-----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, ApqSylYvTFYIXsKs5n3lIYHFHNvRJofg/4GQZ1fHUFJ6cpymFK1xCBlXPApTxwYu Y7CeFvQBjUx4XwtZom1lYQ== 0000950149-98-001464.txt : 19980814 0000950149-98-001464.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950149-98-001464 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: 98685992 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 SECOND QUARTER REPORT 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 JUNE 30, 1998 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 June 30, 1998 TABLE OF CONTENTS
Page PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.................................................................1 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................ 11 PART II -- OTHER INFORMATION....................................................................... 21 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." -i- 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTERMEDIA CAPITAL PARTNERS IV, L.P. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, JUNE 30, 1997 1998 --------- ---------- (unaudited) ASSETS Cash and cash equivalents............................................. $ 6,388 $ 6,714 Accounts receivable, net of allowance for doubtful accounts of $1,685 and $1,982, respectively...................................... 23,163 25,566 Escrowed investments held to maturity................................. 29,359 29,894 Interest receivable on escrowed investments........................... 1,418 1,137 Receivable from affiliate............................................. 686 1,273 Prepaids.............................................................. 599 931 Other current assets.................................................. 359 334 --------- ---------- Total current assets............................................... 61,972 65,849 Escrowed investments held to maturity................................. 31,148 16,105 Intangible assets, net................................................ 550,726 511,868 Property & equipment, net............................................. 310,455 324,749 Deferred income taxes................................................. 14,221 16,910 Other non-current assets.............................................. 2,242 2,095 --------- ---------- Total assets....................................................... $ 970,764 $ 937,576 ========= ========== LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued liabilities.............................. $ 32,708 $ 24,780 Payable to affiliates................................................. 3,813 4,664 Deferred revenue...................................................... 15,856 17,852 Accrued interest...................................................... 22,076 22,395 --------- ---------- Total current liabilities.......................................... 74,453 69,691 Deferred channel launch revenue....................................... 4,154 3,678 Long-term debt........................................................ 876,500 887,000 Other non-current liabilities......................................... 131 122 --------- ---------- Total liabilities.................................................. 955,238 960,491 --------- ---------- Commitments and contingencies......................................... Minority interest..................................................... Mandatorily redeemable preferred shares............................... 13,239 13,698 PARTNERS' CAPITAL Preferred limited partnership interest................................ 24,888 24,888 Junior preferred limited partnership interest......................... (1,423) General and limited partners' capital................................. (20,751) (58,228) Note receivable from general partner.................................. (1,850) (1,850) --------- ---------- Total partners' capital............................................ 2,287 (36,613) --------- ---------- Total liabilities and partners' capital............................ $ 970,764 $ 937,576 ========= ==========
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 SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1998 1997 1998 -------- -------- -------- -------- REVENUES Basic and cable services................................ $ 42,392 $ 47,910 $ 83,680 $ 93,921 Pay service............................................. 10,215 9,865 20,216 19,978 Other service........................................... 9,320 11,630 18,851 20,858 -------- -------- -------- -------- 61,927 69,405 122,747 134,757 -------- -------- -------- -------- COSTS AND EXPENSES Program fees............................................ 13,370 15,254 26,395 30,555 Other direct expenses................................... 6,489 6,800 13,341 13,406 Depreciation and amortization........................... 33,113 33,988 66,403 66,760 Selling, general and administrative expenses 11,827 12,832 23,583 25,962 Management and consulting fees.......................... 838 838 1,675 1,675 -------- -------- -------- -------- 65,637 69,712 131,397 138,358 -------- -------- -------- -------- Loss from operations.................................... (3,710) (307) (8,650) (3,601) -------- -------- -------- -------- OTHER INCOME (EXPENSE) Interest and other income............................. 1,403 920 2,781 2,123 Interest expense...................................... (19,614) (19,753) (38,877) (39,272) Other expense......................................... (132) (74) (302) (380) -------- -------- -------- -------- (18,343) (18,907) (36,398) (37,529) -------- -------- -------- -------- Loss before income tax benefit and minority interest.... (22,053) (19,214) (45,048) (41,130) Income tax benefit...................................... 1,974 1,094 3,462 2,689 -------- -------- -------- -------- Net loss before minority interest....................... (20,079) (18,120) (41,586) (38,441) Minority interest....................................... (214) (230) (428) (459) -------- -------- -------- -------- Net loss................................................ $(20,293) $(18,350) $(42,014) $(38,900) ======== ======== ======== ========
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)
