-----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, NRqomxD17Qag9tLkVc0iUyLE0V48fyVgFQ2VON+1H/zIJGxGkFzPl1xyeMgrrdAX AL22CjrkuOUIxQigXeSZhg== 0000950149-99-000565.txt : 19990331 0000950149-99-000565.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950149-99-000565 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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-K405 SEC ACT: SEC FILE NUMBER: 333-11893 FILM NUMBER: 99578610 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-K405 1 INTERMEDIA PARTNERS FISCAL YEAR ENDED 12/31/98 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] This report, including exhibits, consists of 207 pages. The Index of Exhibits is found on page 134. 2 INTERMEDIA CAPITAL PARTNERS IV, L.P. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. Business........................................................... 3 ITEM 2. Properties......................................................... 23 ITEM 3. Legal Proceedings.................................................. 23 ITEM 4. Submission of Matters to a Vote of Security Holders................ 24 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters................................................ 24 ITEM 6. Selected Financial Data............................................ 24 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 29 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk......... 49 PART III ITEM 8. Financial Statements and Supplementary Data........................ 51 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................................... 119 ITEM 10. Directors and Executive Officers of the Registrant................. 119 ITEM 11. Executive Compensation............................................. 121 ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................................................... 122 ITEM 13. Certain Relationships and Related Transactions..................... 122 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 126 SIGNATURES.................................................................... 129 Supplemental Information...................................................... 129
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 CLUSTERING AND OPERATING STRATEGIES, CAPITAL EXPENDITURES, THE DEVELOPMENT OF NEW SERVICES, 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 ITEM 1 "CERTAIN FACTORS AFFECTING FUTURE RESULTS." THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. 2 3 PART I ITEM 1. BUSINESS THE COMPANY InterMedia Capital Partners IV, L.P., a California limited partnership ("ICP-IV") was formed on March 19, 1996 as a successor to InterMedia Partners IV, L.P. ("IP-IV") which was formed in October 1994, to acquire and consolidate various cable television systems located in high-growth areas of the southeastern United States ("Southeast"). ICP-IV (together with its subsidiaries, the "Company") has one of the largest concentrations of basic subscribers in the Southeast and is the largest cable television service provider in Tennessee. The Company's operations are composed of three clusters that, in the aggregate, served approximately 590,600 basic subscribers and passed approximately 932,800 homes as of December 31, 1998. Acquisitions and Financing During the year ended December 31, 1996 the Company acquired cable television systems (the "Acquisitions") serving as of the acquisition dates approximately 567,200 basic subscribers in Tennessee, South Carolina and Georgia. The Acquisitions were accomplished through the following transactions: The Company's acquisition from affiliates on July 30, 1996 of controlling equity interests in InterMedia Partners of West Tennessee, L.P. ("IPWT") and Robin Media Group, Inc. ("RMG"), (ii) the equity contribution to the Company by Tele-Communications, Inc. ("TCI"), an affiliate, on July 30, 1996 of certain cable television systems located in the Greenville/Spartanburg metropolitan area in South Carolina ("Greenville/Spartanburg System"), (iii) the purchase of certain cable television systems located in Nashville, Tennessee ("Nashville System") on August 1, 1996 and (iv) the purchases of cable television systems serving approximately 59,600 basic subscribers in and around Nashville, Knoxville, Kingsport and central Tennessee, ("Miscellaneous Systems") at various dates during 1996. Prior to the Acquisitions, the Company had no operations. In connection with the Acquisitions, the Company obtained a $475.0 million revolving credit facility ("Revolving Credit Facility") and a $220.0 million term loan ("Term Loan," together with the Revolving Credit Facility, "Bank Facility") and issued $292.0 million of senior subordinated notes ("Notes"). The Company also obtained capital contributions from its general and limited partners of $360.0 million, including the non-cash contributions of the Greenville/Spartanburg System and IPWT. Pending Sales and Exchange In January 1999 the Company executed a letter of intent with affiliates of Charter Communications, Inc. ("Charter") to sell certain of its cable television systems serving approximately 286,000 basic subscribers as of December 31, 1998, in and around western and eastern Tennessee and Gainesville, Georgia and to exchange its cable systems serving approximately 120,000 basic subscribers as of December 31, 1998 in and around Greenville and Spartanburg, South Carolina for Charter systems serving approximately 140,000 basic subscribers, located in Indiana, Kentucky, Utah and Montana ("Charter Transactions"). The Charter Transactions include the sale of all of the Class A Common Stock of RMG. Also in January 1999 the Company received consents from the preferred and limited partners of ICP-IV, which gave the Company the right to proceed with negotiating the Charter Transactions and which provide for payment of cash distributions to the preferred and limited partners, other than TCI, of approximately $550 million, for redemption of their partner interests ("Final Equity Distributions") upon completion of the Charter Transactions. Expected net proceeds from the Charter Transactions of approximately $850 million and the Final Equity Distributions are subject to certain adjustments. The Company expects to close the Charter Transactions and make the Final Equity Distributions during the third quarter of 1999. Consummation of the Charter Transactions are subject to a number of conditions, including regulatory and lender consents. Use of proceeds from the Charter Transactions, including the Final Equity Distributions, are also subject to lender consents. Upon consummation of the Charter Transactions and the Final Equity Distributions, TCI will own 99.999% of the partner interests in the Company. Relationship with TCI and InterMedia Management, Inc. TCI, through wholly owned subsidiaries, directly and indirectly owns 49.6% of ICP-IV's non-preferred equity. TCI is one of the largest cable television operator in the United States, serving more than 11.9 million subscribers. On March 9, 1999, AT&T 3 4 and TCI completed their merger, and TCI became AT&T Broadband & Internet Services. All references herein to TCI, for matters occurring after the merger, shall be to AT&T Broadband & Internet Services. As a result of its relationship with TCI, the Company has the ability to purchase its programming and certain equipment at rates approximating those available to TCI. The Company has a contract with Satellite Services, Inc. ("SSI"), a subsidiary of TCI, to obtain basic and premium programming. SSI contracts with various programmers to purchase programming for TCI and its affiliated companies. The Company has the option to purchase its programming through its contract with SSI for which it pays SSI's cost, plus an administrative fee. See "Certain Factors Affecting Future Results -- Loss of Beneficial Relationship with TCI." Pursuant to administration agreements between each of the subsidiaries of ICP-IV and InterMedia Management, Inc. ("IMI"), the managing member of the managing general partner of ICP-IV, IMI provides certain management services to the Company for a fixed fee of $3,350 per annum. IMI has also entered into service agreements with the Company under which IMI provides accounting and administrative services to the Company at cost. OVERVIEW OF CABLE TELEVISION SYSTEMS The Company's operations are located in three clusters of the Southeast. The "Nashville/Mid-Tennessee Cluster" serves seven contiguous counties (Robertson, Sumner, Wilson, Rutherford, Williamson, Cheatham and Davidson) that encompass Nashville and its suburbs ("Nashville Metropolitan Market"). The Nashville/Mid-Tennessee Cluster also serves rural and suburban areas located in other counties in middle Tennessee, and an area of western Tennessee between Nashville and Memphis. The "Greenville/Spartanburg Cluster" is located in the northwest corner of South Carolina and the northeast corner of Georgia and serves five counties (Greenville, Spartanburg, Cherokee, Union and Pickens) that encompass the combined metropolitan area of Greenville/Spartanburg ("Greenville/Spartanburg Metropolitan Market"). The "Knoxville/East Tennessee Cluster" serves the suburbs of Knoxville, which include parts of Blount, Knox, Loudon and Sevier counties, and rural areas west and south of Knoxville ("Knoxville Metropolitan Market"). In addition, the cluster serves the city of, and certain areas surrounding, Kingsport. As of December 31, 1998, operating data for the Company's three clusters was as follows:
