-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NUEUgN+foIgeHhsWvjbFuCu33KOCzWoEio01BKE+5XB13mLaR3wdgtrDqkhlSKOl 03aX4A5QiyrB20VY35RKZQ== 0000950149-97-002009.txt : 19971110 0000950149-97-002009.hdr.sgml : 19971110 ACCESSION NUMBER: 0000950149-97-002009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971107 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERMEDIA CAPITAL PARTNERS IV L P CENTRAL INDEX KEY: 0001020817 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 943247750 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-11893 FILM NUMBER: 97710149 BUSINESS ADDRESS: STREET 1: 235 MONTGOMERY STREET STREET 2: SUITE 420 CITY: SAN FRANCISCO STATE: CA ZIP: 94120 BUSINESS PHONE: 4156164600 MAIL ADDRESS: STREET 1: 235 MONTGOMERY STREET STREET 2: SUITE 420 CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDING 09/30/1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 333-11893 INTERMEDIA CAPITAL PARTNERS IV, L.P. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-3247750 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 235 MONTGOMERY STREET, SUITE 420 SAN FRANCISCO, CA 94104 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 616-4600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ ================================================================================ 2 INTERMEDIA CAPITAL PARTNERS IV, L.P. INDEX TO REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 TABLE OF CONTENTS
PAGE(S) ------- PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements.................................................. 1 ITEM 2. Management's Discussion and Analysis of Financial Condition and 11 Results of Operations................................................. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings..................................................... 21 ITEM 2. Changes in Securities................................................. 21 ITEM 3. Defaults Upon Senior Securities....................................... 21 ITEM 4. Submission of Matters to a Vote of Security Holders................... 21 ITEM 5. Other Information..................................................... 21 ITEM 6. Exhibits and Reports on Form 8-K...................................... 26 SIGNATURES.......................................................................... 27
INFORMATION CONTAINED IN THIS REPORT INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES LAWS. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, REGARDING ACTIVITIES, EVENTS OR DEVELOPMENTS THAT THE COMPANY EXPECTS, BELIEVES OR ANTICIPATES WILL OR MAY OCCUR IN THE FUTURE, INCLUDING SUCH MATTERS AS, THE COMPANY'S OPERATING STRATEGIES, CAPITAL EXPENDITURES, THE EFFECTS OF COMPETITION, AND OTHER SUCH MATTERS, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, THESE FORWARD-LOOKING STATEMENTS ARE BASED UPON CERTAIN ASSUMPTIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES, AND THE COMPANY CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN PART II, ITEM 5 "OTHER INFORMATION." 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERMEDIA CAPITAL PARTNERS IV, L.P. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, 1997 DECEMBER 31, ------------- 1996 ------------- (UNAUDITED) ASSETS Cash.............................................................. $ 8,770 $ 4,552 Accounts receivable, net of allowance for doubtful accounts of $2,130 and $2,516, respectively................................. 17,539 19,316 Escrowed investments held to maturity............................. 28,237 29,359 Interest receivable on escrowed investments....................... 2,194 567 Receivable from affiliate......................................... 923 381 Prepaids.......................................................... 2,768 1,091 Other current assets.............................................. 232 334 -------- -------- Total current assets.................................... 60,663 55,600 Escrowed investments held to maturity............................. 60,518 31,148 Intangible assets, net............................................ 634,087 570,330 Property & equipment, net......................................... 230,055 279,300 Deferred income taxes............................................. 9,910 14,711 Other non-current assets.......................................... 1,466 2,251 -------- -------- Total assets............................................ $ 996,699 $ 953,340 ======== ======== LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued liabilities.......................... $ 28,973 $ 29,995 Payable to affiliates............................................. 3,408 3,529 Deferred revenue.................................................. 11,753 14,594 Accrued interest.................................................. 20,322 14,156 -------- -------- Total current liabilities............................... 64,456 62,274 Deferred channel launch revenue................................... 5,000 Long-term debt.................................................... 846,000 859,000 Other non-current liabilities..................................... 70 115 -------- -------- Total liabilities....................................... 910,526 926,389 -------- -------- Commitments and contingencies Minority interest Mandatorily redeemable preferred shares........................... 12,357 13,010 PARTNERS' CAPITAL Preferred limited partnership interest............................ 24,888 24,888 General and limited partners' capital............................. 50,778 (9,097) Note receivable from general partner.............................. (1,850) (1,850) -------- -------- Total partners' capital................................. 73,816 13,941 -------- -------- Total liabilities and partners' capital................. $ 996,699 $ 953,340 ======== ========
See accompanying notes to consolidated financial statements 1 4 INTERMEDIA CAPITAL PARTNERS IV, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 1996 1997 1996 1997 ------- -------- ------- -------- Basic and cable services.......................... $27,262 $ 43,444 $33,370 $127,124 Pay service....................................... 6,694 10,601 7,893 30,817 Other service..................................... 5,501 9,790 6,128 28,641 ------- -------- ------- -------- 39,457 63,835 47,391 186,582 ------- -------- ------- -------- Program fees...................................... 8,555 13,849 10,136 40,244 Other direct and operating expenses............... 4,829 6,995 5,731 20,336 Depreciation and amortization..................... 21,786 30,648 26,521 97,051 Selling, general and administrative expenses...... 7,374 11,893 8,975 35,476 Management and consulting fees.................... 721 838 721 2,513 ------- -------- ------- -------- 43,265 64,223 52,084 195,620 ------- -------- ------- -------- Loss from operations.............................. (3,808) (388) (4,693) (9,038) ------- -------- ------- -------- Other income (expense): Interest and other income....................... 4,307 1,217 4,759 3,998 Gain on sale of investments..................... 286 286 Interest expense................................ (14,189) (19,754) (18,191) (58,631) Other expense................................... (525) (134) (526) (436) ------- -------- ------- -------- (10,121) (18,671) (13,672) (55,069) ------- -------- ------- -------- Loss before income tax (expense) benefit, extraordinary item and minority interest........ (13,929) (19,059) (18,365) (64,107) Income tax (expense) benefit...................... (388) 1,338 (388) 4,801 ------- -------- ------- -------- Net loss before extraordinary item and minority interest........................................ (14,317) (17,721) (18,753) (59,306) Extraordinary gain on early extinguishment of debt, net of tax................................ 18,483 18,483 Minority interest................................. (464) (225) (464) (653) ------- -------- ------- -------- Net income(loss).................................. $ 3,702 $(17,946) $ (734) $(59,959) ======= ======== ======= ========
See accompanying notes to consolidated financial statements 2 5 INTERMEDIA CAPITAL PARTNERS IV, L.P. CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DOLLARS IN THOUSANDS)
PREFERRED LIMITED GENERAL LIMITED NOTES PARTNER PARTNER PARTNERS RECEIVABLE TOTAL --------- ------- --------- ---------- --------- Syndication costs.................... $ (43) $ (7) $ (575) $ $ (625) ------ ------ ------ -------- -------- Balance at December 31, 1995......... (43) (7) (575) (625) Cash contributions................... 1,913 188,637 190,550 Notes receivable from General Partner............................ 1,850 (1,850) In-kind contributions, historical cost basis......................... 237,805 237,805 Conversion of GECC debt to equity.... 25,000 11,667 36,667 Allocation of RMG's and IPWT's historical equity balances......... (2,719) (239,368) (242,087) Distribution......................... (119,775) (119,775) Syndication costs.................... (69) (10) (911) (990) Net loss............................. (311) (27,418) (27,729) ------ ------ ------ -------- -------- Balance at December 31, 1996......... 24,888 716 50,062 (1,850) 73,816 Cash contributions (unaudited)....... 84 84 Transfer and conversion of General Partner Interest to Limited Partner Interest (unaudited)............... (799) 799 Net loss (unaudited)................. (1) (59,958) (59,959) ------ ------ ------ -------- -------- Balance at September 30, 1997 (unaudited)........................ $ 24,888 $ $ (9,097) $ (1,850) $ 13,941 ====== ====== ====== ======== ========
See accompanying notes to consolidated financial statements 3 6 INTERMEDIA CAPITAL PARTNERS IV, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1996 1997 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss...................................................................... $ (734) $(59,959) Minority interest............................................................. 464 653 Gain on disposal of fixed assets.............................................. (7) (25) Depreciation and amortization................................................. 27,403 98,072 Gain on sale of investment.................................................... (286) Extraordinary gain on early extinguishment of debt............................ (18,483) Changes in assets and liabilities: Accounts receivable......................................................... (678) (1,777) Interest receivable on escrowed investments................................. (881) 1,627 Receivable from affiliates.................................................. (1,239) 542 Prepaids.................................................................... (3,137) 1,677 Other current assets........................................................ 33 (102) Deferred income taxes....................................................... 388 (4,801) Other non-current assets.................................................... 504 (785) Accounts payable and accrued liabilities.................................... 2,507 205 Payable to affiliate........................................................ 2,392 121 Deferred revenue............................................................ 430 2,841 Accrued interest............................................................ (2,819) (6,166) Deferred channel launch revenue............................................. 5,000 Other non-current liabilities............................................... (517) 45 --------- -------- Cash flows from operating activities.......................................... 5,340 37,168 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of cable systems, net of cash acquired.............................. (413,511) Purchase of RMG Class A Common Stock.......................................... (329) Property and equipment........................................................ (8,293) (81,889) Intangible assets............................................................. (347) (614) Note receivable............................................................... (15,247) Purchases of escrowed investments............................................. (88,756) Proceeds from maturity of escrowed investments................................ 28,248 Proceeds from sale of investment.............................................. 1,080 --------- -------- Cash flows from investing activities.......................................... (525,403) (54,255) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from long-term debt................................................ 837,000 13,000 Repayment of long-term debt................................................... (350,583) Call premium and other fees on early extinguishment of debt................... (4,716) Contributed capital........................................................... 190,530 84 Partner distribution.......................................................... (120,755) Debt issue costs.............................................................. (16,925) (215) Syndication costs............................................................. (967) --------- -------- Cash flows from financing activities.......................................... 533,584 12,869 --------- -------- Net change in cash.............................................................. 13,521 (4,218) Cash, beginning of period....................................................... 8,770 --------- -------- Cash, end of period............................................................. $ 13,521 $ 4,552 ========= ========