JUNIOR PREFERRED PREFERRED LIMITED LIMITED GENERAL LIMITED NOTES PARTNER PARTNER PARTNER PARTNERS RECEIVABLE TOTAL --------- --------- -------- --------- ---------- --------- Balance at December 31, 1996 ......... $ 24,888 $ $ 716 $ 50,062 $ (1,850) $ 73,816 Cash contributions ................... 84 84 Transfer and conversion of General Partner Interest to Limited Partner Interest ................... (799) 799 Net loss ............................. (1) (71,612) (71,613) -------- -------- -------- -------- -------- -------- Balance at December 31, 1997 ......... 24,888 (20,751) (1,850) 2,287 Conversion of Limited Partner Interest to Junior Preferred Limited Partner Interest (unaudited) (1,423) 1,423 Net loss (unaudited) ................. (38,900) (38,900) -------- -------- -------- -------- -------- -------- Balance at June 30, 1998 (unaudited) ........................ $ 24,888 $ (1,423) $ $(58,228) $ (1,850) $(36,613) ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements -3- 6 INTERMEDIA CAPITAL PARTNERS IV, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
Six Months Ended June 30, ---------------------- 1997 1998 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................ $ (42,014) $(38,900) Minority interest....................................... 428 459 Loss (gain) on disposal of fixed assets 2 (44) Depreciation and amortization........................... 67,082 67,525 Changes in assets and liabilities: Accounts receivable................................ (508) (2,403) Interest receivable on escrowed investments 444 281 Receivable from affiliate.......................... 438 (587) Prepaids........................................... 1,495 (332) Other current assets............................... 11 25 Deferred income taxes.............................. (3,462) (2,689) Other non-current assets........................... (324) 147 Accounts payable and accrued liabilities........... (2,422) (4,138) Payable to affiliates.............................. 243 851 Deferred revenue................................... 1,929 2,131 Accrued interest................................... 62 319 Deferred channel launch revenue.................... 5,023 (611) Other non-current liabilities...................... 41 (9) --------- -------- Cash flows from operating activities.................... 28,468 22,025 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property and equipment.................................. (45,989) (45,782) Intangible assets....................................... (462) (925) Proceeds from maturity of escrowed investments 13,927 14,508 --------- -------- Cash flows from investing activities.................... (32,524) (32,199) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt............................ 3,000 10,500 Debt issue costs........................................ (252) --------- -------- Cash flows from financing activities.................... 2,748 10,500 --------- -------- Net change in cash and cash equivalents.................... (1,308) 326 Cash and cash equivalents, beginning of period 8,770 6,388 -------- -------- Cash and cash equivalents, end of period................... $ 7,462 $ 6,714 ======== ========
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 June 30, 1998, 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.................. 338,590 532,063 Greenville/Spartanburg Cluster................... 147,721 206,725 Knoxville/East Tennessee Cluster................. 101,366 150,010 ------- ------- Total..................................... 587,677 888,798 ======= =======
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 June 30, 1998, and its results of operations and cash flows for the three and six months ended June 30, 1998. The results of operations for these periods are not necessarily indicative of results that may be expected for the year ending December 31, 1998. 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, 1997. 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. On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position. -5- 8 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) 2. ACQUISITIONS AND SALE OF CABLE PROPERTIES 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 6--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 as of the acquisition date 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"). 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 debt which was simultaneously repaid by the Company with proceeds from the Financing. On March 31, 1998, TCI converted 5.4% of its limited partner interest in ICP-IV into a $26,458 junior preferred limited partner interest in ICP-IV with a preferred return of 12.75% compounded annually and senior in priority to the limited partner interest, other than the preferred limited partner interest. After giving effect to the conversion, TCI owns a 49.6% limited partner interest in ICP-IV, including a 3.8% limited partner interest held by InterMedia Partners, a California limited partnership ("IP") and a 1.2% interest held by ICM-IV. Effective January 2, 1998, TCI owns a 99.999% limited partner interest in IP, and effective August 5, 1997, TCI owns a 99.997% limited partner interest in ICM-IV (see Note 6--Related Party Transactions). 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 Board Opinion No. 16 ("APB16") and the Nashville System's results of operations have been included in the Company's consolidated results only from August 1, 1996, the date of the acquisition. During the year ended December 31, 1996, the Company acquired other cable television systems serving as of the acquisition dates 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. -6- 9 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) Sale On December 5, 1997, the Company sold its cable television assets serving approximately 7,400 basic subscribers in and around Royston and Toccoa, Georgia. 3. ESCROWED INVESTMENTS HELD TO MATURITY The Company's escrowed investments held to maturity are carried at amortized cost and consist of U.S. Treasury Notes with maturities ranging from one to thirteen 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 4-- Long-term Debt). On February 1, 1997 and 1998, the Company paid interest of $16,569 and $16,425, respectively, on the senior notes with the proceeds from and interest earned on escrowed investments that matured on January 31, 1997 and 1998, respectively. The fair value and maturities of U.S. Treasury Notes held in escrow are as follows:
DECEMBER 31, 1997 JUNE 30, 1998 ---------------------- --------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE -------- ---------- -------- ---------- Matures within 1 year.......... $ 29,359 $29,805 $29,894 $30,565 Matures between 1 and 2 years.. 31,148 31,552 16,105 16,097 -------- ------- ------- ------- Total................ $ 60,507 $61,357 $45,999 $46,662 ======== ======= ======= =======