Basic Homes Basic Subscribers Passed Penetration ----------- ------ ----------- Nashville/Mid-Tennessee Cluster 337,697 536,567 62.9% Greenville/Spartanburg Cluster 147,419 244,032 60.4% Knoxville/East Tennessee Cluster 105,513 152,164 69.3% ------- ------- Total 590,629 932,763 63.3% ======= =======
Revenues and Services The Company earns revenues primarily from monthly service rates and related charges to its subscribers. The Company offers to its subscribers various types of programming, which include basic service, tier service, premium service, pay-per-view programs and various program packages which include several of these services at combined rates. Basic cable television service generally consists of signals of all four national television networks, various independent and educational television stations, PBS (the Public Broadcasting System) and certain satellite-delivered programs. The expanded basic or cable programming services ("CPS") tier generally includes satellite-delivered cable networks such as ESPN, CNN, TNT, the Family Channel, Discovery and others. Premium services consist of feature films, sporting events and other special features that are presented without commercial interruption. Premium services are offered to subscribers at a separate monthly charge for each pay unit and at discounted prices for combinations or packages of pay services. Certain of the Company's cable television systems also provide extra or "multiplexed" 4 5 channels of premium services such as HBO, Cinemax and Showtime free of charge to its premium service subscribers. Pay-per-view services allow subscribers to receive single programs, frequently consisting of feature movies, special events, sporting events and adult programming on a per-day or per-event basis. For the year ended December 31, 1998, of the Company's total revenues, basic and tier services generated 69.2%, premium service fees 12.0%, pay-per-view revenues 2.4%, advertising revenues 4.5%, equipment rentals 5.3% and installation fees, home shopping commissions and other miscellaneous fees 6.6%. OPERATING STRATEGY The Company owns and operates cable television systems in geographically clustered, high-growth markets in the Southeast. The operating strategy includes the following key elements: Cluster Subscribers. Management believes the Company derives certain operating advantages by clustering its operations, including centralizing management, billing, marketing, customer service, technical and administrative functions, and reducing the number of headends. The Company has (i) created regional customer service centers in each of the operating regions, which allow the Company to staff, train and monitor its customer service operations more effectively, and (ii) reduced the number of its headends, engineering support facilities and associated maintenance costs. Management believes that clustering also provides the Company with significant revenue opportunities including the ability to attract additional advertising and to offer a broader platform for data services. Focus on Regions with Attractive Demographics. Management believes that the Company will continue to benefit from the household growth in, and the outward expansion of, the metropolitan areas served by the Company. Furthermore, management believes that households located in areas with attractive demographics are more likely to subscribe to cable television services, premium service packages and new product offerings. Upgrade Cable Television Systems. Management believes that the Company's "Capital Improvement Program," which was designed to comprehensively upgrade the Company's distribution network, will continue to reduce costs, create additional revenue opportunities, increase customer satisfaction and enhance system reliability. Through December 31, 1998, the Company had spent $183.9 million on its Capital Improvement Program which is now substantially complete. The implementation of the Capital Improvement Program has benefited the Company by providing expanded channel capacity, enhanced network quality and dependability, wider availability of addressable services and, in certain systems, the capability to offer digital cable service tiers and high speed Internet access. Target Additional Revenue Sources. Management believes that the Company's geographic clustering, the demographic profile of its subscribers and its Capital Improvement Program have afforded the Company the opportunity to pursue revenue sources incremental to its core business. Management also believes that the Company can create additional revenue growth opportunities through further development of existing cable network, premium, pay-per-view, advertising and home shopping services. With the upgrade of its cable television plant, the Company has and continues to launch additional cable and premium channels, and expand pay-per-view choices through addressable converters. Under an agreement with @Home Network ("@Home"), the Company provides high-speed Internet access over the Company's broadband network in certain of the Company's cable television systems. The Company began providing the @Home service to its customers in September 1997. With the use of a cable modem, @Home customers can access the Internet at speeds substantially in excess of conventional modems. For a fixed monthly rate @Home customers receive a cable modem, an e-mail account, unlimited high speed Internet access, an "always on" Internet connection, and access to proprietary @Home content and services. Possible other future services include near video-on-demand ("NVOD") and interactive services such as video games. With the upgrade of its cable television plant, certain of the Company's cable television systems began providing InterMedia's Digital Cable Service ("I-DIG") during 1998. Pursuant to the Capital Improvement Program, several of the Company's headends were upgraded during 1997 and 1998 with equipment necessary to allow the reception and transmission of digital signals over the cable network. Under a contract with the Company, National Digital Television Center, Inc., an affiliate of TCI, provides services related to the transport and delivery of digitally compressed programming services to the Company's headends. 5 6 Emphasize Customer Service. Management believes that the Company provides quality customer service and attractive programming packages at reasonable rates. As part of its customer service efforts, the Company provides training and incentive programs for all of its employees and also provides same-day, evening and weekend installation and repair visit options in several of its service areas. Increase Penetration Levels and Revenue per Subscriber. The Company continues to seek to increase its penetration levels for basic service, expanded basic service and premium service and to increase revenue per household through both new product offerings and marketing strategies such as (i) targeted promotions using database marketing techniques, (ii) retention marketing campaigns, (iii) augmenting the channel lineup for expanded basic services in certain systems based on customer surveys, (iv) offering multiplexed premium services in certain rebuilt systems and (v) increasing pay-per-view offerings in certain rebuilt systems. UPGRADE STRATEGY AND CAPITAL EXPENDITURES The Company has substantially completed the upgrade and rebuild of its cable television operations ("Systems") pursuant to its Capital Improvement Program. Pursuant to the Capital Improvement Program the Company has (i) deployed fiber optic cable, (ii) consolidated and upgraded headends, (iii) increased the use of addressable technology, (iv) installed two-way transmission capability in selected markets and (v) introduced digital compression capability. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Future Liquidity and Capital Resources." Deployed fiber optic cable. Fiber optic cable makes it possible to divide a system into a number of discrete service areas, or "nodes" of homes. The number of homes per node will vary, depending on the population density of the area covered by that section of the system. This design allows the Company to (i) narrow-cast advertising and programming to specific groupings of subscribers, (ii) significantly reduce ongoing maintenance and repair expenses and improve picture quality, as it reduces the number of active electronic devices in cascade, (iii) isolate the number of subscribers affected by most types of system malfunction or failure thus enhancing reliability and (iv) deliver data and interactive services. The Company's extensive deployment of fiber optic cable reduces the number of headends operated by the Company, resulting in a decrease in the Company's headend-related capital and maintenance expenditures. Consolidated and upgraded headends with backup power and remote network monitoring. Where feasible, neighboring systems have been and will continue to be interconnected via fiber optic cable into a single, upgraded headend. Refinements planned for all headends are designed to deliver high system reliability and improved operating efficiency. Network monitoring makes it possible to identify and correct many types of system malfunctions before they become evident to the subscriber. Increased use of addressable technology. Addressable technology is currently widely available in the Greenville/Spartanburg System and the Nashville System. The Company has and continues to expand its number of homes with access to addressable services, whether they are delivered in analog or digital format. Addressable technology provides subscribers with the ability to purchase the monthly, daily or per-event programs they desire and eliminates the need to send a technician to the subscriber's home when a subscriber changes his or her selection of services. Addressable technology can also provide substantial improvement in securing signals from theft of service. Installed two-way transmission capability. Cable television systems traditionally have been designed to transmit in a single direction from the headend. The Capital Improvement Program has made two-way transmission possible throughout several of the Systems. Two-way capability has permitted the Company to introduce digital cable tiers and high speed data services. Provided the capability to carry digitally compressed signals. The Company began deploying digital technology in certain of its systems during 1998. Digital compression enables a system to carry additional channels. For example, where a 12-to-1 digital compression system is employed, a system with 10 available analog channels today can add up to 120 channels of digital services. The following table summarizes the Systems' current technical profile and architecture in each of the three clusters where the Company's operations are located: 6 7
Percentage of Basic Subscribers as of December 31, 1998 ------------------------------------------------------------------------------------------ Bandwith Addressable ----------------------------------------------------- Two-way Converters 750 MHz 550 MHz 450 MHz <450 MHz Transmission ---------- ------- ------- ------- -------- ------------ Nashville/Mid-Tennessee 47.1 79.0 0.0 2.4 18.6 79.0 Greenville/Spartanburg 72.9 100.0 0.0 0.0 0.0 100.0 Knoxville/East Tennessee 32.8 0.0 37.2 62.8 0.0 37.2 Total Systems 51.1 70.6 6.4 12.3 10.7 77.0
COMPETITION Cable television systems face competition from other sources of news and entertainment such as newspapers, movie theaters, live sporting events, Internet services, interactive computer programs and home video products, including videotape cassette recorders and alternative methods of receiving and distributing video programming. Competing sources of video programming include, but are not limited to, off-air broadcast television, direct broadcast satellite ("DBS") service, multipoint multichannel distribution service ("MMDS") systems, satellite master antenna television ("SMATV") systems and, in some areas of the country, municipalities, telephone companies and utility companies. In addition, the federal, state and local governments in recent years have sought and continue to seek ways in which to increase competition in the cable industry. See "Legislation and Regulation." The extent to which cable service is competitive depends upon the ability of the cable system to provide at least the same quantity and quality of programming and, in some cases, advanced cable services such as digital cable services and Internet access services, at competitive price and service levels. DBS. DBS involves the transmission of an encoded signal directly from a satellite to the home user. DBS provides video service using a dish located at each subscriber's premises. Programming is currently available to the owners of home satellite dishes through conventional, medium and high-powered satellites. PrimeStar Partners, L.P. ("PrimeStar"), a consortium comprised of cable operators and a satellite company, commenced operation in 1990 of a medium-power DBS satellite system using the Ku portion of the frequency spectrum and currently provides service consisting of approximately 95 channels of programming, including broadcast signals and pay-per-view services. On February 19, 1998, the Federal Communications Commission ("FCC") initiated a DBS rulemaking proceeding, which, among other issues, requests comments on whether the FCC should implement cross-ownership restrictions between DBS and cable television operators and whether the FCC's alien ownership restrictions should apply to DBS subscription services. Several major companies are offering or are currently developing nationwide high-power DBS services, including DirecTV, Inc. ("DirecTV") and EchoStar Communications Corporation ("EchoStar"). DirecTV began offering nationwide high-power DBS service in 1994 accompanied by extensive marketing efforts, along with United States Satellite Broadcasting Company which uses capacity on DirecTV's satellite. Both United States Satellite Broadcasting Company and PrimeStar recently entered into agreements to sell their DBS business to DirectTV. EchoStar and DirectTV offer over 200 channels of service using video compression technology. EchoStar, which currently offers a similar package of programming, has begun to offer some local television signals in a limited number of markets. Currently, satellite program providers are only authorized to provide the signals of television network stations to subscribers who live in areas where over-the-air reception of such signals is not possible. Efforts are underway at the United States Copyright Office and in Congress to ensure that local broadcast television offerings are permissible under the Copyright law. Legislation was recently introduced which would permit DBS operators to rebroadcast local television offerings in areas where over-the-air reception of such signals is possible, providing the DBS operators complied with certain requirements, including market-specific must-carry requirements and compliance with programming black-out obligations. The Company cannot predict whether such legislation will be passed or the effect that it will have on the Company's business. The offering of local broadcast signals in DBS program packages combined with joint marketing agreements that have been entered into by DBS operators and local and long distance telephone companies provide substantial competition to the cable