See accompanying notes to consolidated financial statements. 4 7 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) 1. THE COMPANY AND BASIS OF PRESENTATION: InterMedia Capital Partners IV, L.P. ("ICP-IV" or the "Company"), a California limited partnership, was formed on March 19, 1996, as a successor to InterMedia Partners IV, L.P. ("IP-IV") which was formed in October 1994, for the purpose of acquiring and operating cable television systems in three geographic clusters, all located in the southeastern United States. As of September 30, 1997, ICP-IV's systems served the following number of basic subscribers and encompassed the following number of homes passed:
BASIC HOMES SUBSCRIBERS PASSED ----------- ------- Nashville/Mid-Tennessee Cluster................ 331,833 519,534 Greenville/Spartanburg Cluster................. 150,632 212,737 Knoxville/East Tennessee Cluster............... 100,275 140,448 ------- ------- Total................................ 582,740 872,719 ======= =======
The accompanying unaudited interim consolidated financial statements include the accounts of ICP-IV and its directly and indirectly, majority-owned subsidiaries, InterMedia Partners IV, Capital Corp. ("IPCC"), IP-IV, InterMedia Partners Southeast ("IPSE"), InterMedia Partners of Tennessee ("IP-TN"), InterMedia Partners of West Tennessee, L.P. ("IPWT"), and Robin Media Group, Inc. ("RMG"). ICP-IV and its majority-owned subsidiaries are collectively referred to as the "Company." All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles and are presented in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial information. Accordingly, certain footnote disclosures have been condensed or omitted. In the Company's opinion, the interim unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company's financial position as of September 30, 1997, and its results of operations and cash flows for the three and nine months ended September 30, 1997. The results of operations for these periods are not necessarily indicative of results that may be expected for the year ending December 31, 1997. These consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto contained in its Form 10-K for the year ended December 31, 1996. 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 these estimates. Certain prior period items have been reclassified in the accompanying financial statements to conform with the 1997 presentation. 5 8 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Allocation of profits and losses Profits and losses are allocated in accordance with the provisions of ICP-IV's amended and restated partnership agreement, dated as of August 5, 1997, generally as follows: Losses are allocated first to the partners other than the preferred limited partner, and thereafter to the preferred limited partner, in each case to the extent of and in accordance with relative capital contributions; second, to the partners which loaned money to the Partnership to the extent of and in accordance with relative loan amounts; and third, to the partners in accordance with relative capital contributions. Profits are allocated first to the preferred limited partner in an amount sufficient to yield an 11.75% return compounded semi-annually on its capital contributions; second, to the partners which loaned money to the Partnership to the extent of and proportionate to previously allocated losses relating to such loans; third, among the partners, other than the preferred limited partner, in accordance with relative capital contributions, in an amount sufficient to yield a pre-tax return of 15% per annum on their capital contributions; and fourth, 20% to a certain limited partner and 80% to the limited and general partners, other than the preferred limited partner, in accordance with relative capital contributions. 3. ACQUISITIONS On July 30, 1996 and August 1, 1996, the Company borrowed $558,000 under a new bank term loan and revolving credit agreement (the "Bank Facility"), issued $292,000 in senior notes (the "Notes"), and received equity contributions from its partners of $360,000, consisting of: $190,550 in cash; $117,600 representing the fair market value of certain cable television systems (the "Greenville/Spartanburg System") contributed, net of cash paid to the contributing partner of $119,775; $13,333 representing the fair market value of general and limited partner interests in IPWT, an affiliate; $36,667 in exchange for notes receivable from IPWT; and $1,850 in the form of a note receivable from InterMedia Capital Management IV, L.P. ("ICM-IV"), the former 1.1% general partner of ICP-IV (see Note 7 -- Related Party Transactions). The Bank Facility, the Notes and the equity contributions are referred to as the "Financing." On July 30, 1996, the Company acquired cable television systems serving approximately 360,100 basic subscribers in Tennessee, South Carolina and Georgia through the Company's acquisition of controlling equity interests in IPWT and Robin Media Holdings, Inc. ("RMH"), an affiliate, and through the equity contribution of the Greenville/Spartanburg System to the Company by affiliates of Tele-Communications, Inc. ("TCI"). The Company acquired all of the general and limited partner interests of IPWT in exchange for a $13,333 limited partner interest in ICP-IV. Concurrently, General Electric Capital Corporation ("GECC") transferred to ICP-IV its $55,800 note receivable from IPWT and related interest receivable of $3,356 in exchange for an $11,667 limited partner interest in ICP-IV, a $25,000 preferred limited partner interest in ICP-IV and cash of $22,489. InterMedia Partners V, L.P. ("IP-V"), a former affiliate, owned all of the outstanding equity of RMH prior to the Company's acquisition of a majority of the voting interests in RMH. In conjunction with a recapitalization of RMH, ICP-IV purchased 3,285 shares of RMH's Class A Common Stock for $329. Concurrently, a wholly owned subsidiary of TCI converted its outstanding loan to IP-V into a limited partnership interest and, in dissolution of the IP-V partnership, received 365 shares of RMH Class B Common Stock valued at $37 and 12,000 shares of RMH Redeemable Preferred Stock valued at $12,000. Upon 6 9 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) completion of the recapitalization, the Company has 60% of the voting interests of RMH, with TCI owning the remaining 40%. In connection with the acquisition, the Company assumed approximately $331,450 of long-term debt and $11,565 of accrued interest, which was repaid with proceeds from the Financing. Upon consummation of the acquisition, RMH merged into its wholly owned operating subsidiary RMG. All of the RMH stock just described was converted as a result of the merger into capital stock of RMG with the same terms. Affiliates of TCI contributed cash and transferred their interests in the Greenville/Spartanburg System to the Company in exchange for a 49.0% limited partner interest in ICP-IV and an assumption of $119,775 of debt which was simultaneously repaid by the Company with proceeds from the Financing. The cash paid of $119,775 for debt assumed has been recorded as a distribution to TCI in the accompanying consolidated financial statements. TCI held substantial direct and indirect ownership interests in each of RMH, IPWT and the Greenville/Spartanburg System. As a result of TCI's substantial continuing interest in RMG, IPWT and the Greenville/Spartanburg System after the Company's acquisitions, the acquired assets of these entities have been accounted for at their historical basis as of the acquisition date. Results of operations for these entities have been included in the Company's consolidated results only from the acquisition date. On August 1, 1996, the Company acquired certain cable television systems of Viacom in metropolitan Nashville, Tennessee (the "Nashville System") for an aggregate purchase price of $315,333.The Company's acquisition of the Nashville System has been accounted for as a purchase in accordance with Accounting Principles Bulletin No. 16 ("APB16") and the Nashville System's results of operations have been included in the Company's consolidated results only from the date of the acquisition. During the year ended December 31, 1996, the Company acquired other cable television systems serving approximately 59,600 basic subscribers primarily in central and eastern Tennessee for an aggregate purchase price of $102,701 (the "Miscellaneous Acquisitions"). These acquisitions have also been accounted for as purchases in accordance with APB16. Accordingly, results of operations of the Miscellaneous Acquisitions have been included in the Company's consolidated results only from the dates of acquisition. 4. ESCROWED INVESTMENTS HELD TO MATURITY The Company's investments held to maturity are carried at amortized cost and consist of U.S. Treasury Notes with maturities ranging from one to twenty-two months. The investments are held in an escrow account to be used by the Company to make interest payments on the Company's senior notes (see Note 5 -- Long-Term Debt). During the nine months ended September 30, 1997, the Company paid interest of $32,994 on the senior notes with the proceeds from and interest earned on escrowed investments that matured on January 31 and July 31, 1997. The fair value and maturities of U.S. Treasury Notes held in escrow are as follows:
DECEMBER 31, 1996 SEPTEMBER 30, 1997 ----------------------- ----------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE -------- ---------- -------- ---------- Matures within 1 year........................... $ 28,237 $ 28,333 $ 29,359 $ 29,780 Matures between 1 and 2 years................... 60,518 61,019 31,148 31,513 ------- ------- ------- ------- Total................................. $ 88,755 $ 89,352 $ 60,507 $ 61,293 ======= ======= ======= =======
The fair values of the investments are based on quoted market prices. 7 10 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) 5. LONG-TERM DEBT Long-term debt consists of the following:
SEPTEMBER DECEMBER 31, 30, 1996 1997 ------------ --------- Bank revolving credit facility, $475,000 commitment as of September 30, 1997, interest currently at LIBOR plus 1.25% payable quarterly, matures July 1, 2004.......... $334,000 $ 347,000 Bank term loan; interest at LIBOR plus 2.375% payable quarterly, matures January 1, 2005..................... 220,000 220,000 11 1/4% senior notes, interest payable semi-annually, due August 1, 2006......................................... 292,000 292,000 -------- -------- $846,000 $ 859,000 ======== ========