The fair values of the investments are based on quoted market prices. 4. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, JUNE 30, 1997 1998 -------- -------- Bank revolving credit facility, $475,000 commitment as of June 30, 1998, interest currently at LIBOR plus 1.00% (6.63%) and LIBOR plus 1.25% (7.00%) payable quarterly, matures July 1, 2004 ........................... $364,500 $ 375,000 Bank term loan, interest at LIBOR plus 2.00% (7.81%) 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 -------- --------- $876,500 $ 887,000 ======== =========
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 semiannually by increments ranging from $22,500 to $47,500 through maturity on July 1, 2004. The term loan requires semiannual 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. Effective October 20, 1997, pursuant to an amendment to the revolving credit facility and term loan agreement, interest -7- 10 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) rates on borrowings under the term loan vary from LIBOR plus 1.75% to LIBOR plus 2.00% or ABR plus 0.50% to ABR plus 0.75% based on the Company's ratio of senior debt to annualized quarterly operating cash flow ("Senior Debt Ratio"). Interest rates vary also on borrowings under the revolving credit facility from LIBOR plus 0.625% to LIBOR plus 1.50% or ABR to ABR plus 0.25% based on the Company's Senior Debt Ratio. Prior to the amendment, interest rates on borrowings under the term loan were at LIBOR plus 2.375% or ABR plus 1.125%; and, interest rates on borrowings under the revolving credit facility varied from LIBOR plus 0.75% to LIBOR plus 1.75% or ABR to ABR plus 0.50% based on the Senior Debt Ratio. 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 Debt Ratio is greater than 4.0:1.0 and at 0.25% when the Senior Debt Ratio is less than or equal to 4.0:1.0. At December 31, 1997, the interest rates were 6.75% and 8.50% on borrowings of $347,000 and $17,500, respectively, outstanding under the revolving credit facility. At June 30, 1998, the interest rates were 7.00% and 6.63% on borrowings of $357,000 and $18,000, respectively, outstanding under the revolving credit facility. 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 6.32% 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 is based on the current value in the market for transactions with similar terms and adjusted for the holding period. At December 31, 1997 and June 30, 1998, the fair market value of the interest rate swaps was approximately $(2,198) and $(2,365), respectively. Borrowings under the Bank Facility are secured by the capital stock and partnership interests of IP-IV's subsidiaries, a negative pledge on other assets of IP-IV and subsidiaries and a pledge of any intercompany notes. 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 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, 1997 and June 30, 1998, ICP-IV has $61,925 and $47,136, 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 that 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. -8- 11 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) Based on recent trading prices of the Notes, the fair value of these securities at December 31, 1997 and June 30, 1998 is $324,500 and $329,230, 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, 1997 and June 30, 1998 approximate their fair value. 5. 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 position or results of operations. 6. RELATED PARTY TRANSACTIONS ICM-IV provides certain management services to ICP-IV and its subsidiaries for a per annum fee of $3,350, of which ICM-IV defers 20% per annum, payable in each following year, in order to support the Company's bank debt. InterMedia Management, Inc. ("IMI") is the managing member of InterMedia Capital Management, LLC ("ICM-IV LLC"), the .001% general partner of ICP-IV effective August 5, 1997. Prior to August 5, 1997, IMI was wholly owned by the 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 $1,413 and $1,399 for the three months ended June 30, 1997 and 1998, respectively, and $3,088 and $3,203 for the six months ended June 30, 1997 and 1998, 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. 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. Such volume rates may not continue to be available in the future should TCI's ownership in ICP-IV significantly decrease. Programming fees charged by the TCI subsidiary for the three months ended June 30, 1997 and 1998 amounted to $10,440 and $11,766, respectively, and $20,293 and $22,969 for the six months ended June 30, 1997 and 1998, respectively. Payable to affiliates includes programming fees payable to the TCI subsidiary of $3,556 and $4,034 as of December 31, 1997 and June 30, 1998, respectively. On January 1, 1998 an affiliate of TCI entered into an agreement with the Company to manage the Company's advertising business and related services for an annual fixed fee per advertising sales subscriber, as defined by the agreement. In addition to the annual fixed fee, TCI will be entitled to varying percentage shares of the incremental growth in annual cash flow from advertising sales above specified targets. Management fees charged by the TCI subsidiary for the three and six months ended June 30, 1998 amounted to $64 and $145, respectively. -9- 12 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) 7. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS During the six months ended June 30, 1997 and 1998, the Company paid interest of $38,136 and $38,188, respectively. -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, 1997. 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 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 and Sale of Cable Properties During the year ended December 31, 1996 the Company acquired cable television systems serving as of the acquisition dates 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, and (iv) the purchases of cable television systems serving approximately 59,600 basic subscribers at various dates during 1996 (the "Miscellaneous Acquisitions"). The Miscellaneous Acquisitions and the purchase of the Nashville System have been accounted for as purchases in accordance with APB16. 