industry and the Company. Many DBS operators have also announced plans to provide high-speed Internet access service via satellite with a telephone return path at the outset. The offering of such Internet access services would provide competition to the Company's high-speed Internet access service. DBS service similar to the Company's basic expanded service starts at approximately $30 per month nationally. Prices for DBS systems have continued to fall dramatically over the last year. A DBS satellite dish can be purchased for approximately $100 or less under promotional offers from certain DBS service providers. The Company is experiencing increased 7 8 competition from DBS for both its single family home customers and its multiple dwelling unit ("MDU") customers. For example, DBS providers have begun targeting MDU complexes in the Company's service areas. While it is difficult to assess the magnitude of the impact that DBS will have on the Company's operations and revenues, there can be no assurance that it will not have a material adverse effect on the Company. MMDS/Wireless Cable. Wireless program distribution services such as MMDS, commonly called wireless cable television systems, use low-power microwave frequencies to transmit video programming to subscribers. These systems typically offer 20 to 34 channels of programming, which may include local programming. Because MMDS is an early generation technology that is in its early stages of implementation, it is difficult to assess the magnitude of the impact MMDS will have on the cable industry or upon the Company's operations and revenue. Advancement in MMDS distribution technology, including the proposed use of digital compression, could permit MMDS wireless operators to offer over 80 channels of programming. Additionally, the FCC adopted new regulations allocating frequencies in the 28 GHz band for a new multichannel wireless video service similar to MMDS called Local Multipoint Distribution Service ("LMDS"), which is capable of transmitting voice as well as video transmissions. Spectrum auctions for LMDS licenses commenced in February 1998. The FCC has imposed cross-ownership restrictions of these frequencies by cable operators and telephone companies which were recently upheld by the United States Court of Appeals for the District of Columbia Circuit. For a three-year period, cable operators and telephone companies will be precluded from operating on these frequencies in the same authorized or franchised service areas in which they provide service. See "Certain Factors Affecting Future Results -- Competition in the Cable Television Industry; Rapid Technological Change." In addition, certain wireless cable companies may be able to implement more competitive strategies through their affiliations with telephone companies. SMATV. SMATV systems may also present potential competition for cable television operators. SMATV operators typically enter into exclusive agreements with apartment building owners or homeowners' associations to service condominiums, apartment complexes, hospitals, hotels, commercial complexes and other MDUs. This often precludes franchised cable operators from serving residents of such private complexes. Due to widespread availability of reasonably priced earth stations, SMATV systems can offer many of the same satellite-delivered program services that are offered by franchised cable television systems. The Company is subject to increasing competition in the MDU market from various entities, including SMATV companies and other franchised cable operators which are offering bundled services including cable, Internet access and telephony. Under the Telecommunications Act of 1996 ("1996 Act"), the Company can engage in competitive pricing in response to pricing offered by SMATV systems. However, it is unclear, in particular because of a constantly changing regulatory environment, what the future impact of SMATV operators will be on the Company's operations and revenues. See "Certain Factors Affecting Future Results - -- Competition in the Cable Television Industry; Rapid Technological Change." Telephone Companies. The Company is subject to competition from local telephone companies. The federal law that banned the cross-ownership of cable television and telephone companies in the same service area was repealed so that potentially strong competitors, including telephone companies, which were previously subject to various restrictions against entering the cable television industry, may now provide cable television service in their service areas under certain circumstances. The 1996 Act permits telephone companies to provide cable television service through cable television systems and open video systems ("OVS"), and by leasing capacity as common carriers to other cable television service providers. Telephone companies may also provide video programming over wireless cable television systems. Assuming telephone companies begin to provide programming and other services to their customers on a commercial basis, they have competitive advantages which include an existing relationship with substantially every household in their service areas, substantial financial resources, an existing infrastructure and the potential ability to subsidize the delivery of programming through their position as the sole source of telephone service to the home. Given the financial resources of the local telephone companies and the changing legislative and regulatory environment, it is expected that the local telephone companies will provide increased competition for the cable television industry, including the Company, which could have a material adverse effect on the Company. Telephone and other companies provide facilities for the transmission and distribution to homes and businesses of interactive personal computer services, including Internet access services and Web TV services, as well as data and other non-video services. The Company currently markets standard Internet Service Provider services and high-speed Internet access and data services in several areas served by its cable systems, and plans to continue to roll-out such services in additional markets. The high-speed cable modems currently used by the Company are capable of providing access to interactive online information services, including the Internet, at speeds up to 100 times faster than those of conventional or ISDN modems used by other service providers. Competitors in this area include local exchange companies (also known as local exchange carriers or "LECs"), Internet service providers, long distance carriers, 8 9 satellite companies, other cable companies, consumer electronics companies and others, many of whom have more substantial financial resources than the Company. Several parties have requested that the FCC fully deregulate packet-switched networks to allow the provision of high-speed broadband services without regard to present Local Access Transport Area or "LATA" boundaries and other regulatory restrictions, and the Company expects that competition in the Internet access and interactive services area will be significant. The Company cannot predict the likelihood of success of the broadband services offered by the Company's competitors or the impact on the Company of such competitive ventures. BellSouth Telecommunications, Inc. ("BellSouth") applied for cable franchises in certain of the Company's franchise areas in 1996 and has acquired a number of wireless cable companies in regions where the Company operates. However, BellSouth has since publicly 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 ("TCTA") and the Cable Television Association of Georgia ("CTAG") filed a formal complaint with the FCC challenging certain alleged acts and practices that BellSouth is taking in certain areas of Tennessee and Georgia, including, among others, subsidizing its deployment of cable television facilities with regulated services revenues that are not subject to competition. The Company is joined by several other cable operators as the "Complainant Cable Operators" in the complaint. The cross-subsidization claims are currently pending before the FCC's Common Carrier Bureau. In addition, the TCTA filed a petition with the Tennessee Regulatory Authority ("TRA") on November 27, 1996 seeking an investigation and audit by the TRA into BellSouth's activities concerning the construction and deployment of video distribution facilities in Tennessee. Specifically, the petition requests that the TRA review the TCTA's allegations regarding cross-subsidization, anti-competitive conduct and unlawful construction activities in light of Tennessee law and the TRA's rules and policies on promoting competition. The Company is joined by several other cable operators, who are also TCTA members, in bringing the petition. In addition, BellSouth has recently announced plans to launch its Digital Subscriber Line ("DSL") services which will compete with the Company's high speed Internet access services. Overbuilds. Since the Systems generally operate under non-exclusive franchises, other operators may obtain franchises to build competing cable television systems. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") prohibits franchising authorities from unreasonably refusing to award additional franchises and permits the authorities to operate cable television systems themselves without franchises. In Georgia, a number of municipalities have constructed cable television systems and are providing cable services, Internet access services and data services in competition with the existing cable companies. The electric utility departments for these municipalities typically operate the majority of these municipally owned cable systems. On behalf of its member entities, the CTAG is supporting legislation which would ensure fair competition between municipalities and cable companies. The proposed legislation, which has the support of the municipal association, seeks, in part, to prohibit the cross-subsidization of the cable business by the municipal electric business and to generally ensure a level competitive playing field. In Tennessee, the municipal electric utility association and the rural electric cooperative association, on behalf of their members, are supporting legislation which will repeal a current ban on their ability to provide cable services, Internet access services and data services. This legislation would also provide municipalities and the rural electric cooperatives with the right to compete or enter into joint ventures with existing cable operators, respectively. The TCTA is reviewing this legislation on behalf of its member entities and is seeking to oppose it, or at a minimum, to include provisions which would prohibit the cross-subsidization of the cable business by the municipal electric business and to generally ensure a level competitive playing field. Should the ban be repealed, several municipalities throughout Tennessee, including a few municipalities in the Company's service areas that have expressed an interest in constructing a cable system, may provide competing cable services. The outcome of the legislative efforts in Georgia and Tennessee cannot be predicted at this time but could have a material effect on the ability of cable companies to provide competitive cable, Internet and other services. The Company is not aware of any material overbuild, or any pending applications for overbuilds, in any of its franchise areas except as noted above. However, the Company is unable to predict whether any of the Systems will be subject to an overbuild by franchising authorities or other cable operators in the future, or what effect, if any, such an overbuild may have on the Company. Other Competition. Other new technologies may become competitive with services that cable communications systems can offer. 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"). With additional bandwidth to provide HDTV signals, a broadcaster could be a potential competitor providing multiple channels of digital video programming. The FCC also permits commercial and non-commercial FM stations to use their subcarrier frequencies to provide non-broadcast services, including data transmissions. The FCC recently established an over-the-air interactive video and data service that will permit two-way interaction with commercial and educational programming, along with informational and data services. Telephone companies and other common 9 10 carriers also provide facilities for the transmission and distribution of data and other non-video services. Additionally, the 1996 Act permits registered public utility holding companies, subject to regulatory approval of the FCC, to diversify into telecommunications, information services and related services through a single-purpose subsidiary. Such utilities have substantial resources and could pose substantial competition to the cable industry. Technological advances and changes in the legislative and regulatory environment have made it very difficult to predict the effect that ongoing and future developments may have on the cable television industry in general or on the Company in particular. While the Company's upgrade strategy is intended to enhance its ability to respond effectively to competition, there can be no assurance that the Company will be successful in meeting competition. The Company cannot predict the extent to which competition will materialize or the extent of its effect on the Company. FRANCHISES Cable television systems are generally constructed and operated under non-exclusive franchises granted by local governmental authorities. These typically contain many conditions, such as system upgrade or rebuild requirements, time limitations on commencement and completion of construction; general construction requirements; conditions of service, including number of channels, broad categories of programming, minimum customer service and technical performance standards; the provision of free public, educational and governmental channel access and support requirements; institutional network requirements; and maintenance of insurance and indemnity bonds. Certain provisions of local franchises are subject to federal regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the 1992 Cable Act and the 1996 Act. In connection with the renewal of a franchise, the franchise authority may require the cable operator to comply with different and more stringent conditions than those originally imposed, subject to the 1984 Cable Act and other applicable federal, state and local laws. Under the 1996 Act, however, a franchising authority may not require a cable operator to provide telecommunications services or facilities, other than an institutional network, as a condition to a grant, renewal, or transfer of a cable franchise, and franchising authorities are preempted from regulating telecommunications services provided by cable operators and from requiring cable operators to obtain a franchise to provide such services. Subject to applicable law, a franchise may be terminated prior to its expiration date if the cable television operator fails to comply with the material terms and conditions thereof. Under the 1984 Cable Act, if a franchise is lawfully terminated, and if the franchising authority acquires ownership of the cable television system or effects a transfer of ownership to a third party, such acquisition or transfer must be at an equitable price or, in the case of a franchise existing on the effective date of the 1984 Cable Act, at a price determined in accordance with the terms of the franchise, if any. The Systems hold numerous franchises, all of which are non-exclusive and provide for the payment of fees to the issuing authority. Annual franchise fees imposed on the Systems range from 3.0% to 5.0% of the gross revenues generated by the system. The 1984 Cable Act prohibits franchising authorities from imposing franchise fees in excess of 5.0% of gross revenues and also permits the cable operator to seek renegotiation and modification of franchise requirements if warranted by changed circumstances. Under the 1992 Cable Act, cable operators are permitted to itemize the franchise fee and any costs pertaining to franchise-imposed requirements on a subscriber's bill and may pass through such costs to subscribers. Recently, a federal appellate court held that a cable operator's gross revenue includes all revenue received from subscribers, without deduction, and overturned an FCC order which had held that a cable operator's gross revenue does not include money collected from subscribers that is allocated to pay local franchise fees. Operators who relied on the FCC's order and did not permit required franchise fee payments may, in some circumstances, "pass through" such underpayments to subscribers. The federal appellate court decision did not have a material impact on the Company's results of operations. As of December 31, 1998, three franchises relating to approximately 1.3% of the Systems' basic subscribers have expired. The terms of these franchises require the Company to negotiate the renewals of such franchises with the local franchising authorities, and all three franchises are currently in informal renewal negotiations. The Company and the local franchising authorities are operating under extensions of previous franchises while renewal negotiations continue. During the next five years the renewal process must commence for approximately 40% of the Company's franchises relating to approximately 30% of the Systems' basic subscribers. 