other forms of
point-to-point transmission services in the Company's service areas.
Fiberlink currently has three distance education networks in various
stages of operation: MPTC, JEDI and KSCADE. The MPTC Distance
Education Network is a two-way fully interactive system which allows
students and educators to interact from three separate campuses. The
JEDI Distance Education Network provides a network which delivers
voice, video and data transmission to nine high schools in Jefferson
and Dane Counties, Wisconsin and to three campuses of the Madison
Area Technical College system. The KSCADE network, when completed,
will utilize a switched ATM fiber optic network to carry
6
<PAGE>
MPEG2 video
and high speed data communications between 28 educational sites in
east central Wisconsin. Upon the completion of the KSCADE network,
the three networks will collectively include 460 fiber route miles
serving 50 educational sites. The Company is currently pursuing
similar arrangements with other educational bodies throughout the
state.
Recent Developments
General
Ownership
On March 3,1998, the Company announced that it has retained
Goldman Sachs to advise the Company as it explores various strategic
alternatives involving the ownership of the Company. Several
alternatives are being reviewed, however, no decision has been made
and the outcome of the Company's review cannot be predicted at this
time.
Exchanges
Time Warner Exchange
On December 1, 1997, the Company completed an exchange of
certain cable television systems with Time Warner. The exchange
involved approximately 128,000 customers located in communities in
Wisconsin and Indiana. According to the terms of the agreement, Time
Warner received systems serving approximately 57,000 customers, while
the Company received systems serving approximately 71,000 customers
located in communities contiguous to the Company's existing clusters.
In addition to the contribution of its systems, the Company paid
$17,807,000 to Time Warner which was funded with borrowings under the
Senior Credit Facility. Operating results of the acquired systems
are included in the accompanying financial statements from the date
of exchange.
Acquisitions
Pending Acquisition
On October 28, 1997, the Company entered into a definitive
agreement to purchase a cable television system serving approximately
23,000 customers in Alabama from Mountain Brook and Shelby Cable.
The communities served by this system are adjacent to the Company's
existing systems in the suburban Birmingham, Alabama area. This
transaction is subject to certain closing conditions, including
governmental and regulatory approval, and is expected to occur during
the second quarter of 1998.
Harron Acquisition
On July 1, 1997, the Company purchased cable television systems
from Harron serving approximately 22,000 customers located near
Dallas-Fort Worth, Texas for an aggregate purchase price of
$34,500,000. The purchase was financed with funds available under
the Senior Credit Facility. Operating results of the acquired
systems are included in the accompanying financial statements from
the date of acquisition.
Frankfort Acquisition
On July 31, 1996, the Company acquired the assets of Frankfort
Cable Communications, Inc. for an aggregate purchase price of
approximately $6,700,000. The Frankfort System provides service to
approximately 5,300 basic customers in and around Frankfort, Indiana,
located near the Company's other operations in Indiana. Operating
results of the acquired system are included in the accompanying
financial statements from the date of acquisition.
Futurevision Acquisition
On July 8, 1996, the Company acquired the assets of 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. The Futurevision System provides service to
approximately 2,400 basic customers. Operating results of the
acquired system are included in the accompanying financial statements
from the date of acquisition.
7
<PAGE>
Weatherford Acquisition
On January 11, 1996, the Company acquired the assets of the
Weatherford System for an aggregate purchase price of approximately
$875,000. The Weatherford System provides service to approximately
700 basic customers contiguous to the Company's existing system in
Weatherford, Texas. Operating results of the acquired system are
included in the accompanying financial statements from the date of
acquisition.
Divestitures
Pending Divestitures
On October 7, 1997, the Company announced that it intends to
offer for sale certain cable television systems that are not within
the Company's six strategic operating groups. Systems to be sold
serve approximately 195,000 customers in Delaware, Maryland,
Virginia, Connecticut, Mississippi, Louisiana, Illinois, Oklahoma and
the Texas panhandle. The solicitation has thus far resulted in the
following two agreements.
On March 4,1998, the Company entered into a definitive agreement
with TMC Holdings, Inc., an affiliate of Adelphia Communications
Corporation, to sell cable television assets located in Connecticut
and Virginia for a sales price of approximately $150,000,000. The
systems serve approximately 46,000 customers and 17,000 customers in
Connecticut and Virginia, respectively. The transaction is subject
to regulatory approval and is expected to be finalized during the
third quarter of 1998.
On December 4, 1997, the Company entered into a definitive
agreement with an affiliate of Comcast Corporation to sell its
Delaware/Maryland Systems for a sales price of approximately
$65,500,000. The systems serve approximately 26,500 customers in
Delaware and Maryland. The transaction is subject to regulatory
approval and is expected to be finalized during the second quarter of
1998.
The Company is currently marketing the remaining systems serving
approximately 105,500 customers in Illinois, Oklahoma, Texas,
Mississippi and Louisiana. Although the Company has entered into the
above agreements, there can be no assurance that the transactions
will be approved or finalized on the terms presently contemplated.
Additionally, although the Company is currently marketing the
remaining systems noted above, there can be no assurance that the
Company will be successful in completing sales of those systems.
Moses Lake Divestiture
On October 11, 1996, the Company completed the sale of its cable
television systems serving approximately 12,700 customers in the
state of Washington for a sales price of approximately $20,638,000,
net of selling costs of $310,000. The sales price resulted in a gain
on the sale of approximately $6,442,000.
8
<PAGE>
<TABLE>
The following table illustrates the Company's growth over the last
five years:
<CAPTION>
Homes Basic Basic Premium Premium
Passed Customers Penetration Units Penetration
<S> <C> <C> <C> <C> <C>
December 31: (1) (2)
1993 09,549 141,323 67.4% 97,944 69.3%
1994 178,961 142,172 79.4% 78,088 54.9%
1995 1,833,401 1,154,718 63.0% 651,121 56.4%
1996 1,863,299 1,181,293 63.4% 666,702 56.4%
1997 1,950,345 1,232,287 63.2% 583,603 47.4%
<FN>
(1) Basic service customers as a percentage of homes passed.
(2) Premium service units as a percentage of basic service
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.
</FN>
</TABLE>
b) Financial Information About Industry Segments
The Company operates solely in the cable television industry and
all revenues are derived from that industry.
c) Narrative Description of Business
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 antennae, microwave relay systems and satellite earth
stations. These signals are then modulated, amplified and
distributed, primarily through coaxial and 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,
nonbroadcast channels (such as CNN, MTV, USA, ESPN and 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 HBO, 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). 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. Distributing traditional cable television programming is
only one aspect of the industry, as potential opportunities to expand
into Internet access, telephone, educational and
9
<PAGE>
entertainment services on an interactive basis continue to develop.
Business Strategy
Operating Overview
The Company's 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) Midwest (Indiana and Illinois); (5) West
(California); and (6) East (Delaware, Maryland, Virginia and
Connecticut). The table below sets forth certain operating
statistics for these six regions as of December 31, 1997:
<TABLE>
OPERATING DATA
<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 604,121 397,979 65.9% 192,086 48.3%
Southeast 365,336 254,720 69.7% 93,587 36.7%
Southwest 468,501 215,726 46.0% 130,791 60.6%
Midwest 193,194 145,254 75.2% 63,782 43.9%
West 187,917 129,364 68.8% 57,457 44.4%
East 131,276 89,244 68.0% 45,900 51.4%
--------- --------- -------
Total 1,950,345 1,232,287 63.2% 583,603 47.4%
========= ========= =======
<FN>
(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.
</FN>
</TABLE>
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
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 now serves more
locations in Wisconsin than any other MSO.
The November 1995 purchase of the Sammons Systems elevated the
Company's standing to one of the ten largest MSOs in the United
States. The purchase expanded the Company's operations from five
states to nineteen states (eighteen, subsequent to the divestiture of
systems located in Washington). 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 and marketing programs; and (iv)
investing in and deploying HFC plant with advanced analog
10
<PAGE>
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.
In continuing to implement the Company's acquisition strategy,
the Company acquired the Harron Systems in July of 1997, which are in
geographic proximity to other systems owned by the Company in the
Dallas/Ft. Worth Metroplex. The Company's basic customer count
increased by approximately 22,000 as a result of this acquisition.
Funding for the $34.5 million purchase was provided by borrowings
under the Senior Credit Facility. The Company has also entered into
a definitive agreement to purchase the Mountain Brook and Shelby
Cable System. This cable television system, which features a 550 MHz
technical platform, serves approximately 23,000 customers in the
Mountain Brook and Shelby County areas of suburban Birmingham,
adjacent to the Company's existing systems in the Birmingham market.
The transaction is subject to certain regulatory approval and the
closing is expected to occur during the second quarter of 1998. The
acquisition will be financed with funds available under the Senior
Credit Facility.
In addition, the Company completed an exchange of certain cable
systems with Time Warner. The exchange involved cable television
systems in the states of Wisconsin and Indiana serving in total
approximately 128,000 customers. The Company exchanged systems
serving approximately 57,000 customers in municipalities surrounding
the metropolitan areas of Milwaukee and Green Bay, Wisconsin, for
systems serving approximately 71,000 customers in the communities of
Eau Claire, Beloit, Ripon, Marshfield and Merrill, Wisconsin and
Warsaw, Indiana. In addition to the contribution of its systems, the
Company paid an additional $17,807,000 to Time Warner which was
funded with borrowings under the Senior Credit Facility.
The Company's managerial responsibilities are divided into
regional system groups in order to efficiently assimilate and
integrate acquisitions and modifications in the Company's business
plans. At the corporate level and within each of the regional system
groups, several initiatives to grow revenues and reduce operating
expenses have been 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 November 1995 purchase of the
Sammons Systems more that doubled the size of the Company and
significantly expanded the areas served by the Company. The 1997
acquisition of the Harron Systems and the exchange for the Time
Warner Systems has provided additional customers and expanded
existing clusters operated by the Company.
Each of these acquisitions involved selected groups of cable
television systems which the Company believed had the potential for
customer growth and increases 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
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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
exchanging systems in geographic 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.
In implementing this divestiture strategy, the Company has
recently identified certain non-strategic cable systems, serving
approximately 195,000 customers, which are being offered for sale.
Upon completion of the sale of these non-strategic systems, the
Company will focus on six strategic operating groups, each serving
approximately 100,000 to 400,000 customers.
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
has increased operating cash flow and operating margins of its
existing systems through customer and revenue growth, in combination
with economies of scale and other operating synergies realized as a
result of system clustering. 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) Midwest (Indiana and Illinois);
(5) West (California); and (6) East (Delaware, Maryland, Virginia
and Connecticut).
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 94% of
the Company's customers subscribed to both tiers of basic service as
of December 31, 1997.
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
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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.
While the Company has added substantial bandwidth capacity to
its Systems, it has yet to aggressively utilize a portion of the
bandwidth through the offering of incremental unregulated NPTs. As
of December 31, 1997, only 25,000 of the Company's customers, or
approximately 2.0% were purchasing NPTs. As customers continue to
demand more choice and variety of services, the Company's robust
bandwidth capacity should provide an opportunity for the Company to
pursue more aggressively these incremental service offerings
throughout the Systems.
The substantial investment the Company has made in increasing
its video bandwidth has allowed the Company to introduce thousands
of new channels on its expanded basic tiers. Additionally, the
added bandwidth is being utilized to offer "multiplexed" premium
services (e.g., multiple screens of pay services) and the Company
has recently made this feature available across all premium
customers in an effort to build value in the premium category.
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.
During 1997 and continuing in 1998, the Company has been
establishing four major call centers which, by the end of 1998, will
handle customer call volume for more than 60% of the customer base.