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 49.6% limited partner in ICP-IV (as discussed in Note 2 to the Consolidated Financial Statements included herein), 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. On December 5, 1997, the Company sold its cable television assets serving approximately 7,400 basic subscribers in and around Royston and Toccoa, Georgia. 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 the FCC's regulations, several local franchising authorities are reviewing the Company's basic rate justifications and several -11- 14 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 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 these areas but continues to pursue the provision of wireless cable services in certain areas in the Southeast. 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 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. In addition, Bell South has recently announced plans to launch its Digital Subscriber Line ("DSL") services which will compete with the Company's high speed Internet access services. 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. 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 June 30, 1997 and 1998, the Company paid 78.1% and 77.1%, respectively, of its program fees to SSI. During the six months ended June 30, 1997 and 1998, the Company paid 76.9% and 75.2%, respectively, of its program fees to SSI. The Company and its affiliated entities, InterMedia Partners, a California limited partnership, InterMedia Partners III, L.P. and InterMedia Capital Partners VI, 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. IMI is the managing member of ICM-IV LLC, a limited liability company formed in 1997, 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 former managing general partner of ICM-IV, the former general partner of ICP-IV. 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 $1.4 million to the Company for the three months ended June 30, 1997 and 1998, and $3.1 million and $3.2 million for the six months ended June 30, 1997 and 1998, respectively. ICM-IV provides certain management services to the Company for an annual fee of $3,350. See Part II, Item 5 "Other Information -- Certain Factors Affecting Future Results -- Related Party Transactions." -12- 15 RESULTS OF OPERATIONS The following table sets forth, for the periods presented, statement of operations and other data of the Company expressed in dollar amounts (in thousands) and as a percentage of revenue.
Three Months Ended June 30, ------------------------------------------------- 1997 1998 ------------------------ ----------------------- Percentage Percentage Amount of Revenue Amount of Revenue --------- ----------- --------- ---------- (unaudited) Statement of Operations Data: Revenue.............................. $ 61,927 100.0% $ 69,405 100.0% Costs and Expenses: Program fees....................... 13,370 21.6 15,254 22.0 Other direct expenses(1)........... 6,489 10.5 6,800 9.8 Selling, general and administrative expenses(2)...................... 11,827 19.1 12,832 18.5 Management and consulting fees..... 838 1.4 838 1.2 Depreciation and amortization...... 33,113 53.5 33,988 49.0 -------- ------ -------- ----- Loss from operations................. (3,710) (6.0) (307) (0.4) Interest and other income............ 1,403 2.3 920 1.3 Interest expense..................... (19,614) (31.7) (19,753) (28.5) Other expense........................ (132) (0.2) (74) (0.1) Income tax benefit................... 1,974 3.2 1,094 1.6 Minority interest.................... (214) (0.4) (230) (0.3) -------- ------ -------- ----- Net loss............................. $(20,293) (32.8)% $(18,350) (26.4)% ======== ====== ======== ===== Other Data: EBITDA(3)............................ $ 29,403 47.5% $ 33,681 48.5%
-13- 16
Six Months Ended June 30, ------------------------------------------------- 1997 1998 ------------------------ ----------------------- Percentage Percentage Amount of Revenue Amount of Revenue --------- ----------- --------- ---------- (unaudited) Statement of Operations Data: Revenue.............................. $ 122,747 100.0% $ 134,757 100.0 Costs and Expenses: Program fees....................... 26,395 21.5 30,555 22.7 Other direct expenses(1)........... 13,341 10.9 13,406 9.9 Selling, general and administrative expenses(2)...................... 23,583 19.2 25,962 19.3 Management and consulting fees..... 1,675 1.4 1,675 1.2 Depreciation and amortization...... 66,403 54.1 66,760 49.5 --------- ----- --------- ----- Loss from operations................. (8,650) (7.0) (3,601) (2.7) Interest and other income............ 2,781 2.3 2,123 1.6 Interest expense..................... (38,877) (31.7) (39,272) (29.1) Other expense........................ (302) (0.2) (380) (0.3) Income tax benefit................... 3,462 2.8 2,689 2.0 Minority interest.................... (428) (0.3) (459) (0.3) --------- ----- --------- ----- Net loss............................. $ (42,014) (34.2)% $ (38,900) (28.9)% ========= ===== ========= ===== Other Data: EBITDA(3)............................ $ 57,753 47.1% $ 63,159 46.9
- --------------- (1) Other direct 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 generally accepted accounting principles. 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 six months ended June 30, 1998 increased to $69.4 million and $134.8 million, respectively, as compared with $61.9 million and $122.7 million for the same periods ended June 30, 1997, respectively, due primarily to (i) basic subscriber rate increases which resulted in increased revenue of approximately $5.0 million and $9.4 million for the three and six month periods, respectively, (ii) increased number of basic subscribers due to household growth, which accounted for approximately $1.1 million and $2.1 million for the three and six month periods, respectively, and (iii) an increase of approximately $2.3 million and $2.0 million in other service revenue for the three and six month periods, respectively, offset by a decrease of approximately $0.6 million and $1.3 million in total revenues for the three and six month periods, respectively, as a result of the Company's sale of its cable television assets located in and around Royston and Toccoa in December 1997. The increase in other service revenues is due primarily to (i) increased advertising sales of $1.0 million and $1.6 million for the three and six month periods, respectively, (ii) an increase in converter rental income of $0.3 million and $0.6 million for the three and six month