The Company's bank debt is outstanding under the revolving credit facility and term loan agreement executed by IP-IV and dated July 30, 1996. The revolving credit facility currently provides for $475,000 of available credit. Starting January 1, 1999, revolving credit facility commitments will be permanently reduced semi-annually by increments ranging from $22,500 to $47,500 through maturity on July 1, 2004. The term loan requires semi-annual principal payments of $500 starting January 1, 1999 through January 1, 2004, and final principal payments in two equal installments of $107,250 on July 1, 2004 and January 1, 2005. Advances under the Bank Facility are available under interest rate options related to the base rate of the administrative agent for the Bank Facility ("ABR") or LIBOR. Interest rates on borrowings under the term loan are at LIBOR plus 2.375% or ABR plus 1.125%. Interest rates vary on borrowings under the revolving credit facility from LIBOR plus 0.75% to LIBOR plus 1.75% or ABR to ABR plus 0.50% based on the Company's ratio of senior debt to annualized quarterly operating cash flow. For purposes of this computation, senior debt, as defined, excludes the 11 1/4% senior notes. The Bank Facility requires quarterly interest payments, or more frequent interest payments if a shorter period is selected under the LIBOR option, and quarterly payment of fees on the unused portion of the revolving credit facility at 0.375% per annum when the senior leverage ratio is greater than 4.0:1.0 and at 0.25% when the senior leverage ratio is less than or equal to 4.0:1.0. At December 31, 1996 and September 30, 1997, the interest rate on borrowings outstanding under the revolving credit facility was 7.125% and 7.06%, respectively. The Company has entered into interest rate swap agreements in the aggregate notional principal amount of $120,000 to establish long-term fixed interest rates on its variable senior bank debt. Under the swap agreements, the Company pays quarterly interest at fixed rates ranging from 6.28% to 6.3225% and receives quarterly interest payments equal to LIBOR. The differential to be paid or received in connection with an individual swap agreement is accrued as interest rates change over the period to which the payments or receipts relate. The agreements expire between May 1999 and February 2000. The estimated fair value of the interest rate swaps, which is gross of unrealized market gains or losses, is based on the current value in the market for transactions with similar terms and adjusted for the holding period. At December 31, 1996 and September 30, 1997, the fair market value of the interest rate swaps was $(2,700) and $(1,850), respectively. Borrowings under the Bank Facility are secured by the capital stock and partnership interests of IP-IV's subsidiaries. The 11 1/4% senior notes will be redeemable at the option of the Company, in whole or in part, subsequent to August 1, 2001 at specified redemption prices which will decline in equal annual increments and range from 8 11 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) 105.625% beginning August 1, 2001 to 100.0% of the principal amount beginning August 1, 2004 through the maturity date, plus accrued interest. As of December 31, 1996 and September 30, 1997, ICP-IV has $90,949 and $61,074, respectively, in pledged securities, including interest, which represent sufficient funds to provide for payment in full of interest on the Notes through August 1, 1999 and are pledged as security for repayment of the Notes under certain circumstances. Proceeds from the pledged securities will be used by ICP-IV to make interest payments on the Notes through August 1, 1999. ICP-IV is the issuer of the Notes and, as a holding company, has no direct operations. The Notes are structurally subordinated to borrowings of IP-IV under the Bank Facility. The Bank Facility restricts IP-IV and its subsidiaries from paying dividends and making other distributions to ICP-IV. The debt agreements contain certain covenants which restrict the Company's ability to encumber assets, make investments or distributions, retire partnership interests, pay management fees currently, incur or guarantee additional indebtedness and purchase or sell assets. The debt agreements include financial covenants which require minimum interest and debt coverage ratios and specify maximum debt to cash flow ratios. Based on recent trading prices of the Notes, the fair value of these securities at December 31, 1996 and September 30, 1997 is $297,665 and $321,930, respectively. Borrowings under the Bank Facility are at rates that would be otherwise currently available to the Company. Accordingly, the carrying amounts of bank borrowings outstanding as of December 31, 1996 and September 30, 1997 approximate their fair value. 6. COMMITMENTS AND CONTINGENCIES The Company is committed to provide cable television services under franchise agreements with remaining terms of up to nineteen years. Franchise fees of up to 5% of gross revenues are payable under these agreements. Current FCC regulations require that cable television operators obtain permission to retransmit major network and certain local television station signals. The Company has entered into long-term retransmission agreements with all applicable stations in exchange for in-kind and/or other consideration. The Company is subject to litigation and other claims in the ordinary course of business. In the opinion of management, the ultimate outcome of any existing litigation or other claims will not have a material adverse effect on the Company's financial condition or results of operations. 7. RELATED PARTY TRANSACTIONS ICM-IV provides certain management services to ICP-IV and its subsidiaries for a per annum fee of 1% of the Company's total non-preferred capital contributions, or $3,350, of which ICM-IV will defer 20% per annum, payable in each following year, in order to support the Company's bank debt. However, pursuant to ICP-IV's Limited Partnership Agreement, ICM-IV's first year management fees of $3,350 were prepaid in July and August 1996. ICM-IV management fees of $838 and $2,513 were charged to expense for the three and nine months ended September 30, 1997, respectively. ICM-IV management fee expense was not recognized during the first seven months of 1996, until the Company's capital contributions were received from its partners. ICM-IV management fee expense for the three and nine months ended September 30, 1996 amounted to $721. InterMedia Management, Inc. ("IMI") is the managing member of InterMedia Capital Management, LLC ("ICM-IV LLC"), a newly formed limited liability company, which was appointed the managing general partner of ICP-IV effective August 5, 1997. Prior to August 5, 1997, IMI was wholly owned by the 9 12 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) former managing general partner of ICM-IV, the former general partner of ICP-IV. IMI has entered into agreements with all of ICP-IV's subsidiaries to provide accounting and administrative services at cost. IMI also provides such services to other cable systems which are affiliates of the Company. Administrative fees charged by IMI were $991 and $1,448 for the three months ended September 30, 1996 and 1997, respectively, and $1,287 and $4,536 for the nine months ended September 30, 1996 and 1997, respectively. Receivable from affiliate represents advances to IMI, net of administrative fees charged by IMI, and operating expenses paid by IMI on behalf of ICP-IV's subsidiaries. On August 5, 1997, ICM-IV LLC purchased from ICM-IV a .001% general partner interest in ICP-IV. ICM-IV's remaining 1.123% general partner interests in ICP-IV were converted to limited partner interests, and ICM-IV LLC was appointed the managing general partner of the Company. (See Part II, Item 5 "Other Information -- Change in Managing General Partner.") As an affiliate of TCI, ICP-IV is able to purchase programming services from a subsidiary of TCI. Management believes that the overall programming rates made available through this relationship are lower than ICP-IV could obtain separately. The TCI subsidiary is under no obligation to continue to offer such volume rates to ICP-IV, and such rates may not continue to be available in the future should TCI's ownership in ICP-IV significantly decrease or if TCI or the programmers should otherwise decide not to offer such participation to the Company. Programming fees charged by the TCI subsidiary for the three months ended September 30, 1996 and 1997 amounted to $6,549 and $10,292, respectively, and $7,826 and $30,585 for the nine months ended September 30, 1996 and 1997, respectively. Payable to affiliates includes programming fees payable to the TCI subsidiary of $3,353 and $3,487 as of December 31, 1996 and September 30, 1997, respectively. 8. CHANNEL LAUNCH REVENUE During the nine months ended September 30, 1997, the Company received payments of $8,014 from certain programmers to launch and promote their new channels. Of the total amount received, the Company recognized advertising revenue of $174 and $1,627 during the three and nine months ended September 30, 1997, respectively, for advertisements provided by the Company to promote the new channels. The remaining payments received from the programmers are being amortized over the respective terms of the launch agreements which range between five and ten years. 9. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS During the nine months ended September 30, 1996 and 1997, the Company paid interest of $20,128 and $63,776, respectively. As described in Note 3, during the nine months ended September 30, 1996 the Company acquired several cable television systems located in Tennessee and Georgia. In conjunction with the acquisitions, assets acquired and liabilities assumed were as follows: Fair value of assets acquired................................ $416,996 Liabilities assumed, net of current assets................... (1,259) Cash acquired in connection with RMG and IPWT acquisitions... (2,226) -------- Net cash paid................................................ $413,511 ========
10 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended to assist in an understanding of significant changes and trends related to the results of operations and financial condition of the Company and should be read in conjunction with the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Form 10-K for the year ended December 31, 1996. This discussion contains, in addition to historical information, forward-looking statements that are based upon certain assumptions and are subject to a number of risks and uncertainties. The Company's actual results may differ significantly from the results predicted in such forward-looking statements. This discussion and analysis should be read in conjunction with the separate financial statements of the Company. OVERVIEW The Company generates substantially all of its revenues from monthly subscription fees for basic, expanded basic (also referred to as cable programming services, "CPS"), premium and ancillary services (such as rental of converters and remote control devices) and installation charges. Additional revenues have been generated from local and national advertising sales, pay-per-view programming, internet access services and home shopping commissions. The Company has reported net losses primarily caused by high levels of depreciation and amortization and interest expense. Management believes that net losses are common for cable television companies and that the Company will incur net losses in the future. Historically, certain programmers have periodically increased the rates charged for their services. Management believes that such rate increases are common for the cable television industry and that the Company will experience program fee rate increases in the future. Acquisitions During the year ended December 31, 1996 the Company acquired cable television systems serving approximately 567,200 basic subscribers in Tennessee, South Carolina and Georgia through (i) the Company's acquisition on July 30, 1996 of controlling equity interests in IPWT and RMG, (ii) the equity contribution on July 30, 1996 of the Greenville/Spartanburg System to the Company by TCI, (iii) the purchase of the Nashville System on August 1, 1996, (iv) the purchases on January 29, 1996 and February 1, 1996 of cable television systems serving approximately 55,800 basic subscribers, and (v) the purchases on May 2, 1996, July 1, 1996, and August 6, 1996 of cable television systems serving approximately 3,800 basic subscribers (together with the January 29, 1996 and the February 1, 1996 acquisitions, the "Miscellaneous Acquisitions"). The Company paid cash of approximately $418.0 million, including related acquisition costs and fees, for the Miscellaneous Acquisitions and the purchase of the Nashville System. The Miscellaneous Acquisitions and the purchase of the Nashville System have been accounted for as purchases and results of operations are included in the Company's consolidated results only from the dates the systems were acquired. In connection with the Company's acquisitions of RMG and IPWT, the Company paid cash of $0.3 million for its equity interests in RMG and repaid in cash $365.5 million of the acquired entities' indebtedness, including $14.9 million of accrued interest. The Company also paid cash to TCI of $119.8 million in connection with TCI's contribution of the Greenville/Spartanburg System to the Company. The cash payment to TCI has been recorded as an equity distribution in the Company's December 31, 1996 consolidated financial statements. The Company acquired IPWT in exchange for limited partner interests in ICP-IV of $13.3 million, and extinguished $36.7 million of IPWT's indebtedness in exchange for non-cash consideration consisting of a limited partner interest in ICP-IV of $11.7 million and a preferred limited partner interest in ICP-IV of $25.0 million. TCI received non-cash consideration of $117.6 million in the form of a limited partner interest in ICP-IV in exchange for its contribution of the Greenville/Spartanburg System to the Company. 