These call centers are located in Glendale, CA; Ft. Worth, TX;
Birmingham, AL; and Fond du Lac, WI. Each of the centers utilize
between three and six communication trunks with 46 to 138 voice
lines per center, as dictated by call volume. The Ft. Worth and
Fond du Lac call centers are, or will be, staffed seven days per
week and 24 hours per day while the call centers in Glendale and
Birmingham are operated six to seven days per week and an average of
approximately 13.5 hours per day. The Company has invested
significantly in both personnel and hardware/software to insure that
these customer call centers are professionally managed and utilize
state-of-the-art communication equipment.
As a result of the Company's rapid expansion through
acquisition, the Company inherited several different billing and
customer care platforms. Recognizing the benefits of having a
common customer care and billing platform across all of its Systems,
during the last several years the Company has converted all of its
Systems to a common platform. The hardware for the Company's
customer care and billing platform is located in the corporate
office in Dallas. Each of the approximately 440 customer service
representatives located in the four call centers and in the various
other field offices have "real time" dedicated access to customer
information and records through uninterrupted connectivity to this
equipment.
Complementing the Company's significant investment in its call
centers and common customer care and billing platform is the
Company's commitment to, and investment in, the development of its
work force. The
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Company has established a training program known as
P.A.C.E. (Pursuing a Commitment to Excellence) by which each of its
employees receives extensive training to develop customer contact
skills and product knowledge, while learning sales techniques and
successful customer retention methods.
Additionally, as part of the Company's continued efforts to
create positive customer perception, the Company offers an on-time
service guarantee to its customers. This program requires the
Company's technical workforce to perform customer installations and
service calls within a two to four hour appointment window. If the
Company does not meet this standard, the customer is issued a $20
credit.
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.
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 is in the process of
systematically rebuilding its cable systems so that within the next
three years substantially all existing systems will have a bandwidth
of between 450 MHz and 862 MHz. This program should enable the
Company to deliver technological innovations to its customers as
such services become commercially viable.
For fiscal year 1998, the Company is projecting approximately
$214,300,000 of capital expenditures, of which $152,000,000 is
directly committed to system rebuilds and upgrades. The capital
expenditures projected for 1998 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.
As part of its upgrade 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,
or have been, upgraded to 750 MHz or 860 MHz with two-way
communication capabilities. As part of the rebuild program, the
Company has deployed approximately 4,800 miles of fiber optic cable
and upgraded approximately 15,500 miles of coaxial cable. 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 1,200 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, 1997, the average channel capacity
of the Systems is approximately 77 analog channels with
approximately
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42% of the homes passed served by systems with 550 MHz
or greater bandwidth capacity and approximately 83% of the homes
passed served by systems that utilize addressable technology. The
Company's current plan contemplates that by the end of 1998, its
systems will have an average capacity of approximately 89 analog
channels with approximately 66% of the homes passed being served by
systems with 550 MHz or greater bandwidth capacity, including more
than 50% at 750 MHz or greater, warehoused digital spectrum of up to
200 MHz in systems serving approximately 52% of the Company's homes
passed and approximately 84% of the homes passed served by systems
that utilize addressable technology. In addition, as part of the
upgrade process, two-way communication capability will be activated
past approximately 1,000,000 homes by the end of 1998, which will
support enhanced digital video, high speed data services and other
advanced applications.
During the second and third quarters of 1998, the Company is
planning to install digital video equipment in its headend
facilities in Glendale, CA; Ft. Worth, TX; and Birmingham, AL. The
Company intends to offer digital tiers of programming in these
markets, offering an on-screen navigator, 40 channels of digital
audio, 20-30 channels of multiplexed premium television, multiple
channels of NVOD pay-per-view and other new product tier
programming. The service will utilize Scientific Atlanta's Explorer
2000 Home Terminal Device. These digital home terminal devices are
real-time, two-way interactive, offering fully-programmable VCR
functionality and backwards compatibility to the "Open Cable"
industry standards. The markets in which these services are being
offered serve almost one-quarter of the Company's 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, through its' subsidiary,
Fiberlink, 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. In 1996, 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. Finally, in 1997, the
Company, again through its' subsidiary Fiberlink, was awarded a
distance education contract to build a switched ATM network to carry
MPEG2 video between 28 sites in east central Wisconsin. 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.
In addition to allowing 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 has recently
successfully concluded a test of cable modems on its HFC network in
one of its Dallas area systems. The test utilized 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
explored various products and services that can be offered utilizing
the high speed data modems. The Company has entered into a revenue
sharing agreement with @Home in exchange for @Home internet service.
The Company is now deploying cable modems using the @Home service in
its Fort Worth, Texas system and in its system serving University
Park and Highland Park, Texas. The @Home Network provides a high-
speed, fully integrated multimedia service to the home by using the
cable television infrastructure and its own architecture. In the
home, a high-speed cable modem connects to a user's personal
computer, providing speeds hundreds of times faster than telephone
modems. Through the introduction of this service, the Company will
be delivering high-speed interactive content over its HFC
distribution architecture to an estimated 160,000 homes by the end
of 1998. Upon completion of the current rebuild in the Dallas/Ft.
Worth Metroplex area, scheduled for the end of 1999, @Home will be
offered to more than 300,000 homes. The Company is also pursing
additional deployment of internet access via the Company's HFC plant
in systems located in certain of its other operating groups.
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Competition
Cable television systems face competition from alternative
methods of receiving and distributing television signals such as 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."
Competition for the Company's customers will 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 traditional HSDs. 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. DBS
operators have the right to distribute substantially all of the
significant cable television programming services currently carried
by cable television systems. Further, DBS has obtained significant
sports programming packages that are not available to cable
operators. The Company expects that competition from DBS will
continue to grow.
DBS has advantages 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. The primary disadvantage of DBS is its inability to
provide local broadcast television stations to customers in their
local market. However, EchoStar and other potential DBS providers
have announced their intention to retransmit local broadcast
television stations back into a customer's local market. Both
Congress and the U.S. Copyright Office are currently reviewing
proposals to allow such transmission and it is possible that in the
near future, DBS systems will be retransmitting local television
signals back into local television markets. Additional DBS
disadvantages presently include a limited ability to tailor the
programming package to the interests of different geographic
markets; signal reception being subject to line of sight angles; and
technology which require a customer to rent or own one set-top box
(which is significantly more expensive than a cable converter) for
each television on which the customer wants to view DBS programming.
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.
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.
Federal law ensures that telephone companies will have access to
acquire all significant cable programming. 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
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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. Additionally, during 1997, there has been a significant
increase in the number of cities that have constructed their own
cable television systems in a manner similar to city-provided
utility services. These systems typically will compete directly
with the existing cable operator without the burdens of franchise
fees or other local regulation. Although the total number of
municipal overbuild cable systems remains small, events during 1997
would indicate an increasing trend in cities authorizing such direct
municipal competition with cable operators. 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 three competing systems located in each of the East, Midwest
and North Central operating regions, which represent an aggregate of
approximately 2,840 of the homes in the Company's franchise areas.
The Company is only aware of one other company that is actively
seeking local governmental franchises for areas presently served by
the Company. These franchises are located in the North Central
region and in aggregate potentially represent an additional 6,000
homes.
Cable operators face additional competition from private 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 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. See -
"Legislation and Regulation in the Cable Television Industry."
Another alternative method of distribution are 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
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. Finally, an emerging
technology, 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 have
historically 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 RBOCs.
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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 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 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 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 LEC. There is no penetration minimum for a 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 LFAs) are primarily
responsible for administering the regulation of the lowest level of
cable - the 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-
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Delivered programming.
Under the 1996 Telecom Act, the FCC can regulate CPST rates only if
an LFA first receives multiple complaints from local customers
within 90 days of a CPST rate increase and then files a formal
complaint with the FCC within 180 days of the rate increase. 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.
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 encountered
with timing lags associated with the quarterly compliance systems.
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 1995, a total of approximately $25,000 was paid
for rate refunds. There were no refunds issued during 1996 and
1997.
The Company currently has rate filings pending review at the
FCC pertaining to the CPST level of service. For the regulation
period from September 1, 1993 through May 15, 1994, there is one
cost-of-service filing pending review at the FCC affecting 394
customers. For the re-regulation time period from May 1994 to the
present, there are filings for 29 franchises under review at the FCC
affecting approximately 205,000 customers. The majority of these
filings have been waiting to be reviewed for over three years.
Until the FCC rules on the complaints, the Company is required to
refresh its filings annually. During 1997, the Company received
favorable rulings (i.e., the FCC confirmed the Company's rates and
denied the complaint) for 22 filings affecting approximately 130,000
customers. The FCC also issued several decisions reducing rates for
certain of the Company systems serving approximately 43,000
customers, which the Company has asked to be reconsidered. If the
FCC determines that the Company's CPST rates for those 43,000
customers are unreasonable, it has the authority to order the
Company to reduce such rates and to refund to those 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 for those customers is estimated at approximately
$600,000.
The 1996 Telecom Act sunsets FCC regulation of CPST rates for
all systems (regardless of size) on March 31, 1999. However,
certain members of Congress and FCC officials have called for the
delay of this regulatory sunset and further have urged more rigorous
rate regulation (including limits on programming cost pass-throughs
to cable customers) until a greater degree of competition to
incumbent cable operators has developed. The 1996 Telecom Act 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
19
<PAGE>
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. In July 1997, the Eighth Circuit Court
of Appeals vacated certain aspects of the FCC's initial
interconnection order and that decision is now pending before the
Supreme Court. However, the underlying statutory obligation of
local telephone companies to interconnect with competitors remains
in place.
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, a 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 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. In order
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 the LEC 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
20
<PAGE>
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. The FCC is currently conducting a
reconsideration of its national customer ownership rules and it is
possible the FCC will revise both the national customer cable
operator ownership limitation and the manner in which it attributes
ownership to a cable operator.
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 may require substantial payments or other
concessions. Either option has a potentially adverse affect on the
Company's business. The burden associated with must carry
obligations could dramatically increase if television broadcast
stations proceed with planned conversions to digital transmissions
and if the FCC determines that cable systems must carry all analog
and digital signals transmitted by the television stations.
Additionally, cable systems are required to obtain retransmission
consent for all "distant" commercial television stations (except for
commercial satellite-delivered independent "superstations" such as
WGN).
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, the FCC released revised rules which
mandated a modest rate reduction which has made commercial leased
access a more attractive option for third party programmers,
particularly for part-time leased access carriage. Furthermore, a
group of commercial leased access users has challenged the FCC's
February 1997 Order as failing to reduce commercial leased access
rates by an appropriate amount. If this pending court challenge is
successful, the FCC will be forced to undertake a further rulemaking
which could result in significantly reduced commercial leased access
rates, thereby encouraging a much more significant increase in the
use of commercial leased access channels.
"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. In order 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 affiliated cable companies.
Recently, both Congress and the FCC have considered proposals that
would expand the program access rights of cable's competitors,
including the possibility of subjecting video programmers who are
not affiliated with cable operators to all program access
requirements.
Inside Wiring. In a 1997 Order, the FCC established rules that
require an incumbent cable operator, upon expiration or termination
of an MDU service contract to sell, abandon, or remove "home run"
wiring that was installed by the cable operator in a MDU building.
These inside wiring rules will encourage and facilitate building
owners in their attempts to replace existing cable operators with
new video programming providers who are willing to pay the building
owner a higher fee. Additionally, the FCC has proposed abrogating
all exclusive MDU contracts held by cable operators, but at the same
time allowing competitors to cable to enter into exclusive
21
<PAGE>
MDU service contracts.
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. FCC requirements imposed in
1997 for Emergency Alert Systems and for providing hearing impaired
Closed Captioning on programming will result in new and potentially
significant costs for the Company. 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.
The FCC is currently 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.