periods, respectively, and (iii) revenues of $0.4 million and $0.6 million for the three and six months ended -14- 17 June 30, 1998, respectively, generated from providing high-speed Internet access over the Company's broadband network, offset by non-recurring advertising revenue of $0.2 million and $1.5 million earned from certain programmers to promote and launch their new services during the three and six months ended June 30, 1997, respectively. Prior to September 1997, the Company did not offer high-speed Internet access services to its subscribers. The Company served approximately 587,700 basic subscribers at June 30, 1998, compared to 580,300 basic subscribers at June 30, 1997. Average basic service revenue per basic subscriber for the three and six months ended June 30, 1998 was $27.27 and $26.87, respectively, compared to $24.40 and $24.17 for the same periods ended June 30, 1997, respectively. The increase represents rate increases implemented by certain of the Company's cable systems in September 1997 and in early 1998, including rate increases for additional channels offered by certain of the cable systems which have been upgraded pursuant to the Company's Capital Improvement Program. Program Fees Program fees for the three and six months ended June 30, 1998 increased to $15.3 million and $30.6 million, respectively, as compared with $13.4 million and $26.4 million for the same periods ended June 30, 1997, respectively, due primarily to higher rates charged by certain programmers and increased number of channels offered by certain of the Company's systems to their basic subscribers. Average monthly basic program costs per basic subscriber for the three and six months ended June 30, 1998 were $5.51 and $5.48, respectively, compared to $4.46 and $4.30 for the three and six months ended June 30, 1997, respectively. Program fees for the three and six months ended June 30, 1998 represent 26.4% and 26.8%, respectively, of basic and pay service revenues compared to 25.4% for the three and six months ended June 30, 1997. The increases as a percentage of basic and pay service revenues reflect the impact of program fee rate increases outpacing revenue growth for the periods. Other Direct Expenses Other direct expenses increased to $6.8 million and $13.4 million for the three and six months ended June 30, 1998, respectively, compared to $6.5 million and $13.3 million for the three and six months ended June 30, 1997, respectively, as a result of (i) an increase in payroll expense due primarily to wage increases and (ii) increased outside labor costs due primarily to an increase in non-capitalizable installation activities, including reconnects, disconnects and relocation of cable outlets, offset by a decrease in franchise fee expense which resulted from passing through franchise fees to subscribers by certain of the Company's cable systems beginning late 1997. Other direct expenses as a percentage of total revenues remained relatively constant at 9.8% and 9.9% for the three and six months ended June 30, 1998, respectively, compared to 10.5% and 10.9% for the same periods ended June 30, 1997, respectively. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses for the three and six months ended June 30, 1998 increased to $12.8 million and $26.0 million, respectively, compared to $11.8 million and $23.6 million for the same periods ended June 30, 1997, respectively, due primarily to (i) non-recurring billing conversion expenses incurred by certain of the Company's cable systems in early 1998, (ii) increased payroll costs due to annual wage increases as well as non-recurring market rate adjustments for certain of the Company's job positions, (iii) increased marketing expenses resulting from increased promotions of the Company's new data and digital services as well as its newly rebuilt cable systems, and (iv) expenses incurred by certain of the Company's systems to identify illegal tapping of its cable services. SG&A as a percentage of total revenues remained relatively constant at 18.5% and 19.3% for the three and six months ended June 30, 1998, respectively, compared to 19.1% and 19.2% for the same periods ended June 30, 1997, respectively. Depreciation and Amortization Depreciation and amortization expense for the three and six months ended June 30, 1998 increased to $34.0 million and $66.8 million, respectively, compared to $33.1 million and $66.4 million for the same periods ended June 30, 1997, respectively, as a result of capital expenditures of $129.4 million for the twelve months ended June 30, 1998, 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. -15- 18 Interest and Other Income Interest and other income is comprised primarily of interest income earned on the escrowed investments held to be used by the Company to make semi-annual interest payments on the Notes. Interest and other income for the three and six months ended June 30, 1998 decreased to $0.9 million and $2.1 million, respectively, compared to $1.4 million and $2.8 million for the three and six months ended June 30, 1997, respectively, due primarily to decreases in the escrowed investment balances. Income Tax Benefit As partnerships, the tax attributes of ICP-IV and its subsidiaries other than RMG and IPCC accrue to the partners. Income tax benefit of $1.1 million and $2.7 million for the three and six months ended June 30, 1998, respectively, and $2.0 million and $3.5 million for the three and six months ended June 30, 1997, respectively, has been recorded based on RMG's stand alone tax provision. The decreases are due primarily to (i) a decrease in RMG's effective tax rate for the three months ended June 30, 1998 compared to the three months ended June 30, 1997 and (ii) decreases in RMG's losses before income tax benefit due primarily to increases in income from operations and decreases in intercompany interest expense for the three and six month periods. Net Loss The Company's net loss for the three and six months ended June 30, 1998 decreased to $18.4 million and $38.9 million, respectively, from $20.3 million and $42.0 million for the three and six months ended June 30, 1997, respectively. The decrease is due primarily to the decrease in loss from operations, offset by a decrease in interest and other income and income tax benefit. LIQUIDITY AND CAPITAL RESOURCES The following table sets forth certain statement of cash flows information of the Company (in thousands) for the six months ended June 30, 1997 and 1998.