11 14 IPWT, RMG and the Greenville/Spartanburg System were acquired from entities in which TCI had a significant ownership interest. Because of TCI's substantial continuing interest in these entities as a 49.0% limited partner in ICP-IV, these acquisitions were accounted for at their historical cost basis as of the acquisition date. Results of these entities are included in the Company's consolidated results of operations only from the date of acquisition. Rate Regulation and Competition The Company's operations are regulated by the Federal Communications Commission ("FCC") and local franchise authorities under the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") and the Telecommunications Act of 1996 (the "1996 Act"). Certain of the Company's cost of service cases justifying rates for the CPS or expanded basic tier of service are pending before the FCC. Additionally, pursuant to FCC regulations, several local franchising authorities are reviewing the Company's basic rate justifications and several other franchising authorities have requested that the FCC review the Company's basic rate justifications. Management believes that the Company has substantially complied in all material respects with related FCC regulations and the outcome of these proceedings will not have a material adverse effect on the Company. The Company is subject to competition from alternative providers of video services, including wireless service providers and local telephone companies. BellSouth has applied for cable franchises in certain areas where the Company operates. However, BellSouth has since acknowledged it is postponing its request for cable franchises in the state of Tennessee. On October 22, 1996 the Tennessee Cable Telecommunications Association and the Cable Television Association of Georgia filed a formal complaint with the FCC challenging certain alleged acts and practices that BellSouth is taking in certain areas of Tennessee and Georgia including, among others, subsidizing its deployment of cable television facilities with regulated services revenues that are not subject to competition. The Company is joined by several other cable operators as the "Complainant Cable Operators" in the complaint. The cross-subsidization claims are currently pending before the FCC's Common Carrier Bureau. The Company cannot predict the likelihood of success on this complaint. See Part II, Item 5 "Other Information -- Certain Factors Affecting Future Results -- Competition in Cable Television Industry; Rapid Technological Change." The Company cannot predict the extent to which competition will materialize or, if competition materializes, the extent of its effect on the Company. Transactions with Affiliates Due to TCI's equity ownership in the Company, the Company is able to purchase programming services from Satellite Services, Inc. ("SSI"), a subsidiary of TCI. Management believes that the aggregate programming rates obtained through this relationship are lower than the rates the Company could obtain through arm's-length negotiations with third parties. TCI is under no obligation to offer such benefits to the Company. The loss of the relationship with TCI could adversely affect the financial position and results of operations of the Company. During the three months ended September 30, 1996 and 1997, the Company paid 76.6% and 74.3%, respectively, of its program fees to SSI. During the nine months ended September 30, 1996 and 1997, the Company paid 77.2% and 76.0%, respectively, of its program fees to SSI. The Company and its affiliated entities, InterMedia Partners, a California limited partnership, and InterMedia Partners III, L.P. and their consolidated subsidiaries (together the "Related InterMedia Entities") have entered into agreements ("Administrative Agreements") with IMI, pursuant to which IMI provides accounting, operational, marketing, engineering, legal, regulatory compliance and other administrative services at cost. Effective August 5, 1997, IMI owns 95.0% of the equity interests in ICM-IV LLC, the managing general partner of the Company, and IMI is wholly owned by Robert J. Lewis. (See Part II, Item 5 "Other Information --Change in Managing General Partner.") Generally, IMI charges costs to the Related InterMedia Entities based on each entity's number of basic subscribers as a percentage of total basic subscribers for all of the Related InterMedia Entities. In addition to changes in IMI's aggregate cost of providing such services, changes in the number of the Company's basic subscribers and/or changes in the number of basic subscribers for the other Related InterMedia Entities will affect the level of IMI costs charged to the Company. IMI charged $1.0 million and $1.4 million to the Company for the three months 12 15 ended September 30, 1996 and 1997, respectively, and $1.3 million and $4.5 million for the nine months ended September 30, 1996 and 1997, respectively. ICM-IV provides certain management services to the Company for an annual fee of one percent of the Company's total non-preferred capital contributions. See Part II, Item 5 "Other Information -- Certain Factors Affecting Future Results -- Related Party Transactions." In February of this year Leo J. Hindery, Jr. was appointed president of TCI. As part of Mr. Hindery's transition to TCI, substantially all of Mr. Hindery's interests in ICM-IV and its general partner IMI, as well as various other management partnerships for the Related InterMedia Entities, have been converted or sold. Pursuant to these transactions, Mr. Hindery no longer holds a controlling interest in IMI or ICM-IV. See Part II, Item 5 "Other information --Change in Managing General Partner." RESULTS OF OPERATIONS As described above, the Company acquired all of its cable television systems during the nine months ended September 30, 1996 ("1996 Acquisitions"). A significant portion of these acquisitions occurred in July and August 1996. Results of operations of the acquired cable television systems have been included in the Company's results of operations only from the dates the systems were acquired. The Company had no operations prior to its first acquisition on January 29, 1996. As a result, the comparability of the Company's results of operations for the three months and nine months ended September 30, 1996 and 1997 is affected by the 1996 Acquisitions, particularly by the acquisitions which closed on July 30, 1996 and August 1, 1996 ("Late 1996 Acquisitions").
THREE MONTHS ENDED SEPTEMBER 30, -------------------------------------------- 1996 1997 -------------------- --------------------- PERCENTAGE PERCENTAGE AMOUNT OF REVENUE AMOUNT OF REVENUE ------- ---------- -------- ---------- (UNAUDITED) Statement of Operations Data: Revenue................................................ $39,457 100.0% $ 63,835 100.0% Costs and Expenses: Program fees......................................... 8,555 21.7 13,849 21.7 Other direct and operating expenses(1)............... 4,829 12.2 6,995 11.0 Selling, general and administrative(2)............... 7,374 18.7 11,893 18.6 Management and consulting fees....................... 721 1.8 838 1.3 Depreciation and amortization........................ 21,786 55.2 30,648 48.0 ------- ----- -------- ----- Loss from operations................................... (3,808) (9.7) (388) (0.6) Interest and other income.............................. 4,307 10.9 1,217 1.9 Gain on sale of investments............................ 286 0.7 Interest expense....................................... (14,189) (36.0) (19,754) (30.9) Other expense.......................................... (525) (1.3) (134) (0.2) Income tax (expense) benefit........................... (388) (1.0) 1,338 2.1 Extraordinary gain on early extinguishment of debt, net of tax............................................... 18,483 46.8 Minority interest...................................... (464) (1.2) (225) (0.4) ------- ----- -------- ----- Net income (loss)...................................... $ 3,702 9.4% $(17,946) (28.1)% ======= ===== ======== ===== Other Data: EBITDA(3).............................................. $17,978 45.6% $ 30,260 47.4%
13 16
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------------- 1996 1997 -------------------- --------------------- PERCENTAGE PERCENTAGE AMOUNT OF REVENUE AMOUNT OF REVENUE ------- ---------- -------- ---------- (UNAUDITED) Statement of Operations Data: Revenue................................................ $47,391 100.0% $186,582 100.0% Costs and Expenses: Program fees......................................... 10,136 21.4 40,244 21.6 Other direct and operating expenses(1)............... 5,731 12.1 20,336 10.9 Selling, general and administrative(2)............... 8,975 18.9 35,476 19.0 Management and consulting fees....................... 721 1,5 2,513 1.3 Depreciation and amortization........................ 26,521 56.0 97,051 52.0 ------- ----- -------- ----- Loss from operations................................... (4,693) (9.9) (9,038) (4.8) Interest and other income.............................. 4,759 10.0 3,998 2.1 Gain on sale of investments............................ 286 0.6 Interest expense....................................... (18,191) (38.4) (58,631) (31.4) Other expense.......................................... (526) (1.1) (436) (0.2) Income tax (expense) benefit........................... (388) (0.8) 4,801 2.6 Extraordinary gain on early extinguishment of debt, net of tax............................................... 18,483 39.0 Minority interest...................................... (464) (1.0) (653) (0.3) ------- ----- -------- ----- Net loss............................................... $ (734) (1.5)% $(59,959) (32.1)% ======= ===== ======== ===== Other Data: EBITDA(3).............................................. $21,828 46.1% $ 88,013 47.2%