Internet Service Regulation. The Company began offering high-
speed internet service to customers in 1997. At this time, there is
no significant federal or local regulation of cable system delivery
of internet services. However, as the cable industry's delivery of
internet services develops, it is possible that greater federal
and/or local regulation could be imposed.
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 BMI and is negotiating a
similar arrangement with 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.
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
22
<PAGE>
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 revenue) and funding for PEG channels 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.
Proposed Changes in Regulation. The regulation of cable
television systems at the federal, state and local levels is subject
to the political process and has been in constant flux over the past
decade. Material changes in the law and regulatory requirements
must be anticipated and there can be no assurance that the Company's
business will not be affected adversely by future legislation, new
regulation or deregulation.
Technology
At December 31, 1997, approximately 83% 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 27% 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
pay-per-view orders and simultaneously has achieved significant
reductions in service costs. The Company's current plan
contemplates that by the end of 1998, its systems will have an
average capacity of approximately 89 analog channels with
approximately 66% of the homes passed being served by systems with
550 MHz or greater bandwidth capacity, including more than 50% at
750 MHz or greater, warehoused digital spectrum of up to 200 MHz in
systems serving approximately 52% of the Company's homes passed and
approximately 84% of the homes passed served by systems that
utilize addressable technology. In addition, as part of the upgrade
process, two-way communication capability will be activated past
approximately 1,000,000 homes by the end of 1998, which will support
enhanced digital video, high speed data services and other advanced
applications.
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 and 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.
23
<PAGE>
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 or channel 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 has the right to recover up to $1.20 per
customer between January 1, 1995 and 1997 for additional channels
added to CPST's (not to exceed $0.20 per added channel) and up to
$0.30 per customer over that same period for aggregate license fees.
Beginning January 1, 1997, the cap for additional channels will
increase to $1.40 and the license fee reserve will also increase.
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.
24
<PAGE>
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, 1997, the Company operated pursuant to 780
franchises. These nonexclusive franchises provide for the payment
of fees to the issuing authority. Annual franchise fees imposed on
the systems range up to a 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 as of December 31,
1997.
<TABLE>
<CAPTION>
Year of Percentage
Franchise Number of Number of of Total
Expiration Communities Customers Customers
- ---------- ----------- --------- ----------
<S> <C> <C> <C>
Prior to 1998 (1) 63 79,316 6.44%
1998-2001 189 319,295 25.91%
2002 and after 488 800,033 64.92%
Other (2) 40 33,643 2.73%
----------- --------- ----------
Total 780 1,232,287 100.00%
=========== ========= ==========
- ------------------
<FN>
(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.
</FN>
- ------------------
</TABLE>
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.
Employees
At December 31, 1997, the Company had 2,048 full-time employees
and 84 part-time employees. Approximately 180 of the employees are
members of one of seven unions and are represented by a designated
collective bargaining representative or under various labor
agreements. The Company considers its relations with its employees
to be good.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales
MCC has neither foreign operations nor export sales.
ITEM 2. PROPERTIES
The Company currently operates in 780 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
25
<PAGE>
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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for any of the
registrants' equity securities. As of March 26, 1998, 28,335.2
Employee Units were outstanding.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below are derived from
the audited historical 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
Company's historical financial statements and the related notes
thereto.
<TABLE>
FINANCIAL DATA
(in thousands)
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data: (1)
Revenues $479,315 $434,507 $198,294 $64,747 $52,307
Costs and expenses 248,866 230,214 102,024 31,453 21,849
Management fees
and expenses (2) --- --- --- 2,165 3,617
Depreciation
and amortization 188,471 166,429 83,723 37,412 28,633
Operating income (loss) 41,978 37,864 12,547 (6,283) (1,792)
Interest expense 151,207 144,681 82,911 28,105 13,443
Net loss (109,229) (100,070) (52,816) (30,610) (9,643)
Balance Sheet Data:
Total assets $1,750,468 $1,687,550 $1,760,054 $315,217 $195,148
Total debt
(including
current maturities) 1,601,933 1,438,471 1,407,890 327,264 195,000
Subsidiary limited
partner interests (246) (246) (246) (246) 5,788
Partners'
capital (deficit) 80,027 189,256 289,326 (21,290) (11,670)
Other Data:
EBITDA (3) 230,449 204,293 96,270 31,129 26,841
___________________________
<FN>
(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, (ix) the October 11,
1996 divestiture of the Moses Lake System, (x) the July 1,
1997 acquisition of the Harron System and (xi) the December 1,
1997 exchange of the Time Warner Systems.
(2) Each of the then existing Operating Partnerships formerly
entered into management agreements, pursuant to which each
then existing Operating Partnership paid the Management
Company a specified percentage of the revenues from the
systems owned and operated by such Operating Partnerships,
plus certain reimbursable expenses. These agreements
terminated July 29, 1994, in connection with the acquisition
and financing of the Star Systems.
(3) EBITDA is equal to operating income (loss) plus depreciation
and amortization. The Company believes that EBITDA is a
27
<PAGE>
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.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 sales commissions from
home shopping networks. Beginning in September of 1994, revenues
were also generated from management fees earned in conjunction with
two managed systems. On August 31, 1995, the Company purchased one
of the managed systems and thus terminated the related management
agreement. Effective January 31, 1997, the remaining managed
system was sold. As a result of these two transactions, the
Company is no longer involved in the active management of cable
systems for third parties. However, the Company does earn a
nominal monthly oversight fee for Maryland Cable and in 1997 the
Company recognized incentive management fee revenue from the sale
of the Maryland Cable System.
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 1997, the Company acquired systems serving
approximately 22,000 basic customers in Texas with the Harron
Acquisition (completed July 1, 1997) and added approximately 13,800
basic customers in Wisconsin and Indiana through the exchange with
Time Warner (completed December 1, 1997). 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 in July, 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 during 1995 are primarily the result of the acquisitions
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.
Additionally, the Company conformed the method of accounting
for franchise fees in the former Sammons Systems during 1997.
Local governmental authorities impose franchise fees on the Systems
ranging up to a federally mandated maximum of 5.0% of gross
revenues. On a monthly basis, such fees are collected from the
Systems' customers. Historically, franchise fees were not
separately itemized on customers' bills. Such fees were considered
part of the monthly charge for basic services and equipment, and
therefore were reported as revenue and expense in the Company's
financial results. The Company began the process of itemizing such
fees on all customers' bills to conform with the collection of, and
accounting for, franchise fees in the remaining Systems in November
1996 and completed the process during the first quarter of 1997.
In conjunction with itemizing these charges, the Company began
collecting the franchise fee on all taxable revenues. As a result,
beginning in the first quarter of 1997, such fees are no longer
included as revenue or as general and administrative expenses. The
net accounting effect of this change is an annual reduction in
revenue of approximately $6,800,000 and a reduction of $9,300,000
in general and administrative expenses.
The comparability of operating results, as discussed below,
between the year ended December 31, 1997 and the corresponding
period for 1996 are affected by the above discussed acquisitions,
exchange,
28
<PAGE>
divestiture and franchise fee adjustment which occurred
during 1997 and 1996 (collectively referred to as the "Pro Forma
Adjustments").
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 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. The Company expects to
continue to report net losses due to the high levels of charges for
depreciation and amortization and interest expense.
The following table sets forth for the periods indicated, certain
income statement items as a percentage of total revenues.
<TABLE>
Percentage of Revenue for
Periods Ended
December 31, (1)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Selling, service and 36.8 36.2 34.7
system management
General and 15.1 16.8 16.8
administrative
Management fees and 0.0 0.0 0.0
expenses
Depreciation and 39.3 38.3 42.2
amortization
---- ---- ----
Operating income 8.8 8.7 6.3
Interest 31.6 33.2 41.4
Other (income) expense 0.0 (1.5) (12.7)
---- ---- ----
Net loss before
extraordinary items (22.8%) (23.0%) (22.4%)
==== ==== ====
EBITDA (2) 48.1% 47.0% 48.5%
==== ==== ====
<FN>
(1) Reflects results of operations of the following acquisitions
and divestitures by the Company from the date of acquisition
or through the date of 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, (ix) the October 11,
1996 divestiture of the Moses Lake System, (x) the July 1,
1997 acquisition of the Harron
29
<PAGE>
System and (xi) the December 1,
1997 exchange of the Time Warner Systems.
(2) EBITDA is equal to operating income 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.
</FN>
</TABLE>
Fiscal 1997 Compared to Fiscal 1996
Revenues increased from $434,507,000 for the year ended
December 31, 1996 to $479,315,000 for the year ended December 31,
1996. Basic service revenue increased by approximately
$35,800,000, of which approximately $11,100,000 of such increase
was the result of the Harron acquisition and the incremental
revenue as a result of the Time Warner exchange. The increase in
revenue was offset by a decrease of approximately $6,800,000 as a
result of the conforming change regarding franchise fee itemization
in the former Sammons Systems. Monthly management fees decreased
by approximately $1,790,000 in 1997 compared to 1996 as a result of
the sale of the Maryland Cable System on January 31, 1997. This
decrease was offset by the recognition of an incentive management
fee of approximately $5,069,000 in conjunction with the sale of the
Maryland Cable System. Approximately $2,300,000 of the overall
revenue increase was attributable to increased advertising sales
revenue. Revenue from pay-per-view increased approximately
$2,360,000 in 1997 in comparison to 1996. The revenues generated
from internal and continued customer growth account for the
remaining increase. Normalizing the effects of the Pro Forma
Adjustments, pro forma revenue increased $46,927,000, or 10.7%, for
the year ended December 31, 1997.
The Company's basic customers increased from 1,181,293 at
December 31, 1996, to 1,232,287 at December 31, 1997. During 1997,
the Company added approximately 51,000 basic customers, of which
approximately 35,500 were from the Harron acquisition and the Time
Warner exchange. The remaining 15,500 were added through internal
growth, representing an annualized customer growth rate of 1.3%.
This basic customer growth was developed through the extension of
existing plant infrastructure to pass additional dwelling units,
marketing promotions and continued implementation of premium
packaging. The company's pay units decreased from 666,702 at
December 31, 1996 to 583,603 at December 31, 1997. The Harron
acquisition and the Time Warner exchange had a net effect of a
1,700 unit decrease as the systems acquired in the Time Warner
exchange had a lower pay unit penetration than the systems
relinquished in the exchange. Through the third quarter of 1997,
the Company was experiencing annualized customer growth of 2.0%.
However, in the latter half of 1997, two non-recurring events
transpired, each of which affected a significant number of
customers, and negatively impacted the Company's customer growth
for the year. In early fall, the Company halted certain of its
marketing sales initiatives and converted its billing systems in
several of its largest service areas. As a result of these
actions, the Company's customer connect activity slowed, causing
customer growth to decline during the fourth quarter. The Company
continues to evaluate the effectiveness of its redirected marketing
strategy and has recently introduced new value based sales
initiatives and programming packages.
Selling, service and system management expenses increased from
$157,197,000 for the year ended December 31, 1996 to $176,515,000
for the year ended December 31, 1997. The main factor of the
increase noted resulted from an increase in programming costs of
$12,681,000. Substantially all of this programming cost increase
is attributable to increases in the cost of basic satellite
programing as a result of annual cost increases, incremental basic
customer growth and the addition of satellite programming channels
to certain of the Company's rebuilt systems. Another factor
contributing to the increase resulted from an increase in plant
expense of $6,256,000. The majority of the plant expense increase
resulted from extensions and rebuilds of certain of the Company'
systems. Offsetting the increases in programming and plant expense
was a decrease in marketing costs of $1,140,000, primarily the
result of channel launch support received from programmers.
Normalizing the effects of the Pro Forma Adjustments, pro forma
selling, service and system management expenses increased
$18,560,000, or 11.4%, for the year ended December 31, 1997.