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. The 1984 Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act, establishes an orderly process for franchise renewal which protects cable operators against unfair denials of renewals when the operator's past performance and proposal for future performance meet the standards established by the 1984 Cable Act. Management believes that it has generally met the terms of its 10 11 franchises and it anticipates that its future franchise renewal prospects generally will be favorable. Historically, the Company has never had a franchise revoked or failed to have a franchise renewed. LEGISLATION AND REGULATION The cable television industry is regulated at the federal level through a combination of legislation and FCC regulations, by some state governments and by substantially all local government franchising authorities. Various legislative and regulatory proposals under consideration from time to time by the Congress and various federal agencies have in the past, and may in the future, materially affect the Company and the cable television industry. Additionally, many aspects of regulation at the federal, state and local level are currently subject to judicial review or are the subject of administrative or legislative proposals to modify, repeal or adopt new laws and administrative regulations and policies. Federal legislation includes the Cable Communications Policy Act of 1984 (the "1984 Cable Act"), Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), the Telecommunications Act of 1996 (the "1996 Act"), Copyright Act of 1976 (the "Copyright Act") and regulations implementing these statutes. The following summarizes significant regulations and legislation affecting the growth and operation of the cable television industry. Rate Regulation. On September 1, 1993, rate regulation was instituted under the 1992 Cable Act for certain cable television services and equipment in communities that are not subject to effective competition as defined in the legislation. "Effective competition" is defined by the 1992 Cable Act to exist only where (i) fewer than 30% of the households in the franchise area subscribe to a cable service; or (ii) at least 50% of the homes in the franchise area are passed by at least two unaffiliated multichannel video programming distributors where the penetration of at least one distributor other than the largest exceeds 15%; or (iii) a multichannel video programming distributor operated by the franchising authority for that area passes at least 50% of the homes in the franchise area. A local franchising authority seeking to regulate basic service rates must certify to the FCC, among other matters, that it has adopted regulations consistent with the FCC's rate regulation guidelines and criteria. The 1992 Cable Act also requires the FCC to resolve complaints about rates for CPS (i.e., rates other than for programming offered on the basic service tier or on a per channel or per program basis) and to reduce any such rates found to be unreasonable. The 1992 Cable Act eliminates the automatic 5.0% annual basic service rate increase permitted by the 1984 Cable Act without local approval. In April 1993, the FCC adopted regulations governing the determination of rates for basic tier and cable programming tier services and equipment. The regulations became effective on September 1, 1993. Cable operators may elect to justify regulated rates for both tiers of service under either a benchmark or cost-of-service methodology. Except for those operators that filed cost-of-service showings, cable operators with rates that were above September 30, 1992 benchmark levels generally reduced those rates to the benchmark level or by 10.0%, whichever was less, adjusted forward for inflation. Cable operators that have not adjusted rates to permitted levels could be subject to refund liability including applicable interest. In February 1994, the FCC revised its benchmark regulations. Effective May 1994, cable television systems not seeking to justify rates with a cost-of-service showing were to reduce rates up to 17.0% of the rates in effect on September 30, 1992, adjusted for inflation, channel adjustments and changes in equipment and programming costs. Under certain conditions systems were permitted to defer these rate adjustments until July 14, 1994. Further rate reductions for cable systems whose rates were below the revised benchmark levels, as well as reductions that would require operators to reduce rates below benchmark levels in order to achieve a 17.0% rate reduction, were held in abeyance pending completion of cable system cost studies. The FCC subsequently adopted an order which made permanent its deferral of the full 17.0% rate reduction, and consequently these systems will not be required to reduce their rates by the full competitive differential previously implemented by the FCC. The FCC also adopted a cost of service rate form to permit operators to recover the costs of upgrading their plant. 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 in 1996, 1997 and 1998 a series of orders 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. 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. In November 1994, the FCC also revised its regulations governing rate adjustments due to channel changes and additions. From January 1, 1995 through December 31, 1996, cable operators could charge basic subscribers up to $.20 per channel for channels added after May 14, 1994. Adjustments to monthly rates during this period were capped at $1.20 plus an additional $.30 to cover 11 12 programming license fees for those channels. During 1997, cable operators could increase rates by $.20 for one additional channel. Rates may also increase in the third year to cover any additional costs for the programming for any of the channels added during the entire three-year period. Additionally, the FCC permits cable operators to exercise their discretion in setting rates for New Product Tiers ("NPTs") containing new programming services, so long as, among other conditions, the channels that are subject to rate regulation are priced in conformance with applicable regulations and cable operators do not remove programming services from existing rate-regulated service tiers and offer them on the NPT. In September 1995, the FCC authorized a new, alternative method of implementing rate adjustments which will allow cable operators to increase rates for programming annually on the basis of projected increases in external costs (inflation, costs for programming, franchise-related obligations, and changes in the number of regulated channels) rather than on the basis of cost increases incurred in the preceding quarter. Cable operators that elect not to recover all of their accrued external costs and inflation pass-throughs each year may recover them (with interest) in the subsequent year. In December 1995, the FCC adopted final cost-of-service rate regulations requiring, among other things, cable operators to exclude 34.0% of system acquisition costs related to intangible and tangible assets used to provide regulated services. The FCC also reaffirmed the industry-wide 11.25% after tax rate of return on an operator's allowable rate base, but initiated a further rulemaking in which it proposes to use an operator's actual debt cost and capital structure to determine an