SIX MONTHS ENDED JUNE 30, ------------------ 1997 1998 ---- ---- (UNAUDITED) Statement of Cash Flows Data: Cash flows from operating activities........ $ 28,468 $22,025 Cash flows from investing activities........ (32,524) (32,199) Cash flows from financing activities........ 2,748 10,500
SIX MONTHS ENDED JUNE 30, 1997 The Company's cash balance decreased by $1.3 million from $8.8 million as of January 1, 1997 to $7.5 million as of June 30, 1997. Cash Flows From Operating Activities The Company generated cash flows from operating activities of $28.5 million for the six months ended June 30, 1997 reflecting (i) income from operations of $57.8 million before non-cash charges to income for depreciation and amortization of $66.4 million, (ii) interest and other income received of $3.2 million, primarily from escrowed investments, (iii) interest paid of $38.1 million, (iv) $6.2 million in deferred revenue relating to payments received from certain programmers to launch and promote their new services, and (v) other working capital uses and non-operating expenses of $0.6 million. -16- 19 Cash Flows From Investing Activities The Company purchased property and equipment of $46.0 million during the six months ended June 30, 1997 consisting primarily of cable system upgrades and rebuilds, plant extensions, converters and initial subscriber installations. The Company received $13.9 million in proceeds from maturity of its escrowed investments on January 31, 1997. These proceeds and related interest received were used to fund interest payment obligations on the Notes of $16.6 million on February 1, 1997. During the six months ended June 30, 1997, the Company 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 six months ended June 30, 1997 consisted primarily of net borrowings of $3.0 million under the bank revolving credit facility, which were used, along with cash available from operations, to fund the Company's capital requirements. SIX MONTHS ENDED JUNE 30, 1998 The Company's cash balance increased by $0.3 million from $6.4 million as of January 1, 1998 to $6.7 million as of June 30, 1998. Cash Flows From Operating Activities The Company generated cash flows from operating activities of $22.0 million for the six months ended June 30, 1998 reflecting (i) income from operations of $63.2 million before non-cash charges to income for depreciation and amortization of $66.8 million; (ii) interest and other income received of $2.4 million, primarily from its escrowed investments; (iii) interest paid of $38.2 million; and (iv) other working capital uses and non-operating expenses of $5.4 million. Cash Flows From Investing Activities The Company purchased property and equipment of $45.8 million during the six months ended June 30, 1998 consisting primarily of cable system upgrades and rebuilds, plant extensions, converters and initial subscriber installations. During the six months ended June 30, 1998, the Company also paid approximately $0.9 million for the right to provide cable services to several multiple dwelling units in Nashville and Greenville/Spartanburg. The Company received $14.5 million in proceeds from maturity of its escrowed investments on January 31, 1998. These proceeds and related interest received were used to fund interest payment obligations on the Notes of $16.4 million on February 1, 1998. Cash Flows From Financing Activities The Company's cash flows from financing activities for the six months ended June 30, 1998 represented net borrowings of $10.5 million under the bank revolving credit facility. The Company funded its capital expenditures and interest payments on the 11.25% senior notes, the bank term loan and the revolving credit facility primarily with proceeds from the maturity of its escrowed investments and related accrued interest, as described above, borrowings from the bank revolving credit facility and cash available from operations. PRO FORMA LIQUIDITY AND CAPITAL RESOURCES The Company will continue to make substantial expenditures for technological upgrades and rebuilds over the next year under its Capital Improvement Program and will continue to make other capital expenditures for plant -17- 20 extensions, converters and initial subscriber installations over the next several years. 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 semi-annual commitment reductions beginning in 1999, and matures in 2004. As of June 30, 1998, the Company had $375.0 million outstanding under the revolving credit facility, leaving availability of $100.0 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 growth in revenue over the next several years through a combination of household growth, effective rate increases 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 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 and the term loan are available under interest rate options related to the base rate of the administrative agent for the Bank Facility ("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, as defined. Effective October 20, 1997, pursuant to an amendment to the revolving credit facility and term loan agreement, interest rates on borrowings under the term loan vary from LIBOR plus 1.75% to LIBOR plus 2.00% or ABR plus 0.50% to ABR plus 0.75%. Interest rates vary also on borrowings under the revolving credit facility from LIBOR plus 0.625% to LIBOR plus 1.50% or ABR to ABR plus 0.25%. Prior to the amendment, interest rates on borrowings under the term loan were at LIBOR plus 2.375% or ABR plus 1.125%; and, interest rates on borrowings under the revolving credit facility varied from LIBOR plus 0.75% to LIBOR plus 1.75% or ABR to ABR plus 0.50%. 