30
<PAGE>
General and administrative expenses decreased from $73,017,000
for the year ended December 31, 1996 to $72,351,000 for the year
ended December 31, 1997. The Company experienced increased labor
costs of approximately $5,275,000 and increased billing costs of
approximately $852,000 as a result of upgrading the Company's
customer care platform, and increased customer receivable reserves
of approximately $932,000. These increases were offset by a
decrease of approximately $9,300,000, due to the reduction in
franchise fee expense, as a result of the conforming itemization of
such costs on customers' bills. The remaining increase is due to
normal inflationary increases. Normalizing the effects of the Pro
Forma Adjustments, pro forma general and administrative expenses
increased $5,329,000, or 7.8%, for the year ended December 31,
1997.
Depreciation and amortization expense increased from
$166,429,000 for the year ended December 31, 1996 to $188,471,000
for the year ended December 31, 1997 due principally to the
additional capital expenditures incurred to rebuild and upgrade the
broadband network and equipment of certain of the Systems.
Interest expense increased from $144,376,000 for the year ended
December 31, 1996 to $151,207,000 for the comparable period in
1997, primarily due to the scheduled increase in the accretion for
the 13 1/2% Notes and the 14 1/4% Notes of $8,720,000. This accretion
increase was offset by a decrease in the average borrowing costs
under the Senior Credit Facility. Borrowings, excluding capital
leases, increased to $1,599,426,000 at December 31, 1997 from
1,436,269,000 at December 31, 1996. The weighted average interest
rate on all outstanding indebtedness was 9.92% and 9.97% for the
twelve months ended December 31, 1997 and December 31, 1996,
respectively.
The difference between the loss before extraordinary item of
$109,229,000 and $100,070,000 for the year ended December 31, 1997
and 1996, respectively 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, 1997 or 1996.
As a result of the changes explained in the foregoing
paragraphs, EBITDA increased from $204,293,000 for the year ended
December 31, 1996 to $230,449,000 for the year ended December 31,
1997.
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 CALP and
Maryland Cable Agreements, respectively, were recorded in 1995,
compared to a full year of fees earned pursuant to only 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 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
31
<PAGE>
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
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 $82,143,000 for the year ended December 31, 1995 to
$144,376,000 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 twelve months 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 credit agreements 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.
Liquidity and Capital Resources
On October 7, 1997, the Company announced that it intends to
offer for sale certain cable television systems that are not within
the Company's six strategic operating groups. Systems to be sold
serve approximately 195,000 customers in Delaware, Maryland,
Virginia, Connecticut, Mississippi, Louisiana, Illinois, Oklahoma
and the Texas panhandle. The solicitation has thus far resulted in
the following two agreements.
On December 4, 1997, the Company entered into a definitive
agreement with an affiliate of Comcast Corporation to sell its
Delaware/Maryland Systems for a sales price of approximately
$65,500,000. The systems serve approximately 26,500 customers in
the Delmarva peninsula. The transaction is subject to regulatory
approval and is expected to be finalized by June 30, 1998.
On March 4,1998, the Company entered into a definitive
agreement with TMC Holdings, Inc. to sell cable television assets
located in Connecticut and Virginia for a sales price of
approximately $150,000,000. The systems serve approximately 46,000
customers and 17,000 customers in Connecticut and Virginia,
respectively. The transaction is subject to regulatory approval
and is expected to be finalized during the third
32
<PAGE>
quarter of 1998.
The Company is currently marketing the remaining systems
serving approximately 105,500 customers in Illinois, Oklahoma,
Texas, Mississippi and Louisiana. Although the Company has entered
into the above agreements, there can be no assurance that the
transactions will be approved or finalized on the terms presently
contemplated. Additionally, although the Company is currently
marketing the remaining systems noted above, there can be no
assurance that the Company will be successful in completing sales
of those systems. The Company intends to use the proceeds from the
sale of these non-strategic assets to reduce the current
outstanding balance under its Senior Credit Facility.
On March 3, 1998, the Company announced that it has retained
Goldman Sachs to advise the Company as it explores various
strategic alternatives involving the ownership of the Company.
Several alternatives are being reviewed, however, no decision has
been made and the outcome of the Company's review cannot be
predicted at this time.
The Company plans to continue to explore and consider new
commitments, arrangements or transactions to refinance existing
debt, increase the Company's liquidity or decrease the Company's
leverage. These could include, among other things, the future
issuance by the Company, or its subsidiaries, of public or private
equity or debt and the negotiation of new or amended credit
facilities.
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, 1997, unreturned capital contributions from
equity investors totaled approximately $493,327,000. There was no
capital contributed from equity investors during 1997. The Company
has an aggregate of $1,601,933,000 of indebtedness outstanding in
the form of the 11 7/8% Debentures, 13 1/2% Notes, 14 1/4% Notes, borrowings
under its Senior Credit Facility and note payable and capital lease
obligations. The Company has an additional $155,059,000 of
borrowing capacity under its Revolving Credit Facility after
considering committed lines of credit of $3,941,000. Cash flows
generated from operating activities have been positive over the
past three years and increased from $86,030,000 and $118,986,000 in
1995 and 1996, respectively, to $154,302,000 in 1997. 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 and the exchange.
Acquiring and upgrading cable television systems is contingent
upon the availability of cash provided by operations, borrowings
from the Company's existing credit facilities and the Company's
ability to obtain additional debt or equity 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 capital resources necessary to accomplish
the Company's business strategy will be available, or that the
terms will be favorable to the Company.
Cash interest is payable monthly, quarterly and semiannually
on borrowings outstanding under the Company'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 $856,006,000 over the next
five years. The Company expects to cover both interest and
principal payments on its long-term obligations through internally
generated funds, borrowings under the Senior Credit Facility and
with certain proceeds from the sale of non-strategic cable systems.
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. Currently, the Company is systematically
rebuilding and upgrading its cable systems so
33
<PAGE>
that within the next
three years substantially all existing systems will have a
bandwidth of between 450 MHz and 862 MHz. This program should
enable the Company to deliver technological innovations to its
customers as such services become commercially viable. 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 862 MHz with two-way communication capabilities. Capital
expenditures are expected to approximate $214,300,000 (or $171 per
customer) in 1998. Ongoing capital expenditures, other than 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.
Recent Accounting Pronouncements
In February 1997, the financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128
established simplified accounting standards for computing earnings
per share and makes them comparable to international earnings per
share standards. The provisions of SFAS 128 are generally
effective for transactions occurring after December 15, 1997,
however, SFAS 128 will not have an impact on the Company's
financial statements.
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 129, "Disclosure of Information about Capital
Structure" ("SFAS 129"). SFAS 129 is applicable to all entities
and requires that disclosure about any entity's capital structure
include a brief discussion of rights and privileges for securities
outstanding. SFAS 129 is effective for financial statement for
period ending after December 15, 1997. The effective adoption of
SFAS No. 129 is not expected to have a material impact on the
Company's financial statements and related disclosures.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 is effective for fiscal years beginning after December 15,
1997. This statement establishes standards for reporting and
display of comprehensive income and its components. The effective
adoption of SFAS No. 130 is not expected to have a material impact
on the Company's financial statements and related disclosures.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 is effective for
fiscal years beginning after December 15, 1997. This statement
establishes standards for the way that public companies report
information about segments in annual and interim financial
statements. The effective adoption of SFAS No. 131 is not expected
to have a material impact on the Company's financial statements and
related disclosures.
Year 2000 Impact
During the fiscal year ended December 31, 1997, the Company
began a process to identify and address issues surrounding the Year
2000 and its impact on the Company's computer operations. The
issue surrounding the Year 2000 is whether the Company's computer
systems will properly recognize data sensitive information when the
year changes to 2000, or "00." Systems that do not properly
recognize such information could generate erroneous data or cause a
system to fail. As the Company has not completed their assessment
of the impact the Year 2000 may have on their computer operations,
management can not estimate the costs associated with ensuring the
Company's systems are Year 2000 compliant. There can be no
assurance that the Company's systems nor the computer systems of
other companies with whom the Company conducts business will be
Year 2000 compliant prior to December 31, 1999. If such
modifications and conversions are not completed timely, the Year
2000 problem may have a material impact on the operations of the
Company.
Inflation
Based on the FCC's current rate regulation standards, an
inflation factor is included in the benchmark
34
<PAGE>
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, 1997, the Company had $949,750,000
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 2.25% 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, 1997,
interest rate swap agreements covering a notional balance of
$400,000,000 were outstanding which require the Company to pay
fixed rates ranging from 5.75% to 5.77%, plus the applicable
interest rate margin. These agreements mature during 1998 and
1999, and allow for the optional extension by the counterparty
for additional periods and certain of these agreements provide
for the automatic termination in the event that one month LIBOR
exceeds 6.75% on any monthly reset date. The Company has also
entered into an interest rate swap agreement covering an
aggregate notional principal balance of $100,000,000 which
matures in the year 2000 whereby the Company receives one month
LIBOR plus 0.07% and is required to pay the higher of one month
LIBOR at either the beginning or end of the interest period, plus
the applicable interest rate margin.
As interest rates change under the interest rate swap
agreements, the differential to be paid or received is recognized
as an adjustment to interest expense. During the year ended
December 31, 1997, the Company recognized additional interest
expense of $322,000 under its interest rate swap agreements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company
required under Regulation S-X are set forth herein commencing on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
35
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
Director and Executive Officers of Marcus Cable Properties, Inc.
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>
Name Age Position
---- --- --------
<S> <C> <C>
Jeffrey A. Marcus 51 President and Chief Executive Officer
Louis A. Borrelli, Jr. 42 Executive Vice President and Chief
Operating Officer
Thomas P. McMillin 36 Executive Vice President
and Chief Financial Officer
Richard A. B. Gleiner 45 Senior Vice President, Secretary
and General Counsel
John C. Pietri 48 Senior Vice President and Chief
Technical Officer
Cynthia J. Mannes 39 Senior Vice President of Human
Resources
John P. Klingstedt, Jr. 35 Senior Vice President and Controller
Daniel J. Wilson 33 Senior Vice President of Finance
and Development
David L. Hanson 49 Senior Vice President of Operations
Edwin F. Comstock, III 45 Vice President of Operations
J. Christian Fenger 43 Vice President of Operations
Alan D. Collins 42 Vice President of Operations
Steven P. Brockett 47 Vice President of Operations - Administration
David M. Intrator 42 Vice President of Marketing and Programming
Susan C. Holliday 32 Vice President of Regulatory
Compliance and Planning
</TABLE>
36
<PAGE>
The following sets forth certain biographical information with
respect to the director and executive officers of MCPI:
Jeffrey A. Marcus, is President and Chief Executive Officer 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 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 Executive Vice President and Chief
Financial Officer of MCPI with responsibility for overseeing all of
the financing, corporate development, accounting, regulatory,
planning 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 -
37
<PAGE>
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.
John C. Pietri is Senior Vice President and Chief Technical
Officer of MCPI, with responsibility for the technical operations
and standards of the Company's cable television systems including:
new business development and technology; 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 21 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.
Cynthia J. Mannes is Senior Vice President of Human Resources
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.
John P. Klingstedt, Jr. is Senior 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. He was
named Vice President in 1994 with the promotion to Senior Vice
President following in 1997. Mr. Klingstedt holds a Bachelors of
Science Degree in 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 Senior Vice President of Finance and
Development 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 and to Senior Vice President of Finance and Development
in December 1997. 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.
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 25 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
38
<PAGE>
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.
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.
Alan D. Collins is Vice President of Operations of MCPI with
responsibility for the daily operations of the Metroplex Region.
Mr. Collins brings 16 years of experience in the cable television
industry. Prior to joining the Company in February of 1997, he
spent 15 years with Cox Communications in several capacities, most
notably as Vice President and General Manager of the cable property
in Spokane, Washington. During his tenure in Washington state, Mr.