operator's cost of capital or rate of return. In the FCC orders released in 1996 and 1997 which found certain of the Company's rates to be reasonable, the FCC based its determinations on the final cost-of-service rules. The Company generally excluded 34.0% or more of system acquisition costs from its cost of service filings and, therefore, found the final rules, with few exceptions, to follow the Company's filing methodology. After a rate has been set pursuant to a cost-of-service showing, rate increases for regulated services are indexed for inflation, and operators are permitted to increase rates in response to increases in costs including increases in programming, retransmission, franchise, copyright and FCC user fees and increases in cable specific taxes and franchise related costs. The 1996 Act amends the rate regulation provisions of the 1992 Cable Act. The FCC has issued interim regulations implementing these amendments and has requested comments on its proposed final regulations. Under the 1996 Act, CPS tier rates are to be deregulated on March 31, 1999. The 1996 Act allows cable operators to aggregate equipment costs into broad categories, such as converter boxes, regardless of the varying levels of functionality of the equipment within each such broad category, on a franchise, system, regional, or company level. The statutory changes also facilitate the rationalizing of equipment rates across jurisdictional boundaries. These cost-aggregation rules do not apply to the limited equipment used by basic service-only subscribers. Regulation of basic cable service continues in effect until a cable television system becomes subject to effective competition. In addition to the existing definition of effective competition, a new effective competition test permits deregulation of both basic and CPS tier rates where a telephone company offers cable service by any means (other than direct-to-home satellite services) provided that such service is comparable to the services provided in the franchise area by the unaffiliated cable operator. Subscribers are no longer permitted to file programming service complaints with the FCC, and complaints may only be brought by a franchising authority if, within 90 days after a rate increase becomes effective, it receives more than one subscriber complaint. The FCC is required to act on such complaints within 90 days. The uniform rate provision of the 1992 Cable Act is amended to exempt bulk discounts to multiple dwelling units so long as a cable operator that is not subject to effective competition does not charge predatory prices to a multiple dwelling unit. Although regulation under the 1992 Cable Act has been detrimental to the Company, it is still not possible to predict the 1992 Cable Act's full impact on the Company. Its impact will be dependent, among other factors, on the continuing interpretation to be afforded by the FCC and the courts to the statute and the implementing regulations, as well as the actions of the Company in response thereto. The Company expects to continue to sustain higher operating costs in order to administer the additional regulatory burdens imposed by the 1992 Cable Act, although, should the sunset of rate regulation on the CPS tier occur on March 31, 1999, the Company expects some reduction in its administrative burdens. 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, and several bills have recently been introduced in Congress which would repeal the deregulation of CPS tiers now scheduled for March 1999 and/or require the establishment of a low cost basic tier. The outcome of these bills cannot be predicted at this time. Cable Television Entry into Telephony. The 1996 Act is intended, in part, to promote substantial competition in the marketplace for telephone local exchange service and in the delivery of video and other services and permits cable television operators 12 13 to enter the local telephone exchange market. The Company's ability to competitively offer telephone services may be adversely affected by the degree and form of regulatory flexibility afforded to local telephone companies (also known as LECs), and in part, will depend upon the outcome of various FCC rulemakings, including the current proceeding dealing with the interconnection obligations of telecommunications carriers. On August 8, 1996 the FCC adopted a national framework for interconnection but left to the individual states the task of implementing the FCC's rules. Although the FCC's interconnection order is intended to benefit new entrants in the local exchange market, it is uncertain how effective that order will be until the FCC completes all of its rulemaking proceedings under the 1996 Act and state regulators complete implementation of the FCC's regulations. The Eighth Circuit Court of Appeals has overturned many of the interconnection rules affecting LECs, including the pricing rules, dialing parity rules, certain rules governing unbundled elements and the "pick and choose" rule (which allows carriers to request that the incumbent LEC make available to them any interconnection, service or network element contained in an approved agreement to which the LEC was a party, under the same terms and conditions). On January 25, 1999, the United States Supreme Court issued its decision reversing the Eighth Circuit's decision and thereby reinstating the FCC interconnection rules. Many states have applied the FCC's interpretations of the 1996 Act as guidelines. The telephony provisions of the 1996 Act promote local exchange competition as a national policy by eliminating legal barriers to competition in the local telephone business and setting standards to govern the relationships among telecommunications providers, establishing uniform requirements and standards for entry, competitive carrier interconnection and unbundling of LEC monopoly services. The statute expressly preempts any legal barriers to competition under state and local laws. The 1996 Act also establishes new requirements to maintain and enhance universal telephone service and new obligations for telecommunications providers to maintain the privacy of customer information. Competitive Entry into Video. Federal cross-ownership restrictions have previously limited entry into the cable television business by potentially strong competitors such as telephone companies. The 1996 Act repeals the cross-ownership ban and provides that telephone companies may operate cable television systems within their own service areas. The 1996 Act will enable telephone companies to provide video programming services as cable operators or as common carriers through open video systems ("OVS"), a regulatory vehicle that may give them more flexibility than traditional cable systems. If OVS systems become widespread in the future, cable television systems could be placed at a competitive disadvantage because, unlike OVS operators, cable television systems are required to obtain local franchises to provide cable television service and must comply with a variety of obligations under such franchises. The FCC has determined that a cable operator may operate an OVS only if it is subject to effective competition within its franchise area and this determination has been appealed; but, an operator that elects to operate an OVS continues to be subject to the terms of any current franchise or other contractual agreements. Under the 1996 Act, common carriers leasing capacity for the provision of video programming services over cable systems or as OVS operators are not bound by the interconnection obligations of Title II of the Communications Act of 1934, as amended, which otherwise would require the carrier to make capacity available on a nondiscriminatory basis to any other person for the provision of cable service directly to subscribers. Additionally, under the 1996 Act, common carriers providing video programming are not required to obtain a Section 214 certification to establish or operate a video programming delivery system. This will limit the ability of cable operators to challenge telephone company entry into the video market. With certain exceptions, the 1996 Act also restricts buying out incumbent cable operators in the LEC's service area. Common carriers that qualify as OVS operators are exempt from many of the regulatory obligations that