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 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 intercompany 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 June 30, 1998 the Company was in compliance with all of the debt covenants as provided by the Bank Facility and the Indenture. -18- 21 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 5 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 production of new products and enhancements; and competitors' product introductions and enhancements. YEAR 2000 The Company is in the process of conducting a review of its computer systems to identify the systems that could be affected by the year 2000 issue and is developing an implementation plan to resolve the issue. Generally, the year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The systems being evaluated include all internal use software and devices and those systems and devices that manage the distribution of the Company's video and data services to subscribers. The Company is utilizing both internal and external resources to identify, correct and reprogram, and test systems for year 2000 readiness. The Company is currently conducting an inventory of its accounting and information systems, data and voice networks, engineering systems, facilities, hardware and software supporting distribution of the Company's services, and other equipment and systems potentially impacted by the year 2000 problem. The Company expects to complete the inventory and assessment of its internal hardware and software systems that will require remediation or replacement by the end of 1998. The Company relies heavily on certain significant third party vendors, such as its billing service vendor, to provide services to its subscribers. Such third party vendors whose systems are critical to the Company's cable operations are being identified and surveyed. Representations have been received from certain of the vendors indicating that they are either fully compliant or have plans in place to ensure compliance. The Company intends to have further communication with primary vendors which do not respond to the survey or which are identified as having systems that are not year 2000 compliant to assess those vendors' plans for remediating their own year 2000 issues and to assess the impact on the Company if such vendors fail to remediate their year 2000 issues. The Company expects to complete its assessment of the impact of the year 2000 issue by March 31, 1999. The Company continues to evaluate the level of validation it will require of third parties to ensure their year 2000 readiness. Management of the Company has not yet determined the total cost associated with its year 2000 project and the related potential impact on the Company's results of operations. Amounts expended to date have not been material, although there can be no assurance that the total expense of the year 2000 project will not have an adverse effect on the Company's financial position. Additionally, there can be no assurance that the Company's third party suppliers will all be fully compliant. The failure of the Company or its primary suppliers to resolve the year 2000 issue adequately could have a material adverse effect on the Company. -19- 22 (For a description of the above risks and uncertainties, see the Certain Factors Affecting 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 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. 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 June 30, 1998, the Company's total debt balance was approximately $887.0 million and partners' capital had a deficit balance of approximately $36.6 million. 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 -21- 24 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. 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 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 has completed upgrading certain of its existing systems and is currently upgrading certain of its other 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 year, there can be no -22- 25 assurance that the Company's upgrade of its cable television systems will allow it to remain competitive with competitors that either do not rely on cable into the home (e.g., direct broadcast satellite ("DBS") service and multipoint multichannel distribution service ("MMDS") systems) 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 various planned 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 in 1996, 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 upon the efforts of senior management. 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, satellite master antenna television ("SMATV"), Local Multipoint Distribution Service ("LMDS") and other new technologies. Other new technologies may become competitive with services that cable communications systems can offer. For example, Bell South has recently announced plans to launch its Digital Subscriber Line ("DSL") services which will compete with the Company's high speed Internet access services. In addition, with respect to non-video services, the FCC has authorized television broadcast stations to transmit, in subscriber frequencies, text and graphic information useful both to consumers and to businesses. The FCC has recently adopted a final Table of Allotments and Rules for the assignment of channels for high definition television ("HDTV"). 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 will now be 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 these areas but continues to pursue the provision of wireless cable services in certain cities in the Southeast. 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. -23- 26 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 (the "1996 Act"). Among other things, the 1996 Act reduces in some circumstances, and by March 31, 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 elected the benchmark or cost-of-service methodologies to justify its 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 FCC released a series of orders in 1996 and 1997 in which it found the Company's rates in the majority of cases to be reasonable, but several cost-of-service cases are still 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 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 remaining 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. The FCC, Congress and local franchising authorities continue to be concerned that cable rates are rising too rapidly. The FCC has begun to explore ways of addressing this issue. For example, a bill was recently introduced in Congress which would repeal the deregulation of CPS tiers now scheduled for March 1999. The outcome of this bill or other similar bills cannot be predicted at this time. 