Collins served on the Washington State Cable Communications
Association Board of Directors ans was President of the
organization in 1991 and 1992. Mr. Collins holds a Bachelor of the
Arts and a Master of the Arts degree from the University of
Florida.
Steven P. Brockett is Vice President of Operations -
Administration, 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).
David M. Intrator is Vice President of Marketing and
Programming 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 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 the Cable
Television Administration and Marketing Society ("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.
Susan C. Holliday is Vice President of Regulatory Compliance
and Planning of MCPI, with
39
<PAGE>
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).
ITEM 11. 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, 1995, 1996, and
1997.
<TABLE>
SUMMARY COMPENSATION TABLE (1)
<CAPTION>
Annual Compensation All Other
Name and Principal Position Year Salary Bonus Compensation
- ------------------------------- ---- ------ ------------ ------------
<S> <C> <C> <C> <C>
Jeffrey A. Marcus 1995 $583,196 - -
President and 1996 $980,781 $500,000 $38,186(2)
Chief Executive Officer 1997 $1,250,002 $160,000 $41,900(2)
Louis A. Borrelli, Jr. 1995 $276,235 $185,000 $6,464(2)
Executive Vice President and 1996 $353,099 $52,000 $15,377(2)
Chief Operating Officer 1997 $432,016 $38,800 $15,898(2)
Thomas P. McMillin 1995 $172,680 $200,000 $6,214(2)
Executive Vice President and 1996 $255,000 $32,000 $15,244(2)
Chief Financial Officer 1997 $312,000 $49,000 $15,782(2)
Richard A.B. Gleiner 1995 $170,816 $200,000 $6,526(2)
Senior Vice President, Secretary 1996 $220,673 $32,000 $16,662(2)
and General Counsel 1997 $231,750 $28,000 $16,372(2)
Cynthia J. Mannes 1995 $153,460 $32,500 $4,620(2)
Senior Vice President of 1996 $170,000 $30,000 $3,689(2)
Human Resources 1997 $175,100 $35,500 $3,948(2)
- ---------------
<FN>
(1) Pursuant to the Employee Unit Plan: (a) Mr. Marcus was issued
16,600 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) Ms. Mannes was issued 120 Series II Employee
Units. Mr. Marcus' Employee Units are fully vested. The
Series I Employee Units vested 20% on the date of issuance and
the remaining 80% will vest in equal amounts on the first
through fourth anniversaries of the date of issuance thereof.
The Series II Employee Units (other than those held by Mr.
Marcus) vest 10%, 10%, 20%, 30% and 30% on November 1, 1996,
1997, 1998, 1999 and 2000, respectively. The first year in
which Employee Units were issued was 1995. See "Incentive
Performance Plans-Employee Unit Plan" and "Security Ownership
of Certain Beneficial Owners and Management-Principal Security
Holders."
(2) 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 Ms.
Mannes 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.
Gleiner also includes amounts paid by the Company for
relocation expenses incurred in 1996.
</FN>
</TABLE>
40
<PAGE>
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, 1998, MCC had issued
5,552.2 Employee Units with a $1,600 Strike Price and 22,783.0
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 Cynthia J. Mannes
hold 13.75 and 7.50 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, 1997. 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 1997
contribution of $9,500 (as set by the Internal Revenue Service).
The Company matches participant 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.
41
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
PRINCIPAL SECURITY HOLDERS
Security Ownership of Certain Beneficial Owners
The following table sets forth, as of March 26, 1998, (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 22,029.990(4) 6.24%
Goldman Sachs & Co. 125,866.241(6) 35.68
Affiliates (5)
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. 56,428.571 15.99
Incorporated
Affiliates (7)
11100 Santa Monica
Boulevard
Los Angeles, California
90025
Greenwich Street Capital 27,053.571 7.67
Partners,
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 *
Richard A. B. Gleiner (10) 1,273.700 *
Cynthia J. Mannes (10) 120.000 *
Sole Director and 50,365.190 14.28
Executive Officers as a
Group (14 persons)
MCPI Jeffrey A. Marcus (9) 1,000.00 100.00%
General MCPI (9) 66.50 (11) 66.50%
Partner
Jeffrey A. Marcus 66.50 (11) 66.50
Louis A. Borrelli, Jr. 13.75 (12) 13.75
Thomas P. McMillin 2.50 (12) 2.50
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Name and Address of # of Equivalent
Beneficial Owners (1) Units/Shares % of Class (2)
--------------------- --------------- --------------
<S> <C> <C> <C>
Richard A. B. Gleiner 1.00 (12) 1.00
Cynthia J. Mannes 7.50 (12) 7.50
Sole Director and 99.38 99.38
Executive Officers as a
Group (14 persons)
<FN>
* Less than 1%.
(1) The address for the General Partner, MCPI and Messrs Marcus,
Borrelli, McMillin, Gleiner and Ms. Mannes 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 3,181.80 unissued Employee Units.
(5) The current ownership of affiliates of Goldman Sachs of the
outstanding Class B Units of MCC is as follows: Broad Street
Investment Fund I, L.P. (53,562.116 units); Broad Street
Investment Fund, L.P. (27,949.580 units); the Goldman Sachs
Group, L.P. (7,529.855 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); Goldman
Sachs & Co. (566.000 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 (46.130
units); and Stone Street 1995 Marcus Holding, Inc. (13.900
units).
(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, amounts for MCC
include 28,335.20 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.
43
<PAGE>
(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.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no significant transactions, new relationships
or indebtedness between the Company and related parties during
1997.
In January 1998, an agreement was reached between the Company's
equity shareholders and MCPI in which the sole shareholder of MCPI
will be paid a transaction fee of $10,000,000 in connection with
the consummation of a divestiture transaction relating to the
ownership of the Company, as discussed under "Recent
Developments". The sole shareholder of MCPI will only be
entitled to such fee if such divestiture transaction is entered
into by January, 2000.
The Company has entered into an agreement with Goldman Sachs
pursuant to which Goldman Sachs has agreed to act as financial
advisor in connection with any possible sale of the Company. Goldman
Sachs expects to receive a transaction fee of 0.50% (subject to an
increase in certain limited circumstances) of the aggregate
consideration received in such transaction upon consummation of
such transaction.
The Company has agreed to reimburse Goldman Sachs for its
reasonable out-of-pocket expenses in connection with its services
under such agreement and will indemnify and hold Goldman Sachs
harmless against any losses, claims, damages or liabilities
incurred by Goldman Sachs in the performance of such agreement,
except to the extent any of the foregoing are incurred as a result
of the gross negligence or bad faith of Goldman Sachs.
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.
44
<PAGE>
Senior Credit Facility
Goldman Sachs and Pearl Street, L.P., ("Pearl Street") 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
Pearl Street received fees of approximately $3,300,000.
Investment Banking Agreement
MCC, the General Partner, 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a) (1) Financial Statements
Included in this Report: Page
Independent Auditors' Report F-1
Consolidated Balance Sheets
December 31, 1997 and 1996 F-2
Consolidated Statements of Operations
Years ended December 31, 1997, 1996, and 1995 F-3
Consolidated Statements of Partners' Capital (Deficit)
Years ended December 31, 1997, 1996, and 1995 F-4
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
Separate financial statements of Operating, as issuer of the 13 1/2%
Notes, have not been presented, as the aggregate net assets,
earnings and partners' capital (deficit) of Operating are
substantially equivalent to the net assets, earnings and
partners' capital (deficit) of the Company and its subsidiaries
on a consolidated basis. Additionally, separate financial
statements of Capital, Capital II and Capital III have not been
presented because these entities have no operations and
substantially no assets or equity.
Financial statement schedules have been omitted because they are
either inapplicable or the requested information is shown in the
financial statements or notes thereto.
(2) Exhibits
<TABLE>
Included in this Report:
<CAPTION>
Exhibit:
<S> <C>
(1)3.1 Fifth Amended and Restated
Agreement of Limited Partnership of MCC, dated as
of August 31, 1995. (Exhibit 99.1)
45
<PAGE>
*3.2 Certificate of Limited Partnership of
MCC. (Exhibit 3.2)
+3.3 First Amended and Restated Agreement of
Limited Partnership of Operating, dated as of June
9, 1995. (Exhibit 3.3)
**3.4 Certificate of Limited Partnership
of Operating. (Exhibit 3.20)
*3.5 Certificate of Incorporation of Capital.
(Exhibit 3.16)
*3.6 Bylaws of Capital. (Exhibit 3.17)
**3.7 Certificate of Incorporation of
Capital II. (Exhibit 3.13)
**3.8 Bylaws of Capital II. (Exhibit 3.14)
****3.9 Certificate of Incorporation of
Capital III. (Exhibit 3.10)
****3.10 Bylaws of Capital III. (Exhibit 3.11)
*4.1 Form of Indenture by and among MCC,
Capital and the U.S. Trust Company of Texas, N.A.,
as Trustee, related to the 11 7/8% Debentures.
(Exhibit 4.1)
***4.2 Indenture by and among MCC,
Operating, Capital II and the U.S. Trust Company
of Texas, N.A., as Trustee, relating to the 13 1/2%
Notes. (Exhibit 4.1)
****4.3 Indenture by and among MCC,
Capital III and Norwest Bank Minnesota National
Association, relating to the 14 1/4% Notes.
*10.1 Investment Banking Agreement,
dated as of January 17, 1990, by and among MCC,
MCPI, Jeffrey A. Marcus and Goldman Sachs (the
"Investment Banking Agreement"). (Exhibit 10.8)
*10.2 Amendment to the Investment
Banking Agreement, dated as of August 1, 1990.
(Exhibit 10.9)
(1)10.12 Senior Credit Facility. (Exhibit 99.2)
****10.13 1995 Long-Term Incentive Plan
(compensatory plan). (Exhibit 10.20)
++10.16 Form of Amendment to the Senior Credit
Facility, dated March 14, 1997. (Exhibit 10.16)
10.17 Divestiture Transaction Agreement.
12.1 Computation of Ratio of Earnings to
Fixed Charges.
21.1 Subsidiaries.
<FN>
* Incorporated by reference to the exhibit shown in parenthesis
contained in the Registrants' Registration Statement on Form S-1
(File Nos. 33-67390 and 33-67390-01).
** Incorporated by reference to the exhibit shown in parentheses
contained in the Registrants' Registration Statement on Form S-1
(File Nos. 33-74104 and 33-74104-01).
*** Incorporated by reference to the exhibit shown in parentheses
contained in the Registrants' Registration Statement on Form S-1
(File Nos. 33-81008, 33-81008-01 and 33-81008-02).
46
<PAGE>
**** Incorporated by reference to the exhibit shown in parentheses
contained in the Registrants' Registration Statement on Form S-4
(File Nos. 33-93808 and 33-03808-01).
(1) Incorporated by reference to the exhibit shown in parentheses
contained in Form 8-K
dated August 31, 1995.
+ Incorporated by reference to the exhibit shown in parentheses
contained in Form 10-K
dated December 31, 1995.
++ Incorporated by reference to the exhibit shown in parentheses
contained in Form 10-K
dated December 31, 1996.
(b) Reports on Form 8-K:
The Company filed reports on Form 8-K reporting Item 5 -- Other
Events on October 8, 1997 and December 8, 1997.
</FN>
</TABLE>
47
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE
NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy statement has been sent to the security
holders of the Company.
<PAGE>
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
<S> <C>
(1)3.1 Fifth Amended and Restated
Agreement of Limited Partnership of MCC,
dated as of August 31, 1995. (Exhibit
99.1)
*3.2 Certificate of Limited Partnership of MCC.