- --------------- (1) Other direct and operating expenses consist of expenses relating to installations, plant repairs and maintenance and other operating costs directly associated with revenues. (2) Selling, general and administrative expenses consist mainly of costs related to system offices, customer service representatives and sales and administrative employees. (3) EBITDA is defined as earnings before interest, income taxes, depreciation and amortization, minority interest and other expense. EBITDA is a commonly used measure of performance in the cable industry. However, it does not purport to represent cash flows from operating activities in related Consolidated Statements of Cash Flows and should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. For information concerning cash flows from operating, investing and financing activities, see Unaudited Financial Statements included elsewhere in this Report. Revenues The Company's revenues for the three and nine months ended September 30, 1997 increased to $63.8 million and $186.6 million, respectively, as compared with $39.5 million and $47.4 million for the same periods ended September 30, 1996, respectively, due primarily to the 1996 Acquisitions. The Company's total revenues consisted of basic service revenues which represented 68.1% of total revenues for the three and nine months ended September 30, 1997, respectively, compared to 69.1% and 70.4% for the same periods ended September 30, 1996, respectively. The decreases in basic service revenues as a percentage of total revenues is due primarily to a proportionately higher volume of advertising sales, converter rental and other services provided by the systems acquired on July 30 and August 1, 1996, as compared to those systems acquired during the first six months of 1996. Pay service revenues of $10.6 million and $30.8 million for the three and nine months ended September 30, 1997, respectively, represented 16.6% and 16.5% of total revenues, compared to 17.0% and 16.7% for the three and nine months ended September 30, 1996, respectively. Other service revenues represented 15.3% and 15.4% of total revenues for the three and nine months ended September 30, 1997, respectively, compared to 13.9% and 12.9% for the three and nine months ended 14 17 September 30, 1996, respectively. Other service revenues for the three and nine months ended September 30, 1997 included non-recurring advertising revenue of $0.2 million and $1.6 million, respectively, earned from certain programmers to promote and launch their new services. The Company also recognized $0.5 million and $0.9 million of revenues for the three and nine months ended September 30, 1997, respectively, representing a portion of the remaining payments received during April and May 1997 from such programmers to launch and promote their new channels (see Part I, Item 1 "Financial Statements -- Note 8 Channel Launch Revenue"). The Company served approximately 582,700 basic subscribers who subscribed to 433,600 pay units at September 30, 1997, compared to 570,200 basic subscribers and 432,600 pay units at September 30, 1996. Average basic service revenue per basic subscriber for the three and nine months ended September 30, 1997 was $24.92 and $24.42, respectively, compared to $22.46 and $21.93 for the same periods ended September 30, 1996, respectively. The increase represents rate increases implemented by certain of the Company's cable systems in September 1996 and during the nine months ended September 30, 1997 and higher effective basic service rates for the systems acquired on July 30 and August 1, 1996, compared to those systems acquired during the first six months of 1996. Average pay service revenue per pay unit for the three and nine months ended September 30, 1997 was $8.02 and $7.70, respectively, compared to $8.21 and $9.13 for the three and nine months ended September 30, 1996, respectively. The decrease between the 1997 and 1996 rates is due primarily to marketing promotions offered by the Company and the impact of the systems acquired on July 30 and August 1, 1996 with lower average pay service revenue per pay unit compared with those systems acquired during the first six months of 1996. The increased average pay service revenue per pay unit of $8.02 for the three months ended September 30, 1997, compared to $7.70 for the nine months ended September 30, 1997 is due primarily to an increase in pay-per-view revenue which resulted from a popular boxing event which took place during the three months ended September 30, 1997. Program Fees Program fees for the three and nine months ended September 30, 1997 increased to $13.8 million and $40.2 million, respectively, as compared with $8.6 million and $10.1 million for the same periods ended September 30, 1996, respectively, due primarily to the Late 1996 Acquisitions. Program fees for the three and nine months ended September 30, 1997 represent 25.6% and 25.5%, respectively, of basic and pay service revenues compared to 25.2% and 24.6% for the three and nine months ended September 30, 1996, respectively. The increase as a percentage of basic and pay service revenues reflects the impact of program fee increases, which resulted from higher rates charged by certain programmers and the higher number of channels offered by the systems acquired on July 30 and August 1, 1996 compared to those acquired during the first six months of 1996 without the proportionately higher cable service revenues. Other Direct Expenses Other direct expenses, which include costs related to technical personnel, franchise fees and repairs and maintenance, amounted to $7.0 million and $20.3 million for the three and nine months ended September 30, 1997, respectively, compared to $4.8 million and $5.7 million for the same periods ended September 30, 1996, respectively. The increase is a result of the Late 1996 Acquisitions. Other direct expenses as a percentage of total revenues, before non-recurring launch revenue, remained relatively constant at 11.1% and 11.0% for the three and nine months ended September 30, 1997, respectively, compared to 12.2% and 12.1% for the same periods ended September 30, 1996, respectively. The slight decrease for the three and nine months ended September 30, 1997 is due primarily to a decrease in franchise fee expense. During the nine months ended September 30, 1997 certain of the Company's systems began passing through franchise fee expenses to its subscribers. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses for the three and nine months ended September 30, 1997 increased to $11.9 million and $35.5 million, respectively, compared to $7.4 million and $9.0 million for the same periods ended September 30, 1996, respectively, due primarily to the Late 1996 Acquisitions. SG&A as a percentage of total revenues, before non-recurring launch revenue, remained 15 18 relatively constant at 18.9% and 19.3% for the three and nine months ended September 30, 1997, respectively, compared to 18.7% and 18.9% for the same periods ended September 30, 1996, respectively. Management and Consulting Fees Management and consulting fees of $0.8 million and $2.5 million for the three and nine months ended September 30, 1997, respectively, represent fees charged by ICM-IV. ICM-IV provides certain management services to the Company for a per annum fee of 1.0% of the Company's total non-preferred capital contributions, or $3.4 million. ICM-IV management fees were not accrued on the Company's books prior to July 30, 1996, the date on which the Company's capital contributions were received from its partners. ICM-IV management fees for the three and nine months ended September 30, 1996 amounted to $0.7 million. Depreciation and Amortization Depreciation and amortization expense for the three and nine months ended September 30, 1997 increased to $30.6 million and $97.1 million, respectively, compared to $21.8 million and $26.5 million for the same periods ended September 30, 1996, respectively, as a result of the Late 1996 Acquisitions and capital expenditures of $111.8 million during the twelve months ended September 30, 1997, offset by the Company's use of an accelerated depreciation method that results in higher depreciation expense being recognized in the earlier years and lower expense in the later years. Interest and Other Income Interest and other income of $1.2 million and $4.0 million for the three and nine months ended September 30, 1997, respectively, is comprised primarily of $0.8 million and $3.1 million of interest income earned on the escrowed securities for the three and nine months ended September 30, 1997, respectively. Interest and other income also includes $0.1 million and $0.3 million of interest income earned on cash and cash equivalents for the three and nine months ended September 30, 1997, respectively. Interest and other income of $4.3 million and $4.8 million for the three and nine months ended September 30, 1996, respectively, is comprised of the following: (i) equity distribution income of $2.9 million received from a former investee of RMG during the three months ended September 30, 1996, (ii) $0.1 million and $0.4 million of interest income earned during the three and nine months ended September 30, 1996, respectively, on a $15.0 million loan to RMH prior to the Company's acquisition of RMH on July 30, 1996, (iii) $0.9 million of interest income earned on the escrowed securities during the two months ended September 30, 1996, and (iv) other income and interest earned on cash and cash equivalents of $0.4 million and $0.6 million during the three and nine months ended September 30, 1996, respectively. The Company had no escrowed securities until it issued its 11.25% senior notes on July 30, 1996. Gain on Sale of Investments The gain on sale of investments of $0.3 million for the three and nine months ended September 30, 1996 resulted from the sale of certain limited partner interests in August 1996. Interest Expense Interest expense increased to $19.8 million and $58.6 million for the three and nine months ended September 30, 1997, respectively, compared to $14.2 million and $18.2 million for the three and nine months ended September 30, 1996, respectively, due primarily to higher debt balances during 1997 compared to the same periods in 1996. Interest expense for the three and nine months ended September 30, 1997 includes interest on borrowings outstanding under the Bank Facility and the Notes, which were incurred to finance the Company's acquisitions in July and August 1996. Interest expense for the three and nine months ended September 30, 1996 includes interest on a bridge loan obtained by a subsidiary of ICP-IV for acquisitions of certain cable television systems during the first seven months of 1996 and two month's interest on borrowings outstanding under the Bank Facility and the Notes. 16 19 Provision for Income Taxes As partnerships, the tax attributes of ICP-IV and its subsidiaries other than RMG and IPCC accrue to the partners. Income tax benefit of $1.3 million and $4.8 million for the three and nine months ended September 30, 1997, respectively, and income tax expense of $0.4 million for the three and nine months ended September 30, 1996, has been recorded based on RMG's stand alone tax provision. RMG's tax expense for the periods ended September 30, 1996, versus tax benefit for the periods ended September 30, 1997, resulted primarily from its non-recurring equity distribution income of $2.9 million and gain on sale of certain limited partner interests of $0.3 million recognized during the two months ended September 30, 1996, net of loss from operations. Prior to ICP-IV's acquisition of RMG on July 30, 1996, the Company had no income tax expense or benefit. Extraordinary Gain on Early Extinguishment of Debt The extraordinary gain on early extinguishment of debt of $18.5 million for the three and nine months ended September 30, 1996, includes (i) costs paid in July 1996 associated with the prepayment of RMG's long-term debt and (ii) recognition of the unamortized portion in July 1996 of a debt restructuring credit associated with the restructuring of IPWT's long-term debt in 1994. Minority Interest Minority interest for the three and nine months ended September 30, 1997, represents accrued dividends of $0.2 million and $0.7 million, respectively, on RMG's mandatorily redeemable preferred stock held by a subsidiary of TCI as the minority shareholder of RMG's common stock. Minority interest for the three and nine months ended September 30, 1996 includes accrued dividends of $0.1 million on RMG's mandatorily redeemable preferred stock and the allocation of $0.3 million of RMG's income for the period from July 30, 1996 through September 30, 1996 to the minority shareholder. Prior to ICP-IV's acquisition of RMG on July 30, 1996, ICP-IV's consolidated subsidiaries were wholly-owned by ICP-IV. Net Income (Loss) The Company's net loss for the three and nine months ended September 30, 1997 increased to $17.9 million and $60.0 million, respectively, compared to net loss before extraordinary gain on early extinguishment of debt, net of tax of $14.8 million and $19.2 million for the three and nine months ended September 30, 1996, respectively. The increase is due primarily to the Late 1996 Acquisitions, which resulted in significantly higher depreciation, amortization and interest expenses relative to the increased revenues. LIQUIDITY AND CAPITAL RESOURCES The following table sets forth certain statement of cash flows information of the Company (in thousands) for the nine months ended September 30, 1996 and 1997. The Company consummated acquisitions of cable television systems in January, February, May, July and August 1996. Cash flows from operating activities of the acquired systems have been included only from the dates of acquisition.