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 InterMedia Partners, a California limited partnership ("IP"), InterMedia Partners II, L.P. ("IP-II"), InterMedia Partners III, L.P. ("IP-III"), InterMedia Capital Partners VI, L.P. ("ICP-VI"), and their consolidated subsidiaries 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 IP, IP-III and ICP-VI and their consolidated subsidiaries (together the "Related InterMedia Entities"). 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 IP-II 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. Failure to obtain franchise renewals or the imposition of new or different conditions could have a material adverse effect on the Company. LOSS OF BENEFICIAL RELATIONSHIP WITH TCI -24- 27 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, 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. 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 -- Overview -- Transactions with Affiliates." PURCHASE OF NOTES UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control, 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. 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 securities for which there is a limited 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. NationsBanc Capital Markets, Inc. ("NationsBanc") and Toronto Dominion Securities (USA) Inc. ("Toronto Dominion") have made a market in the Notes, however such market making activities may be discontinued at any time without notice. Accordingly, there can be no assurance as to the continued development or liquidity of any market for the Exchange Notes. 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 the market for the Exchange Notes will continue to develop, or that such a market would not be subject to similar disruptions. YEAR 2000 The Company is in the process of conducting a review of its computer systems to identify the systems that could be affected by the year 2000 issue and is developing an implementation plan to resolve the issue. Generally, the year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The systems being evaluated include all internal use software and devices and those systems and devices that manage the distribution of the Company's video and data services to subscribers. The Company is utilizing both internal and external resources to identify, correct and reprogram, and test systems for year 2000 readiness. The Company is currently conducting an inventory of its accounting and information systems, data and voice networks, engineering systems, facilities, hardware and software supporting distribution of the Company's services, and other equipment and systems potentially impacted by the year 2000 problem. The Company expects to complete the inventory and assessment of its internal hardware and software systems that will require remediation or replacement by -25- 28 the end of 1998. The Company relies heavily on certain significant third party vendors, such as its billing service vendor, to provide services to its subscribers. Such third party vendors whose systems are critical to the Company's cable operations are being identified and surveyed. Representations have been received from certain of the vendors indicating that they are either fully compliant or have plans in place to ensure compliance. The Company intends to have further communication with primary vendors which do not respond to the survey or which are identified as having systems that are not year 2000 compliant to assess those vendors' plans for remediating their own year 2000 issues and to assess the impact on the Company if such vendors fail to remediate their year 2000 issues. The Company expects to complete its assessment of the impact of the year 2000 issue by March 31, 1999. The Company continues to evaluate the level of validation it will require of third parties to ensure their year 2000 readiness. Management of the Company has not yet determined the total cost associated with its year 2000 project and the related potential impact on the Company's results of operations. Amounts expended to date have not been material, although there can be no assurance that the total expense of the year 2000 project will not have an adverse effect on the Company's financial position. Additionally, there can be no assurance that the Company's third party suppliers will all be fully compliant. The failure of the Company or its primary suppliers to resolve the year 2000 issue adequately could have a material adverse effect on the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit Index
EXHIBIT SEQUENTIALLY NUMBER EXHIBIT NUMBERED PAGES ------ ------- --------------- 24.1 Power of Attorney (included on page 27).................... 27.1 Schedule of Financial Data for InterMedia Capital Partners IV, L.P...........................................
(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 June 30, 1998. -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 General Partner By: InterMedia Management, Inc., its Managing Member By: /s/ ROBERT J. LEWIS -------------------------------------------- Robert J. Lewis President Date: August 13, 1998. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Robert J. Lewis and Edon V. Hartley, 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. /s/ ROBERT J. LEWIS - -------------------------------- President, Chief Executive Officer and Sole August 13, 1998 Robert J. Lewis Director of InterMedia Management, Inc. (principal executive officer) /s/ EDON V. HARTLEY - -------------------------------- Chief Financial Officer of InterMedia August 13, 1998 Edon V. Hartley Management, Inc. (principal financial officer) /s/ THOMAS R. STAPLETON - --------------------------------- Vice President of InterMedia August 13, 1998 Thomas R. Stapleton Management, Inc. (principal accounting officer)
-27- EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1000 U.S. DOLLARS 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 1 6,714 45,999 25,566 (1,982) 0 65,849 324,749 0 937,576 69,691 0 13,698 0 0 (36,613) 937,576 69,405 69,405 22,054 69,712 74 0 19,753 (19,214) (1,094) (18,350) 0 0 0 (18,350) 0 0 PP&E IS SHOWN NET OF ACCUMULATED DEPRECIATION. INCLUDES PROGRAM FEES AND OTHER DIRECT EXPENSES.
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