(Exhibit 3.2)
+3.3 First Amended and Restated Agreement of
Limited Partnership of
Operating, dated June 9, 1995. (Exhibit 3.3)
**3.4 Certificate of Limited Partnership of Operating.
(Exhibit 3.20)
*3.5 Certificate of Incorporation of Capital.
(Exhibit 3.16)
*3.6 Bylaws of Capital. (Exhibit 3.17)
**3.7 Certificate of Incorporation of Capital II. (Exhibit 3.13)
**3.8 Bylaws of Capital II. (Exhibit 3.14)
****3.9 Certificate of Incorporation of Capital III. (Exhibit 3.10)
****3.10 Bylaws of Capital III. (Exhibit 3.11)
*4.1 Form of Indenture by and among MCC,
Capital and the U.S. Trust Company of
Texas, N.A., as Trustee, related to the
11 7/8% Debentures. (Exhibit 4.1)
***4.2 Indenture by and among MCC,
Operating, Capital II and the U.S. Trust
Company of Texas, N.A., as Trustee,
relating to the 13 1/2% Notes. (Exhibit
4.1)
****4.3 Indenture by and among MCC,
Capital III and Norwest Bank Minnesota
National Association, relating to the
14 1/4% Notes.
*10.1 Investment Banking Agreement,
dated as of January 17, 1990, by and
among MCC, MCPI, Jeffrey A. Marcus and
Goldman Sachs (the "Investment Banking
Agreement"). (Exhibit 10.8)
*10.2 Amendment to the Investment
Banking Agreement, dated as of
August 1, 1990. (Exhibit 10.9)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Page
<S> <C> <C>
(1)10.12 Senior Credit Facility.
(Exhibit 99.2)
****10.13 1995 Long-Term Incentive Plan (compensatory
plan). (Exhibit 10.20)
++10.16 Form of Amendment to the
Senior Credit Facility, dated March
14, 1997. (Exhibit 10.16)
10.17 Divestiture Transaction Agreement 53
12.1 Computation of Ratio of Earnings to Fixed Charges. 62
21.1 Subsidiaries 63
<FN>
* Incorporated by reference to the exhibit shown in
parenthesis contained in the Registrants' Registration
Statement on Form S-1 (File Nos. 33-67390 and 33-67390-01).
** Incorporated by reference to the exhibit shown in
parentheses contained in the Registrants' Registration
Statement on Form S-1 (File Nos. 33-74104 and 33-74104-01).
*** Incorporated by reference to the exhibit shown in
parentheses contained in the Registrants' Registration
Statement on Form S-1 (File Nos. 33-81008, 33-81008-01 and 33-
81008-02).
**** Incorporated by reference to the exhibit shown in
parentheses contained in the Registrants' Registration
Statement on Form S-4 (File Nos. 33-93808 and 33-93808-01).
(1) Incorporated by reference to the exhibit shown in
parentheses contained in Form 8-K dated August 31, 1995.
+ Incorporated by reference to the exhibit shown in
parentheses contained in Form 10-K dated December 31,
1995.
++ Incorporated by reference to the exhibit shown in
parentheses contained in Form 10-K dated December 31,
1996.
</FN>
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Marcus Cable Company, L.P.:
We have audited the accompanying consolidated financial
statements of Marcus Cable Company, L.P. as listed in the
index in Item 14(a). 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, 1997 and 1996, and the
results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick
Dallas, Texas
February 20, 1998, except for note 11,
which is as of March 4, 1998
F-1
<PAGE>
<TABLE>
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands)
<CAPTION>
Assets 1997 1996
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,607 $ 6,034
Accounts receivable,
net of allowance of $1,904 in 1997
and $1,900 in 1996 23,935 17,043
Prepaid expenses 2,105 2,432
--------- ---------
Total current assets 27,647 25,509
Property and equipment, net (notes 2 and 3) 706,626 578,507
Other assets, net (notes 2 and 4) 1,016,195 1,083,534
--------- ---------
$1,750,468 $1,687,550
========= =========
Liabilities and Partners' Capital
Current liabilities:
Current maturities of long-term
debt (note 6) $ 68,288 $ 41,819
Accrued liabilities (note 5) 60,805 49,405
Accrued interest 7,949 10,664
--------- ---------
Total current liabilities 137,042 101,888
Long-term debt (note 6) 1,533,645 1,396,652
Subsidiary limited partner
interests (note 1) (246) (246)
Partners' capital (note 7) 80,027 189,256
Commitments and contingencies
(notes 6, 7 and 10)
--------- ---------
$1,750,468 $1,687,550
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995
(in thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Cable services $ 473,701 $ 432,172 $ 195,004
Management fees (note 8) 5,614 2,335 3,290
--------- --------- --------
Total revenues 479,315 434,507 198,294
--------- --------- --------
Operating expenses:
Selling, service and system management 176,515 157,197 68,753
General and administrative 72,351 73,017 33,271
Depreciation and amortization 188,471 166,429 83,723
--------- --------- --------
Total operating expenses 437,337 396,643 185,747
--------- --------- --------
Operating income 41,978 37,864 12,547
--------- --------- --------
Other (income) expense:
Interest expense, net 151,207 144,376 82,143
Gain on sale of cable
systems(note 2) - (6,442) (26,409)
Other, net - - 1,234
--------- --------- --------
Total other (income) expense 151,207 137,934 56,968
--------- --------- --------
Loss before extraordinary item (109,229) (100,070) (44,421)
--------- --------- --------
Extraordinary item - loss on early
retirement of debt - - (8,395)
--------- --------- --------
Net loss $(109,229)$(100,070)$ (52,816)
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidated Statements of Partners' Capital (Deficit)
Years ended December 31, 1997, 1996 and 1995
(in thousands)
<CAPTION>
Class B
General Limited
Partner Partners Total
<S> <C> <C> <C>
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
Net loss (218) (109,011) (109,229)
--------- --------- ---------
Balance at December 31, 1997 $ 21,814) $ 101,841 $ 80,027
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(in thousands)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(109,229) $(100,070) $ (52,816)
Adjustments to reconcile net loss to
net cash provided by
operating activities:
Extraordinary item - loss on early
retirement of debt - - 8,395
Gain on sale of assets - (6,442) (26,409)
Depreciation and amortization 188,471 166,429 83,723
Accretion of discount on notes 68,695 59,975 41,922
Other non cash interest 3,962 3,303 1,817
Changes in operating assets and
liabilities, net of effects
of acquisitions:
Accounts receivable (6,439) (70) (2,610)
Prepaid expenses 95 (574) (474)
Other assets (385) (502) 1,721
Accrued liabilities 9,132 (3,063) 30,761
-------- ------- -------
Net cash provided by
operating activities 154,302 118,986 86,030
-------- ------- -------
Cash flows from investing activities:
Acquisition of cable systems and
franchises, net of cash acquired (53,812) (10,272) (1,455,718)
Net proceeds from sale of assets - 20,638 65,037
Additions to property and equipment (197,275) (110,639) (42,219)
-------- ------- -------
Net cash used in investing
activities (251,087) (100,273) (1,432,900)
-------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt 226,000 65,338 1,280,003
Repayment of long-term debt (131,359) (95,052) (245,000)
Contributions by limited partners,
net of syndication costs - - 362,615
Payment of debt issuance costs (1,725) - (38,307)
Payments on capital leases (558) (374) (360)
-------- ------- -------
Net cash provided by (used in)
financing activities 92,358 (30,088) 1,358,951
-------- ------- -------
Net(decrease)increase in cash and
cash equivalents (4,427) (11,375) 12,081
Cash and cash equivalents at beginning
of year 6,034 17,409 5,328
-------- ------- -------
Cash and cash equivalents at end
of year $ 1,607 $ 6,034 $ 17,409
======== ======= =======
Supplemental disclosure of cash flow
information - interest paid $81,155 $83,473 $ 27,591
======== ======= =======
Non-cash investing activities - capital
lease additions $ 684 $ 694 $ 2,067
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(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. 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)Franchise Fees
Local governmental authorities impose franchise fees on
the cable television systems owned by the Company (the
"Systems") ranging up to a federally mandated maximum of
5.0% of gross revenues. On a monthly basis, such fees
are collected from the Systems' customers. Historically,
franchise fees in certain of the Systems (i.e., the
former Sammons Systems) were not separately itemized on
customers' bills. Such fees were considered part of the
monthly charge for basic services and equipment, and
therefore were reported as revenue and expense in the
Company's financial results. The Company began the
process of itemizing such fees on all customers' bills to
conform with the collection of, and accounting for,
franchise fees in the remaining Systems in November 1996
and completed the process during the first quarter of
1997. In conjunction with itemizing these charges, the
Company began collecting the franchise fee on all taxable
revenues. As a result, beginning in the first quarter of
1997, such fees are no longer included as revenue or as
general and administrative expenses. The net effect of
this change is a reduction in 1997 revenue of
approximately $6,800,000 and a reduction of approximately
$9,300,000 in 1997 general and administrative expenses,
versus the comparable period in 1996.
(d)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, 1997 and 1996, the
Company had cash equivalents of
F-6
<PAGE>
$10,944,000 and
$6,233,000, respectively, consisting of certificates of
deposit and money market funds. A book overdraft of
approximately $9,300,000 existed at December 31, 1997.
(e)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, which include
converters, headends, distribution systems and microwave
equipment, 3 to 10 years; and vehicles and other, 3 to 10
years.
(f)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 using 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 its 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 intangible assets, such
carrying amounts are adjusted for impairment to a level
commensurate with the estimated fair value of the
underlying assets.
(g)Revenues
Revenues from basic and premium service are recognized
when the service is provided.
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,
or as a specified monthly amount as stipulated in the
management agreement. Incentive management fee revenue
is recognized upon performance of specified actions as
stipulated in the management agreement.
F-7
<PAGE>
(h)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.
(i)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."
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.
(j)Derivative Financial Instruments and Fair Value
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 carrying value of the interest rate
agreements approximates fair value due to their
maturities.
The carrying amounts of cash equivalents, accounts
receivable and accrued operating liabilities reported in
the accompanying consolidated financial statements
approximate fair value due to their short maturities.
The fair value of long-term debt was $1,700,259,000 and
$1,511,233,000 at December 31, 1997 and 1996,
respectively, based on quoted market prices for the
publicly held debt. The carrying amount of the Senior
Credit Facility approximates fair value as the
outstanding borrowings bear interest at market rates.
(k)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.
F-8
<PAGE>
(l)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.
(2)Acquisitions and Dispositions
On July 1, 1997, the Company purchased cable television
systems located near Dallas-Fort Worth, Texas for an
aggregate purchase price of $34,500,000. On December 1, the
Company completed an exchange of cable television systems in
Wisconsin and Indiana. According to terms of the exchange
agreement, in addition to the contribution of its systems,
the Company paid $17,807,000.
On January 11, 1996, the Company completed the purchase of
a cable television system in Texas for $875,000. On July 8,
1996, the Company acquired a cable television system in
Mississippi for an aggregate purchase price of $2,600,000.
On July 31, 1996, the Company acquired a cable television
system in Indiana for a purchase price of $6,700,000.
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.
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. The cable system
exchange discussed above was accounted for as a nonmonetary
exchange and, accordingly, the
F-9
<PAGE>
additional cash contribution
was allocated to tangible and intangible assets based on
recorded amounts of the nonmonetary assets relinquished.
Operating results of the acquired companies and systems are
included in the accompanying financial statements from the
dates of acquisition and exchange except for operating
results of Crown, which are included from January 1, 1995.