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 1996 1997 --------- -------- (UNAUDITED) STATEMENT OF CASH FLOWS DATA: Cash flows from operating activities.......................... $ 5,340 $ 37,168 Cash flows from investing activities.......................... (525,403) (54,255) Cash flows from financing activities.......................... 533,584 12,869
17 20 NINE MONTHS ENDED SEPTEMBER 30, 1996 The Company's cash balance increased from zero as of January 1, 1996 to $13.5 million as of September 30, 1996. Cash Flows From Operating Activities The Company generated cash flows from operating activities of $5.3 million for the nine months ended September 30, 1996 reflecting (i) income from operations of $21.8 million before non-cash charges to income for depreciation and amortization of $26.5 million; (ii) interest and other income received of $3.8 million; (iii) interest paid of $20.1 million; and (iv) other changes in working capital and other expenses of approximately $0.2 million. Cash Flows From Investing Activities The Company used cash during the nine months ended September 30, 1996 of $415.7 million to fund the 1996 Acquisitions. The Company also received cash of $2.2 million as part of IPWT's and RMG's total assets acquired. In April 1996, prior to the Company's purchase of RMG, the Company loaned $15.0 million to RMG. The Company purchased property and equipment of $8.3 million during the nine months ended September 30, 1996 consisting primarily of cable system upgrades and rebuilds, plant extensions, converters and initial subscriber installations. Under the terms of the related indenture, the Company purchased approximately $88.8 million in escrowed securities that, together with interest thereon, represent funds sufficient to provide for payment in full of interest on the Company's $292.0 million Notes through August 1, 1999. Cash Flows From Financing Activities The Company financed the 1996 Acquisitions and its investment in the escrowed securities with proceeds from the issuance of the Notes, the $220.0 million Term Loan and borrowings of $338.0 million under the Revolving Credit Facility and $190.6 in cash contributions from the partners of ICP-IV. The Company subsequently repaid borrowings under the Revolving Credit Facility of $13.0 million. The Company paid debt issue costs of $16.9 million in connection with the offering of the Notes and the bank financing and paid syndication costs of $1.0 million in connection with raising its contributed equity. The Company repaid $350.6 of RMH's and IPWT's indebtedness upon its acquisition of these entities. The Company paid a call premium and other fees associated with the repayment of RMH's indebtedness of $4.7 million. The Company paid cash to TCI of $120.8 million as repayment of debt assumed upon TCI's contribution of the Greenville/Spartanburg System to the Company. The amount paid has been recorded as a distribution to TCI in the accompanying consolidated financial statements. NINE MONTHS ENDED SEPTEMBER 30, 1997 The Company's cash balance decreased by $4.2 million from $8.8 million as of January 1, 1997 to $4.6 million as of September 30, 1997. Cash Flows From Operating Activities The Company generated cash flows from operating activities of $37.2 million for the nine months ended September 30, 1997 reflecting (i) income from operations of $88.0 million before non-cash charges to income for depreciation and amortization of $97.1 million; (ii) interest and other income received of $5.6 million, primarily from escrowed investments; (iii) interest paid of $63.8 million; (iv) $5.8 million in deferred revenue relating to payments received from certain programmers to launch and promote their new programs; and (v) net working capital sources of $1.6 million, net of non-operating expenses. 18 21 Cash Flows From Investing Activities The Company purchased property and equipment of $81.9 million during the nine months ended September 30, 1997 consisting primarily of cable system upgrades and rebuilds, plant extensions, converters and initial subscriber installations. The Company received $28.2 million in proceeds from sale of its escrowed investments upon maturity on January 31 and July 31, 1997. These proceeds and related interest received were used to fund interest payment obligations on the Notes of $33.0 million during the nine months ended September 30, 1997. During the nine months ended September 30, 1997, the Company also paid approximately $0.3 million for the right to provide cable services to a multiple dwelling unit in Greenville/Spartanburg. Cash Flows From Financing Activities The Company's cash flows from financing activities for the nine months ended September 30, 1997 consisted primarily of net borrowings of $13.0 million under the bank revolving credit facility, which were used, along with cash available from operations, to fund the Company's capital requirements. PRO FORMA LIQUIDITY AND CAPITAL RESOURCES The Company has plans to make substantial expenditures for technological upgrades and rebuilds over the next several years under its Capital Improvement Program, which is reviewed and modified periodically by management. Management believes that substantial growth in revenues and operating cash flows is not achievable without implementing at least a significant portion of the Capital Improvement Program. For each of the years through maturity of the Notes, the Company's principal sources of liquidity are expected to be cash generated from operations and borrowings under the Company's revolving credit facility. The revolving credit facility provides for borrowings up to $475.0 million in the aggregate, with permanent annual commitment reductions beginning in 1999, and matures in 2004. As of September 30, 1997, the Company had $347.0 million outstanding under the revolving credit facility, leaving availability of $128.0 million. Prior to January 1, 1999, the Company has no mandatory amortization requirements under the Bank Facility. Management believes that the Company will be able to realize substantial growth rates in revenue over the next several years through a combination of household growth, increased penetration and new product offerings that the Company will be able to make available as technological upgrades are completed under the Capital Improvement Program. Management believes that, with the Company's ability to realize operating efficiencies and sustain substantial growth rates in revenue, it will be able to generate cash flows from operating activities which, together with available borrowing capacity under the revolving credit facility, will be sufficient to fund required interest payments and planned capital expenditures over the next several years. However, the Company may not be able to generate sufficient cash from operations or accumulate sufficient cash from other activities or sources to repay in full the principal amounts outstanding under the Notes on maturity. In order to satisfy its repayment obligations with respect to the Notes due August 1, 2006, the Company may be required to refinance the Notes. There can be no assurance that financing will be available at that time in order to accomplish any necessary refinancing on terms favorable to the Company. See Part II, Item 5 "Other Information -- Certain Factors Affecting Future Results -- Substantial Leverage; Deficiency of Earnings to Cover Fixed Charges"; and "-- Future Capital Requirements." Borrowings under the revolving credit facility are available under interest rate options related to ABR (which is based on the administrative agent's published prime rate) and LIBOR. Interest rates vary under each option based on IP-IV's senior leverage ratio. For ABR loans the rate varies from ABR to ABR plus 0.50%, and for LIBOR loans the rate varies from LIBOR plus 0.75% to LIBOR plus 1.75%. Interest periods are specified as one, two or three months for LIBOR loans. The Bank Facility requires quarterly interest payments, or more frequent interest payments if a shorter period is selected under the LIBOR option. The 19 22 Bank Facility also requires IP-IV to pay quarterly a commitment fee of 0.25% or 0.375% per year, depending on the senior leverage ratio of IP-IV, on the unused portion of available credit. The obligations of IP-IV under the Bank Facility are secured by a first priority pledge of the capital stock and/or partnership interests of IP-IV's subsidiaries, a negative pledge on other assets of IP-IV and subsidiaries and a pledge of any inter-company notes. The obligations of IP-IV under the Bank Facility are guaranteed by IP-IV's subsidiaries. The Bank Facility and the Indenture, as defined herein, restrict, among other things, the Company's ability to incur additional indebtedness, incur liens, pay distributions or make certain other restricted payments, consummate certain asset sales and enter into certain transactions with affiliates. In addition, the Bank Facility and Indenture restrict the ability of a subsidiary to pay distributions or make certain payments to ICP-IV, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. The Bank Facility also requires the Company to maintain specified financial ratios and satisfy certain financial condition tests. Such restrictions and compliance tests, together with the Company's substantial leverage and the pledge of substantially all of IP-IV's equity interests in its subsidiaries, could limit the Company's ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities. As of September 30, 1997 the Company was in compliance with all of the debt covenants as provided by the Bank Facility and the Indenture. COMMITMENTS AND CONTINGENCIES The Company has continuing commitments under franchise agreements and FCC regulations and is subject to litigation and other claims in the ordinary course of business. See Note 6 to the Consolidated Financial Statements included herein. See Part II, Item 5 "Other Information -- Certain Factors Affecting Future Results -- Regulation of the Cable Television Industry" and "-- Expiration of Franchises." CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Statements in this report which are prefaced with words such as expects, anticipates, believes and similar words and other statements of similar sense, are forward-looking statements. These statements are based on the Company's current expectations and estimates as to prospective events and circumstances which may or may not be within the Company's control and as to which there can be no firm assurances given. These forward-looking statements, like any other forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. In addition to other risks and uncertainties that may be described elsewhere in this document, certain risks and uncertainties that could affect the Company's financial results include the following: the development, market acceptance and successful introduction of new services and enhancements; competitors' service introductions and enhancements; and risks associated with the 1996 Acquisitions, including the Company's ability to successfully integrate the acquired cable television systems. (For a description of the above risks and uncertainties, see the Certain Factors that May Affect Future Results section under Item 5 of PART II.) 20 23 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material legal proceedings to which the Company is a party or to which the Company's properties are subject. The Company knows of no threatened or pending material legal action against it or its properties. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION CHANGE IN MANAGING GENERAL PARTNER In February of this year Leo J. Hindery, Jr. was appointed president of TCI. As part of Mr. Hindery's transition to TCI, substantially all of Mr. Hindery's interests in ICM-IV and its general partner IMI, as well as in various other management partnerships for the Related InterMedia Entities, were converted or sold. Pursuant to these transactions, Mr. Hindery no longer holds a controlling interest in IMI or ICM-IV and ICM-IV is no longer the managing general partner of the Company. On August 5, 1997, Robert J. Lewis purchased from Mr. Hindery all of the outstanding stock of IMI for $0.025 million. IMI retained its .002% general partner interest in ICM-IV and was appointed managing general partner of ICM-IV. Concurrently, Mr. Hindery withdrew as managing general partner of ICM-IV and converted his general partner interest in ICM-IV to a limited partner interest, and TCI purchased substantially all of the limited partner interests in ICM-IV. IMI owns 95% of the equity interests in InterMedia Capital Management, LLC ("ICM-IV LLC"), a newly formed limited liability company. ICM-IV LLC purchased from ICM-IV a .001% general partner interest in ICP-IV and the .01% managing general partner interests in certain of ICP-IV's subsidiaries for approximately $0.090 million. ICM-IV's remaining general partner interests in ICP-IV were converted to limited partner interests, and ICM-IV LLC was appointed the managing general partner of the Company. ICP-IV and its subsidiaries' various senior debt and partnership agreements have been amended to reflect the change in the Managing General Partner of the Company. In addition, pursuant to the transactions described above, certain arrangements have been entered into that would cause a change in the Managing General Partner. In the event that Mr. Lewis dies or Mr. Hindery leaves his employment with TCI, Mr. Hindery has the right to repurchase all of the stock of IMI from Mr. Lewis and thereby will hold a controlling interest in IMI which controls the Managing General Partner. In addition, the limited partners, have the right to remove the Managing General Partner in certain circumstances. INTERMEDIA PARTNERS IV, CAPITAL CORP. InterMedia Partners IV, Capital Corp., a Delaware corporation ("IPCC"), is the wholly owned subsidiary of the Company and was formed solely for the purpose of serving as a co-issuer of the Notes. The Notes are the joint and several obligation of the Company and IPCC. Separate financial statements and other disclosure concerning IPCC have not been provided because IPCC's financial position is not deemed to be material and it does not have any operations. 21 24 CERTAIN FACTORS AFFECTING FUTURE RESULTS SUBSTANTIAL LEVERAGE; DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES The Company has indebtedness that is substantial in relation to partners' capital. On September 30, 1997, the Company's total debt balance was approximately $859.0 million and partners' capital balance was approximately $13.9 million. Under the Financing, ICP-IV received $360.0 million of new equity from its partners, comprised of cash and in-kind contributions. See Part I, Item 1 "Financial Statements -- InterMedia Capital Partners IV, L.P. -- Notes to Consolidated Financial Statements." In addition, subject to the restrictions in the indenture for the Notes (the "Indenture"), ICP-IV and its subsidiaries (other than IPCC) may incur additional indebtedness from time to time to finance acquisitions and capital expenditures or for general corporate purposes. The high level of the Company's indebtedness will have important consequences, including: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for general corporate purposes or for the Capital Improvement Program; (ii) the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions or for the Capital Improvement Program may be limited; and (iii) the Company's level of indebtedness could limit its flexibility in reacting to changes in the industry and economic conditions generally. See "-- Future Capital Requirements." There can be no assurance that the Company will generate earnings in future periods sufficient to cover its fixed charges, including its debt service obligations with respect to the Notes. In the absence of such earnings or other financial resources, the Company could face substantial liquidity problems. ICP-IV's ability to pay interest on the Notes and to satisfy its other debt obligations will depend upon its future operating performance, including the successful implementation of the Capital Improvement Program and will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond the Company's control. Based upon expected increases in revenue and cash flow, the Company anticipates that its cash flow, together with available borrowings, including borrowings under the Bank Facility, will be sufficient to meet its operating expenses and capital expenditure requirements and to service its debt requirements for the next several years. See Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations." However, in order to satisfy its repayment obligations with respect to the Notes, ICP-IV may be required to refinance the Notes on their maturity. There can be no assurance that financing will be available at that time in order to accomplish any necessary refinancing on terms favorable to the Company or at all. If the Company is unable to service its indebtedness, it will be forced to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all. Management believes that substantial growth in revenues and operating cash flows is not achievable without implementing at least a significant portion of the Capital Improvement Program. See Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations." HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION The Notes are the general obligations of ICP-IV and IPCC and rank pari passu with all senior indebtedness of ICP-IV and IPCC, if any. The Company's operations are conducted through the direct and indirect subsidiaries of IP-IV. ICP-IV and IPCC hold no significant assets other than their investments in and advances to ICP-IV's subsidiaries, and ICP-IV and IPCC have no independent operations and, therefore, are dependent on the cash flow of ICP-IV's subsidiaries and other entities to meet their own obligations, including the payment of interest and principal obligations on the Notes when due. Accordingly, ICP-IV's and IPCC's ability to make interest and principal payments when due and their ability to purchase the Notes upon a Change of Control or Asset Sale (as defined in the Indenture) is dependent upon the receipt of sufficient funds from ICP-IV's subsidiaries and will be severely restricted by the terms of existing and future indebtedness of ICP-IV's subsidiaries. The Bank Facility was entered into by IP-IV and prohibits payment of distributions by any of ICP-IV's subsidiaries to ICP-IV or IPCC prior to February 1, 2000, and permits such distributions thereafter only to the extent necessary for ICP-IV to make cash interest payments on the Notes 22 25 at the time such cash interest is due and payable, provided that no default or event of default with respect to the Bank Facility exists or would exist as a result. RESTRICTIONS IMPOSED BY LENDERS The Bank Facility and, to a lesser extent, the Indenture contain a number of significant covenants that, among other things, restrict the ability of the Company to dispose of assets or merge, incur debt, pay distributions, repurchase or redeem capital stock, create liens, make capital expenditures and make certain investments or acquisitions and otherwise restrict corporate activities. The Bank Facility also contains, among other covenants, requirements that IP-IV maintain specified financial ratios, including maximum leverage and minimum interest coverage, and prohibits IP-IV and its subsidiaries from prepaying the Company's other indebtedness (including the Notes). The ability of the Company to comply with such provisions may be affected by events that are beyond the Company's control. The breach of any of these covenants could result in a default under the Bank Facility. In the event of any such default, lenders party to the Bank Facility could elect to declare all amounts borrowed under the Bank Facility, together with accrued interest and other fees, to be due and payable. If the indebtedness under the Bank Facility were to be accelerated, all indebtedness outstanding under such Bank Facility would be required to be paid in full before IP-IV would be permitted to distribute any assets or cash to ICP-IV. There can be no assurance that the assets of ICP-IV and its subsidiaries would be sufficient to repay all borrowings under the Bank Facility and the other creditors of such subsidiaries in full. In addition, as a result of these covenants, the ability of the Company to respond to changing business and economic conditions and to secure additional financing, if needed, may be significantly restricted, and the Company may be prevented from engaging in transactions that might otherwise be considered beneficial to the Company. FUTURE CAPITAL REQUIREMENTS Consistent with the Company's business strategy, and in order to comply with requirements imposed by certain of its franchising authorities and to address existing and potential competition, the Company has implemented the Capital Improvement Program. Pursuant to the Capital Improvement Program, the Company is expanding and upgrading the systems' plant to improve channel capacity and system reliability and to allow for interactive services such as enhanced pay-per-view, home shopping, data transmission (including Internet access) and other interactive services to the extent they become technologically viable and economically practicable. The Company expects to upgrade certain of its existing systems with a digital-capable, high-capacity, broadband hybrid fiber/coaxial network architecture to accomplish these objectives. Although the Company anticipates that it will continue to upgrade portions of its systems over the next several years, there can be no assurance that the Company will be able to upgrade its cable television systems at a rate that will allow it to remain competitive with competitors that either do not rely on cable into the home (e.g., MMDS and DBS) or have access to significantly greater amounts of capital and an existing communications network (e.g., certain telephone companies). The Company's business requires continuing investment to finance capital expenditures and related expenses for expansion of the Company's subscriber base and system development. There can be no assurance that the Company will be able to fund its Capital Improvement Program or any of its other capital expenditures. The Company's inability to upgrade its cable television systems or make its other planned capital expenditures could have a material adverse effect on the Company's operations and competitive position and could have a material adverse effect on the Company's ability to service its debt, including the Notes. LIMITED OPERATING HISTORY; DEPENDENCE ON MANAGEMENT ICP-IV was organized in March 1996. The partners of IP-IV transferred their partnership interests to ICP-IV in 1996. Therefore, there is limited historical financial information about the Company upon which to base an evaluation of its performance. Pursuant to the Acquisitions, the Company substantially increased the size of its operations. Therefore, the historical financial data of the Company may not be indicative of the Company's future results of operations. Further, there can be no assurance that the Company will be able to successfully implement its business strategy. The future success of the Company will be largely dependent 23 26 upon the efforts of senior management of its general partner, ICM-IV LLC. Although ICM-IV LLC as general partner of ICP-IV may acquire systems on behalf of the Company, there is no obligation to do so. COMPETITION IN CABLE TELEVISION INDUSTRY; RAPID TECHNOLOGICAL CHANGE Cable television systems face competition from other sources of news, information and entertainment, such as off-air television broadcast programming, newspapers, movie theaters, live sporting events, interactive computer programs and home video products, including video tape cassette recorders. Competing sources of video programming include, but are not limited to, off-air broadcast television, DBS, MMDS, SMATV and other new technologies. Furthermore, the cable television industry is subject to rapid and significant changes in technology. The effect of any future technological changes on the viability or competitiveness of the Company's business cannot be predicted. In addition, the Telecommunications Act of 1996 has repealed the cable/telephone cross-ownership ban, and telephone companies are now permitted to provide cable television service within their service areas. Certain of such potential service providers have greater financial resources than the Company, and in the case of local exchange carriers seeking to provide cable service within their