In connection with the acquisitions and exchange, the Company
also assumed responsibility for settling outstanding
receivables and payables of the cable television systems
acquired. Net assets acquired as a result of the exchange
and acquisitions are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Working capital deficit $ - $ - $ (15,900)
Property and equipment 26,310 5,004 485,410
Franchise rights 27,002 4,861 959,651
Going concern value - - 33,055
Noncompetition agreements 1,000 383 12,160
Other (liabilities) assets (500) 24 1,342
------ ------ ---------
Total purchase price (1995
includes $5,000 from escrow
paid in 1994) $53,812 $10,272 $1,475,718
====== ====== =========
</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 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 cash 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 cash 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, 1997 and 1996 as though the acquisitions and
dispositions discussed above had occurred at January 1, 1996
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revenues $484,673 $437,746
Operating income 40,945 39,950
Net loss (110,263) (97,983)
</TABLE>
F-10
<PAGE>
The pro forma financial information has been prepared for
comparative purposes only and does not purport to indicate
the results of operations which would actually have occurred
had the acquisitions, dispositions and exchange been made at
the beginning of the period indicated, or which may occur in
the future.
(3) Property and Equipment
Property and equipment consists of the following at December
31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cable systems $ 878,721 $ 670,829
Vehicles and other 37,943 26,008
Land and buildings 17,271 13,256
-------- --------
933,935 710,093
Accumulated depreciation (227,309) (131,586)
-------- --------
$ 706,626 $ 578,507
======== ========
</TABLE>
(4) Other Assets
Other assets consist of the following at December 31, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Franchise rights $1,209,725 $1,175,009
Debt issuance costs 45,225 43,500
Going concern value of acquired
cable systems 37,274 45,969
Noncompetition agreements 25,914 31,914
Other 1,090 1,069
--------- ---------
1,319,228 1,297,461
Accumulated amortization (303,033) (213,927)
--------- ---------
$1,016,195 $1,083,534
========= =========
</TABLE>
Effective December 31, 1997, the Company wrote off
approximately $7,000,000 and $175,000 of fully amortized
noncompetition agreements and other costs,
respectively.
F-11
<PAGE>
(5)Accrued Liabilities
Accrued liabilities consist of the following at December 31,
1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Accrued operating expenses $ 27,923 $ 20,377
Accrued franchise fees 10,131 9,429
Accrued programming costs 9,704 8,301
Accrued property taxes 5,125 3,830
Other accrued liabilities 5,726 4,630
Accrued acquisition costs 2,196 2,838
-------- --------
$ 60,805 $ 49,405
======== ========
</TABLE>
(6)Long-term Debt
The Company has outstanding borrowings on long-term debt
arrangements at December 31, 1997 and 1996 as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Senior Credit Facility $ 949,750 $ 855,000
13 1/2% Senior Subordinated
Discount Notes 336,304 295,119
14 1/4% Senior Discount Notes 213,372 185,862
11 7/8% Senior Debentures 100,000 100,000
Capital leases and other notes 2,507 2,490
--------- ---------
1,601,933 1,438,471
Less current maturities 68,288 41,819
--------- ---------
$1,533,645 $1,396,652
========= =========
</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 B"). The Senior Credit Facility,
as amended on March 14, 1997, provides for scheduled
amortization of the two term loan facilities which began in
September 1997. The Senior Credit Facility also provides for
a $360,000,000 Revolving Credit Facility, with a maturity
date of December 31, 2002. At December 31, 1997, there were
borrowings of $748,750,000 under the two term loan facilities
and $201,000,000 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 or Federal Funds rate, plus a margin of up
to 2.25% subject to certain adjustments based on the ratio of
Operating's total debt to annualized operating cash flow, as
defined. At December 31, 1997, borrowings under the Senior
Credit Facility bore interest at rates ranging from 5.97% to
8.00% under the Eurodollar and prime rate options. The
Senior Credit Facility, among other things, provides for (i)
a pledge by Operating
F-12
<PAGE>
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 0.250% to 0.375% on the unused commitment under the
Senior Credit Facility. Commitment fees on the unused
portion of credit facilities amounted to $944,000, $866,000
and $788,000 for the years ended December 31, 1997, 1996 and
1995, 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 $85,856,000 and $113,366,000 at December 31,
1997 and 1996, 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 $77,157,000 and $118,342,000 at December 31, 1997 and
1996, 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.
F-13
<PAGE>
To reduce the impact of changes in interest rates on its
floating rate long-term debt, the Company has entered into
certain interest rate swap agreements with certain of the
participating banks under the Senior Credit Facility. At
December 31, 1997, interest rate swap agreements covering a
notional balance of $400,000,000 were outstanding which
require the Company to pay fixed rates ranging from 5.75% to
5.77%, plus the applicable interest rate margin. These
agreements mature during 1998 and 1999, and allow for the
optional extension by the counterparty for additional periods
and certain of the agreements provide for the automatic
termination in the event that one month LIBOR exceeds 6.75%
on any monthly reset date. The Company has also entered into
an interest rate swap agreement covering an aggregate
notional principal amount of $100,000,000 which matures in
the year 2000 whereby the Company receives one month LIBOR
plus 0.07% and is required to pay the higher of one month
LIBOR at either the beginning or end of the interest period,
plus the applicable interest rate margin.
As interest rates change under the interest rate swap
agreements, the differential to be paid or received is
recognized as an adjustment to interest expense. During the
year ended December 31, 1997, the Company recognized
additional expenses under its interest rate swap agreements
of $322,000. During the year ended December 31, 1996, the
Company recognized benefits of $130,000 under its interest
rate swap agreements.
A summary of the future maturities of long-term debt follows
(in thousands):
<TABLE>
<S> <C>
1998 $ 68,288
1999 78,372
2000 89,591
2001 156,255
2002 463,500
Thereafter 745,927
----------
$1,601,933
==========
</TABLE>
(7)Partners' Capital
(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
F-14
<PAGE>
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, 1997, 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. At
December 31, 1997 and 1996, 28,033.20 and 27,758.2
Employee Units, respectively, were outstanding with a
subordinated threshold ranging from $1,600 to $1,750 per
unit.
(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 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.
F-15
<PAGE>
(c)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.
(d)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;
(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;
F-16
<PAGE>
(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.
(e)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.
(f)Issuance of Partnership Units
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.
(8) Related Party Transactions
Affiliates of Goldman Sachs own limited partnership interests
in MCC. Maryland Cable, which is controlled by an affiliate
of Goldman Sachs, owned the Maryland Cable System which
served customers in and around Prince Georges County,
Maryland. Operating managed the Maryland Cable Systems under
the Maryland Cable Agreement, which was entered into in
September of 1994. Operating earned a management fee,
payable monthly, equal to 4.7% of the revenues of Maryland
Cable, and was reimbursed for certain expenses.
Effective January 31, 1997, the Maryland Cable System was
sold to Jones Communications of Maryland, Inc. Pursuant to
the Maryland Cable Agreement, Operating recognized incentive
management fees of $5,069,000 during 1997 in conjunction with
the sale. Additional incentive management fees may be
recognized upon dissolution of Maryland Cable, which is
anticipated to occur during 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 nominal
monthly fee. Including the incentive management fees noted
above, during the years ended December 31, 1997 and 1996,
Operating earned total management fees of $5,614,000 and
$2,335,000, respectively.
F-17
<PAGE>
In connection with the acquisitions in 1995, fees of
$5,250,000 were paid to Marcus Cable Properties, Inc.
for services directly related to the Sammons and Crown
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.
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 year ended
December 31, 1995 were $1,082,000.
(9)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, 1997, 1996 and
1995, the Company made contributions to the plan of
approximately $761,000, $480,000 and $247,000, respectively.
(10) 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, 1997, 1996 and 1995 were approximately
$7,544,000, $6,775,000 and $3,093,000, respectively.
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
F-18
<PAGE>
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 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.
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.
(11) Subsequent Events
On March 3, 1998, the Company announced that it has retained
Goldman Sachs to advise the Company as it explores various
strategic alternatives involving the ownership of the
Company. Several alternatives are being reviewed, however, no
decision has been made and the outcome of the Company's
review cannot be predicted at this time.
On March 4, 1998, the Company entered into a definitive
agreement with TMC Holdings, Inc. to sell cable television
assets located in Connecticut and Virginia for a sales price
of approximately $150,000,000. The systems serve
approximately 46,000 customers and 17,000 customers in
Connecticut and Virginia, respectively. The transaction is
subject to regulatory approval and is expected to be
finalized during the third quarter of 1998.
F-19
<PAGE>
(12) Financial Information
The following schedules present balance sheet and statement of
operations information of the Company as of and for the year ended
December 31, 1997:
<TABLE>
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidating Schedule - Balance Sheet Information
As of December 31, 1997
(unaudited)
(in thousands)
ASSETS
<CAPTION>
Combined
Operating Capital Elimin- Operating Capital Elimin-
Partnership II Operating ations Consolidated Capital III Company ations Company
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents 8,695 1 (7,902) 0 794 1 1 811 0 1,607
Accounts receivable, net 132,337 0 80,756 (189,158) 23,935 0 0 0 0 23,935
Prepaid expenses 1,692 0 413 0 2,105 0 0 0 0 2,105
---------- ----- -------- ---------- ---------- ------ ------ ------- -------- ---------
Total current assets 142,724 1 73,267 (189,158) 26,834 1 1 811 0 27,647
Property and equipment, net 699,518 0 7,108 0 706,626 0 0 0 0 706,626
Other assets, net 1,016,966 0 1,621,662 (1,599,185) 1,039,443 0 0 8,464 (31,712) 1,016,195
Investment in subsidiaries 0 0 80,054 (80,054) --- 0 0 412,353 (412,353) ---
---------- ----- --------- ---------- ---------- ------ ------ ------- -------- ---------
Total assets 1,859,208 1 1,782,091 (1,868,397) 1,772,903 1 1 421,628 (444,065) 1,750,468
========== ===== ========= ========== ========== ====== ====== ======= ======== =========
Current liabilities:
Current maturities of
long-term debt 194 0 68,094 0 68,288 0 0 0 0 68,288
Accrued liabilities 173,379 0 76,947 (183,045) 67,281 0 0 25,236 (31,712) 60,805
Accrued interest 7,925 0 4,956 (7,925) 4,956 0 0 2,993 0 7,949
---------- ----- --------- ---------- ---------- ------ ------ ------- -------- ---------
Total current
liabilities 181,498 0 149,997 (190,970) 140,525 0 0 28,229 (31,712) 137,042
Long-term debt 1,597,657 0 1,219,989 (1,597,373) 1,220,273 0 0 313,372 0 1,533,645
Subsidiary limited partner
interest 0 0 (246) 0 (246) 0 0 0 0 (246)
Partners' capital 80,053 1 412,351 (80,054) 412,351 1 1 80,027 (412,353) 80,027
---------- ----- --------- ---------- ---------- ------ ------ ------- -------- ---------
Total liabilities and
parterns' capital 1,859,208 1 1,782,091 (1,868,397) 1,772,903 1 1 421,628 (444,065) 1,750,468
========== ===== ========= ========== ========== ====== ====== ======= ======== =========
</TABLE>
F-20
<PAGE>
<TABLE>
MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES
Consolidating Schedule - Statement of Operations Information
For the twelve months ended December 31, 1997
(unaudited)
(in thousands)
<CAPTION>
Combined Operating
Operating Capital Elimin- Consol- Capital Elimin-
Partnerships II Operating ations idated Capital III MCC ations Company
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Cable services 473,701 --- --- --- 473,701 --- --- --- --- 473,701
Management fees --- --- 5,614 --- 5,614 --- --- --- --- 5,614
--------- ------ --------- ------ -------- ------- ----- ----- ----- -------
Total revenues 473,701 --- 5,614 --- 479,315 --- --- --- --- 479,315
--------- ------ --------- ------ -------- ------- ----- ----- ----- -------
Operating expenses:
Selling, service and
system management 174,173 --- 2,342 --- 176,515 --- --- --- --- 176,515
General and administrative 58,127 --- 14,224 --- 72,351 --- --- --- --- 72,351
Allocated corporate costs 11,552 --- (11,552) --- --- --- --- --- --- ---
Depreciation and amortization 187,105 --- 1,366 --- 188,471 --- --- --- --- 188,471
--------- ------ --------- ------ -------- ------- ----- ----- ----- -------
Total operating expenses 430,957 --- 6,380 --- 437,337 --- --- --- --- 437,337
--------- ------ --------- ------ -------- ------- ----- ----- ----- -------
Operating income (loss) 42,744 --- (766) --- 41,978 --- --- --- --- 41,978
Other (income) expense:
Interest (income) expense, net 152,264 --- (41,438) --- 110,826 --- --- 40,381 --- 151,207
Equity earnings (loss)
of subsidiaries --- --- 109,520 (109,520) --- --- --- 68,848 (68,848) ---
--------- ------ --------- ------ -------- ------- ----- ------ ------ -------
Total other
(income) expense 152,264 --- 68,082 (109,520) 110,826 --- --- 109,229 (68,848) 151,207
--------- ------ --------- ------ -------- ------- ----- ------ ------ -------
Net loss (109,520) --- (68,848) 109,520 (68,848) --- --- (109,229) 68,848 (109,229)
========= ====== ========= ====== ======== ======= ===== ====== ====== ========
</TABLE>
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, each of the registrants have duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
MARCUS CABLE COMPANY, L.P.