service areas, have an installed plant and switching capabilities, any of which could give them competitive advantages with respect to cable television operators such as the Company. BellSouth has applied for cable franchises in certain of the Company's franchise areas and is acquiring a number of wireless cable companies in regions where the Company operates. However, BellSouth has since acknowledged it is postponing its request for cable franchises in the state of Tennessee. On October 22, 1996 the Tennessee Cable Telecommunications Association ("TCTA") and the Cable Television Association of Georgia filed a formal complaint with the FCC challenging certain acts and practices that BellSouth is taking in connection with its deployment of video distribution facilities in certain areas of Tennessee and Georgia. In addition, the TCTA also filed a petition for investigation with the Tennessee Regulatory Authority concerning certain alleged acts and practices that BellSouth is taking in connection with its construction and deployment of cable facilities in Tennessee. The Company is joined by several other cable operators in the complaint. The Company cannot predict the likelihood of success in this complaint or the petition nor can there be any assurance that the Company will be successful with either the complaint or the petition. Furthermore, the Company cannot predict either the extent to which competition from BellSouth or other potential service providers will materialize or, if such competition materializes, the extent of its effect on the Company. REGULATION OF THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation at the federal, state and local levels, and many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. In February 1996, Congress passed, and the President signed into law, major telecommunications reform legislation, the Telecommunications Act of 1996. Among other things, the 1996 Act reduces in some circumstances and by 1999 will eliminate, rate regulation for CPS packages for all cable television systems and immediately eliminates regulation of this service tier for small cable operators. The FCC is undertaking numerous rulemaking proceedings to interpret and implement the provisions of the 1996 Act. The 1996 Act and the FCC's implementing regulations could have a significant effect on the cable television industry. In addition, the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") imposed substantial regulation on the cable television industry, including rate regulation, and significant portions of the 1992 Act remain in effect despite the enactment of the 1996 Act and remain highly relevant to the Company's operations. The Company's systems elected the benchmark or cost-of-service methodologies to justify their basic and CPS tier rates in effect prior to May 15, 1994, but relied primarily upon the cost-of-service methodology to justify regulated service rates in effect after May 14, 1994. The Company's cost-of-service cases justifying certain rates for the CPS tier of service are currently pending before the FCC. Additionally, pursuant to the FCC's regulations, several local franchising authorities are reviewing the Company's basic rate justifications and several other franchising authorities have requested that the FCC review the Company's basic rate 24 27 justifications. Although the Company generally believes that its rates are justified under the FCC's benchmark or cost-of-service methodologies, it cannot predict the ultimate resolution of these cases. Management believes that the regulation of the cable television industry will remain a matter of interest to Congress, the FCC and other regulatory bodies. There can be no assurance as to what, if any, future actions such legislative and regulatory authorities may take or the effect thereof on the industry or the Company. RELATED PARTY TRANSACTIONS Conflicts of interests may arise due to certain contractual relationships of the Company and the Company's relationship with the Related InterMedia Entities and its other affiliates. IMI, which is wholly owned by Robert J. Lewis, provides administrative services at cost to the Company and to the operating companies of the Related InterMedia Entities. See Part II, Item 5 "Other Information --Change in Managing General Partner." Conflicts of interest may arise in the allocation of management and administrative services as a result of such relationships. In addition, the Related InterMedia Entities and their respective related management partnerships have certain relationships, and will likely develop additional relationships in the future with TCI, which could give rise to conflicts of interest. EXPIRATION OF FRANCHISES In connection with a renewal of a franchise, the franchising authority may require the Company to comply with different conditions with respect to franchise fees, channel capacity and other matters, which conditions could increase the Company's cost of doing business. Although management believes that it generally will be able to negotiate renewals of its franchises, there can be no assurance that the Company will be able to do so and the Company cannot predict the impact of any new or different conditions that might be imposed by franchising authorities in connection with such renewals. LOSS OF BENEFICIAL RELATIONSHIP WITH TCI The Company's relationship with TCI currently enables the Company to (i) purchase programming services and equipment from a subsidiary of TCI at rates that management believes are generally lower than the Company could obtain through arm's-length negotiations with third parties, (ii) share in TCI's marketing test results, (iii) share in the results of TCI's research and development activities and (iv) consult with TCI's operating personnel with expertise in engineering, technical, marketing, advertising, accounting and regulatory matters. While the Company expects the relationship to continue, TCI is under no obligation to offer such benefits to the Company, and there can be no assurance that such benefits will continue to be available in the future should TCI's ownership in the Company significantly decrease or should TCI for any other reason decide not to continue to offer such benefits to the Company. The loss of the relationship with TCI could adversely affect the financial position and results of operations of the Company. Further, the Bank Facility provides that an event of default will exist if TCI does not own beneficially 35.0% or more of ICP-IV's non-preferred partnership interests. See Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Transactions with Affiliates." PURCHASE OF NOTES UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control, the ICP-IV and IPCC are required to make an offer to purchase all outstanding Notes at a purchase price equal to 101.0% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. There can be no assurance that ICP-IV and IPCC will have available funds sufficient to purchase the Notes upon a Change of Control. In addition, any Change of Control, and any repurchase of the Notes required under the Indenture upon a Change of Control, would constitute an event of default under the Bank Facility, with the result that the obligations of the borrowers thereunder could be declared due and payable by the lenders. Any acceleration of the obligations under the Indenture or the Bank Facility would make it unlikely that IP-IV could make adequate distributions to ICP-IV in order to service the Notes and, accordingly, that IP-IV could make adequate distributions to ICP-IV as required to permit ICP-IV and IPCC to effect a purchase of the Notes upon a Change of Control. 25 28 ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF EXCHANGE NOTE PRICE The Notes registered pursuant to the exchange offer completed in January 1997 (the "Exchange Notes") are new securities for which there is currently no market. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for the inclusion of the Exchange Notes in any automated quotation system. Although the Company was advised by NationsBanc Capital Markets, Inc. ("NationsBanc") and Toronto Dominion Securities (USA) Inc. ("Toronto Dominion") that, following completion of the private offering in July 1996, NationsBanc and Toronto Dominion intend to make a market in the Notes, they are not obligated to do so and any such market making activities may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Exchange Notes. If a market for the Exchange Notes were to develop, the Exchange Notes could trade at prices that may be higher or lower than their initial offering price depending upon many factors, including prevailing interest rates, the Company's operating results and the markets for similar securities. Historically, the market for non-investment-grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Exchange Notes. There can be no assurance that, if a market for the Exchange Notes were to develop, such a market would not be subject to similar disruptions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit Index
EXHIBIT SEQUENTIALLY NUMBER EXHIBIT NUMBERED PAGES - ------- -------------------------------------------------------------------- -------------- * 3.3 Amended and Restated Agreement of Limited Partnership of InterMedia Capital Partners IV, L.P. dated as of August 5, 1997 by and among InterMedia Capital Management, LLC, InterMedia Capital Management IV, L.P. and various other limited partners......................... *10.12 Consent and Second Amendment to Revolving Credit and Term Loan Agreement, dated as of July 30, 1996 and amended as of August 6, 1996, dated as of February 28, 1997 among InterMedia Partners IV, L.P. and The Bank of New York, as Administrative Agent, and The Bank of New York, NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc., as Arranging Agents, and NationsBank of Texas, N.A. and Toronto Dominion (Texas), Inc., as Syndication Agents and the Financial Institution Parties thereto............................... 24.1 Power of Attorney (included on page 27)............................. 27.1 Schedule of Financial Data for InterMedia Capital Partners IV, L.P. ...............................................................
- --------------- * Incorporated by reference to the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 333-11893. (b) Reports on Form 8-K: No reports on Form 8-K were filed with the Securities and Exchange Commission during the fiscal quarter ended September 30, 1997. 26 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERMEDIA CAPITAL PARTNERS IV, L.P. By: InterMedia Capital Management, LLC, its Managing General Partner By: InterMedia Management, Inc., its Managing Member By: /s/ ROBERT J. LEWIS ------------------------------------ Robert J. Lewis President Date: November 7, 1997. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Edon V. Hartley, and Thomas R. Stapleton and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substation and resubstation, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, and fully to all intents and purposes as he might or could do in person, hereby ratifying and conforming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - ------------------------------------------ ----------------------------- ------------------ /s/ ROBERT J. LEWIS President, Chief Executive November 7, 1997 - ------------------------------------------ Officer and Sole Director Robert J. Lewis of InterMedia Management, Inc. (principal executive officer) /s/ EDON V. HARTLEY Chief Financial Officer of November 7, 1997 - ------------------------------------------ InterMedia Management, Inc. Edon V. Hartley (principal financial officer) /s/ THOMAS R. STAPLETON Vice President of InterMedia November 7, 1997 - ------------------------------------------ Management, Inc. Thomas R. Stapleton (principal accounting officer)
27 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 INTERMEDIA CAPITAL PARTNERS IV, L.P. 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 JUL-01-1997 SEP-30-1997 1 4,552 60,507 19,316 (2,516) 0 55,600 279,300 0 953,340 62,274 0 13,010 0 0 13,941 953,340 63,835 63,835 13,849 64,223 134 0 19,754 (19,059) (1,338) (17,946) 0 0 0 (17,946) 0 0 PP&E IS SHOWN NET OF ACCUMULATED DEPRECIATION. INCLUDES PROGRAM FEES AND OTHER DIRECT EXPENSES
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