(Registrant)
By: Marcus Cable Properties, L.P.,its general partner,
By: Marcus Cable Properties, Inc., its general partner,
March 30, 1998 By: /s/ Jeffrey A. Marcus
Jeffrey A. Marcus
Its: President and Chief Executive Officer
By: /s/ Thomas P. McMillin
Thomas P. McMillin
Its: Executive Vice President and
Chief Financial Officer
By: /s/ John P. Klingstedt, Jr.
John P. Klingstedt, Jr.
Its: Senior Vice President and Controller
MARCUS CABLE OPERATING COMPANY, L.P.
(Registrant)
By: Marcus Cable Company, L.P., its general partner,
By: Marcus Cable Properties, L.P., its general partner,
By: Marcus Cable Properties, Inc., its general partner,
March 30, 1998 By: /s/ Jeffrey A. Marcus
Jeffrey A. Marcus
Its: President and Chief Executive Officer
By: /s/ Thomas P. McMillin
Thomas P. McMillin
Its: Executive Vice President and
Chief Financial Officer
By: /s/ John P. Klingstedt, Jr.
John P. Klingstedt, Jr.
Its: Senior Vice President and Controller
<PAGE>
MARCUS CABLE CAPITAL CORPORATION
(Registrant)
March 30, 1998 By: /s/ Jeffrey A. Marcus
Jeffrey A. Marcus
Its: President and Chief Executive Officer
By: /s/ Thomas P. McMillin
Thomas P. McMillin
Its: Executive Vice President and
Chief Financial Officer
By: /s/ John P. Klingstedt, Jr.
John P. Klingstedt, Jr.
Its: Senior Vice President and Controller
MARCUS CABLE CAPITAL CORPORATION II
(Registrant)
March 30, 1998 By: /s/ Jeffrey A. Marcus
Jeffrey A. Marcus
Its: President and Chief Executive Officer
By: /s/ Thomas P. McMillin
Thomas P. McMillin
Its: Executive Vice President and
Chief Financial Officer
By: /s/ John P. Klingstedt, Jr.
John P. Klingstedt, Jr.
Its: Senior Vice President and Controller
MARCUS CABLE CAPITAL CORPORATION III
(Registrant)
March 30, 1998 By: /s/ Jeffrey A. Marcus
Jeffrey A. Marcus
Its: President and Chief Executive Officer
By: /s/ Thomas P. McMillin
Thomas P. McMillin
Its: Executive Vice President and
Chief Financial Officer
By: /s/ John P. Klingstedt, Jr.
John P. Klingstedt, Jr.
Its: Senior Vice President and Controller
<PAGE>
Exhibit 10.17
<PAGE>
January 19, 1998
Mr. Jeffrey A. Marcus
Marcus Cable Company, L.P.
2911 Turtle Creek Boulevard
Suite 1300
Dallas, Texas 75219
Dear Jeff:
In recognition of your contribution to the success of
Marcus Cable Company, L.P. (the "Company") over the past seven and
one-half years and for your efforts in connection with a successful
completion of a Divestiture Transaction (as defined below), we
hereby agree that upon consummation of a Divestiture Transaction,
the Company will pay you a fee of $10,000,000.
As used herein, the term "Divestiture Transaction" means
a transaction or series of transactions as a result of which one or
more persons directly or indirectly acquire, by purchase, merger,
consolidation or otherwise, (i) a majority of the assets of the
Company and its subsidiaries on a consolidated basis or (ii) a
majority of the limited partner interests in the Company.
Notwithstanding the foregoing, you will only be entitled
receive the foregoing fee if an agreement is entered into with
respect to a Divestiture Transaction within 24 months after the
date of this letter agreement.
We are grateful for all that you have done in the
operation of the Company and the enhancement of value thereof.
<PAGE>
Sincerely,
THE GOLDMAN SACHS GROUP, L.P.
BROAD STREET YIELD CORPORATION
BROAD STREET INVESTMENT FUND I, L.P.
BROAD STREET EMPIRE CORPORATION
BROAD STREET ACQUISITION CORPORATION
BROAD STREET EXPLORATION CORPORATION
BROAD STREET INCOME CORPORATION
BROAD STREET VALUE CORPORATION
BROAD STREET INVESTMENT FUND, L.P.
BROAD STREET ADVANCEMENT
CORPORATION
BROAD STREET STRATEGIC CORPORATION
BROAD STREET FUNDING CORPORATION
BROAD STREET INVESTMENT
CORPORATION I
BROAD STREET INVESTMENT
CORPORATION II
STONE STREET FUND 1990, L.P.
STONE STREET FUND 1991, L.P.
STONE STREET FUND 1992, L.P.
STONE STREET FUND 1994, L.P.
STONE STREET FUND 1995, L.P.
STONE STREET 1995 MARCUS HOLDING,INC.
GS CAPITAL PARTNERS II OFFSHORE, L.P.
GS CAPITAL PARTNERS II OFFSHORE
MARCUS HOLDING I, L.P.
GS CAPITAL PARTNERS II GERMANY
MARCUS HOLDING I, L.P.
GS CAPITAL PARTNERS II, L.P.
GS CAPITAL PARTNERS II MARCUS
HOLDING I, L.P.
BRIDGE STREET FUND 1990, L.P.
BRIDGE STREET FUND 1991, L.P.
BRIDGE STREET FUND 1992, L.P.
BRIDGE STREET FUND 1994, L.P.
BRIDGE STREET FUND 1995, L.P.
PARTICIPATION SUBSIDIARY CORP. II
On Behalf of Each of the Foregoing
Entities:
--------------------------------
Name:
Title: Authorized Officer
of Foregoing
Entities or Their
Direct or Indirect
General Partners
<PAGE>
HICKS, MUSE, TATE & FURST EQUITY
FUND II, L.P.
HM2 CABLE, L.P.
On Behalf of Each of the Foregoing
Entities:
By:________________________________
Name:
Title:
FS EQUITY PARTNERS III, L.P.
MCC INTERNATIONAL HOLDINGS, LTD.
On Behalf of Each of the Foregoing
Entities:
By:________________________________
Name:
Title:
WPG CORPORATE DEVELOPMENT
ASSOCIATES IV, L.P.
WPG HOLDING, INC.
LION INVESTMENTS LIMITED
GLENBROOK PARTNERS, L.P.
FIRST UNION CAPITAL PARTNERS, L.P.
On Behalf of Each of the Foregoing
Entities:
By:________________________________
Name:
Title:
<PAGE>
GREENWICH STREET CAPITAL PARTNERS,
L.P.
TRV EMPLOYEES FUND, L.P.
GSCP OFFSHORE HOLDINGS, INC.
THE TRAVELERS INSURANCE COMPANY
THE TRAVELERS LIFE AND ANNUITY
COMPANY
On Behalf of Each of the Foregoing
Entities:
By:________________________________
Name:
Title:
STATE OF WISCONSIN INVESTMENT BOARD
Name:
Title:
<PAGE>
Exhibit 12.1
<TABLE>
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
Year Ended December 31,
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net loss $ (109,229) $ (100,070) $ (52,816) $ (30,610) $ (9,643)
Add:
Fixed charges per (b)
below 151,207 144,681 82,911 29,346 16,847
---------- --------- --------- --------- ---------
Earnings for computation
purposes (a) $ 41,978 $ 44,611 $ 30,095 $ (1,264) $ 7,204
========== ========= ========= ========= =========
Fixed Charges:
Interest Costs $ 147,244 $ 141,380 $ 81,094 $ 27,699 $ 12,912
Amortization of Debt
issue costs 3,963 3,301 1,817 406 531
Preference Returns --- --- --- 1,241 3,404
---------- --------- --------- --------- ---------
Total Fixed Charges (b) $ 151,207 $ 144,681 $ 82,911 $ 29,346 $ 16,847
========== ========= ========= ========= =========
Ratio of earnings to
fixed charges (a)/(b) $ --- $ --- $ --- $ --- $ ---
========== ========= ========= ========= =========
Deficiency of earnings
to cover fixed charges $ (109,229) $ (100,070) $ (52,816) $ (30,610) $ (9,643)
========== ========= ========= ========= =========
</TABLE>
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF MCC
Listed below are the names of certain subsidiaries, at least 50%
owned, directly or indirectly, of MCC as of December 31, 1997.
Indented subsidiaries are direct subsidiaries of the company under
which they are indented.
<TABLE>
<CAPTION>
Percentage
Owned by State of
Parent Formation
<S> <C> <C>
Marcus Cable Company, L.P. (Registrant): Delaware
Marcus Cable Capital Corporation 100.0% Delaware
Marcus Cable Capital Corporation III 100.0% Delaware
Marcus Cable Operating Company, L.P. 99.8% Delaware
Marcus Fiberlink, L.L.C. 99.0% Delaware
Marcus Cable Capital Corporation II 100.0% Delaware
Marcus Cable Associates, L.P. 99.8% Delaware
Marcus Cable Partners, L.P. 99.6% Delaware
Marcus Cable, Inc. 100.0% Delaware
Marcus Cable of Alabama, Inc. (1) 100.0% Delaware
Marcus Cable of Alabama, L.P. 99.0% Delaware
Marcus Cable of Delaware and Maryland, L.P. 99.9% Delaware
<FN>
(1) Marcus Cable of Alabama, Inc. holds 1% general partner interest in Marcus
Cable of Alabama, L.P.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Financial Data Schedule represents Consolidated Marcus Cable Company, L.P.
and Subsidiaries as reflected in the Form 10-K for the year ended December 31,
1997.
</LEGEND>
<CIK> 0000910629
<NAME> MARCUS CABLE COMPANY, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,607
<SECURITIES> 0
<RECEIVABLES> 25,839
<ALLOWANCES> (1,904)
<INVENTORY> 0
<CURRENT-ASSETS> 27,647
<PP&E> 933,935
<DEPRECIATION> (227,309)
<TOTAL-ASSETS> 1,750,468
<CURRENT-LIABILITIES> 137,042
<BONDS> 1,533,645
0
0
<COMMON> 0
<OTHER-SE> 80,027
<TOTAL-LIABILITY-AND-EQUITY> 1,750,468
<SALES> 473,701
<TOTAL-REVENUES> 479,315
<CGS> 0
<TOTAL-COSTS> 437,337
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151,207
<INCOME-PRETAX> (109,229)
<INCOME-TAX> 0
<INCOME-CONTINUING> (109,229)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (109,229)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