currently apply to cable operators. However, certain restrictions and requirements that apply to cable operators will still be applicable to OVS operations. Common carriers that elect to provide video services over an OVS may do so upon obtaining certification by the FCC. The 1996 Act requires the FCC to adopt rules governing the manner in which OVS operators provide video programming services. Among other requirements, the 1996 Act prohibits OVS operators from discriminating in the provision of video programming services and requires OVS operators to limit carriage of video services selected by the OVS operator to one-third of the OVS's capacity. OVS operators must also comply with the FCC's sports exclusivity, network nonduplication and syndicated exclusivity restrictions, public, educational, and government channel use requirements, the "must-carry" requirements of the 1992 Cable Act, and regulations that prohibit anticompetitive behavior or discrimination in the prices, terms and conditions of providing vertically integrated satellite-delivered programming. Upon compliance with such requirements, an OVS operator will be exempt from various statutory restrictions which apply to cable operators, such as broadcast-cable ownership restrictions, commercial leased access requirements, franchising, rate regulation, and consumer electronics compatibility requirements. Although OVS operators are not subject to franchise fees, as defined by the 1996 Act, they may be subject to fees charged by local franchising authorities or other governmental entities in lieu of franchise fees. Such fees may not exceed the rate at which franchise fees are imposed on cable operators and may be itemized separately on 13 14 subscriber bills. It was anticipated that the primary benefit of using the OVS model was the avoidance of the need to obtain a local franchise prior to providing services. However, in January 1999, a federal court of appeals held that OVS providers can be required to obtain such a franchise. The 1996 Act generally restricts common carriers from holding greater than a 10.0% financial interest or any management interest in cable operators which provide cable service within the carrier's telephone exchange service area or from entering joint ventures or partnerships with cable operators in the same market subject to four general exceptions which include population density and competitive market tests. The FCC may waive the buyout restrictions if it determines that, because of the nature of the market served by the cable television system or the telephone exchange facilities, the cable operator or LEC would be subject to undue economic distress by enforcement of the restrictions, the system or LEC facilities would not be economically viable if the provisions were enforced, the anticompetitive effects of the proposed transaction clearly would be outweighed by the public interest in serving the community, and the local franchising authority approves the waiver. The 1992 Cable Act seeks to encourage competition with existing cable television systems by: (i) allowing municipalities to own and operate their own cable television systems without having to obtain a franchise; (ii) preventing franchising authorities from granting exclusive franchises or unreasonably refusing to award additional franchises covering an existing cable system's service area; and (iii) prohibiting the common ownership of co-located MMDS or SMATV systems. See "-- Ownership." Ownership. The 1996 Act eliminates the statutory ban on the cross-ownership of a cable system and a television station, and permits the FCC to amend or revise its own regulations regarding the cross-ownership ban. The FCC lifted its ban on the cross-ownership of cable television systems by broadcast networks pursuant to the requirements of the 1996 Act. In order to encourage competition in the provision of video programming, the FCC adopted a rule in 1993 prohibiting the common ownership, affiliation, control or interest in cable television systems and MMDS facilities having overlapping service areas, except in very limited circumstances. The 1992 Cable Act also codified this restriction and extended it to co-located SMATV systems, except that a cable system may acquire a co-located SMATV system if it provides cable service to the SMATV system in accordance with the terms of its cable television franchise. Permitted arrangements in effect as of October 5, 1992 were grandfathered. The 1992 Cable Act permits states or local franchising authorities to adopt certain additional restrictions on the transfer of ownership of cable television systems. The 1996 Act amended the MMDS/SMATV co-ownership ban to permit co-ownership of MMDS or SMATV systems and cable television systems in areas where the cable operator is subject to effective competition. The cross-ownership prohibitions would preclude investors from holding ownership interests in the Company if they simultaneously served as officers or directors of, or held an attributable ownership interest in, these other businesses, and would also preclude the Company from acquiring a cable television system when the Company's officers or directors served as officers or directors of, or held an attributable ownership in, these other businesses which were located within the same area as the cable system which was to be acquired. Carriage of Broadcast Television Signals -- Must Carry/Retransmission Consent. The 1992 Cable Act contained new signal carriage requirements. The FCC's regulations implementing these provisions allow commercial television broadcast stations which are "local" to a cable system, i.e., the system is located in the station's Area of Dominant Influence ("ADI"), to elect every three years whether to require the cable system to carry the station, subject to certain exceptions, or whether the cable system will have to negotiate for "retransmission consent" to carry the station. The first such election by local broadcast stations was made on June 17, 1993 and the second election was made on October 6, 1996. Local noncommercial television stations are also given mandatory carriage rights, subject to certain exceptions, but are not given the option to negotiate retransmission consent for the carriage of their signal. In March 1997 the U.S. Supreme Court affirmed a District of Columbia three-judge court decision upholding the constitutional validity of the 1992 Cable Act's mandatory signal carriage requirements. In addition, cable systems are required to obtain retransmission consent for the carriage of all "distant" commercial broadcast stations (except for certain "superstations," i.e., commercial satellite-delivered independent stations such as WTBS), commercial radio stations and certain low powered television stations carried by such cable systems after October 5, 1993. Generally, a cable operator is required to dedicate up to one-third of its activated channel capacity for the carriage of commercial television broadcast stations, as well as additional channels for non-commercial television broadcast stations. The Company currently carries all broadcast stations pursuant to the FCC's must-carry rules and has obtained permission from all broadcasters who elected retransmission consent. The Company has not been required to pay cash compensation to broadcasters for retransmission consent nor been required by broadcasters to remove broadcast stations from cable television channel lineups. The Company has, however, agreed to carry some services (e.g. ESPN 2, Home & Garden TV, America's Talking and fX) in specified 14 15 markets pursuant to retransmission consent arrangements for which it will pay monthly fees to the service providers (as it does with other satellite delivered services). The FCC will initiate a rulemaking proceeding on the carriage of broadcast television signals in HDTV and digital formats. The Company cannot predict the ultimate outcome of this proceeding which could have a material effect on the number of services that a cable operator will be required to carry. Leased Access. In addition to the obligation to set aside certain channels for public, educational and governmental access programming, the 1984 Cable Act also requires a cable television system with 36 or more channels to designate a portion of its channel capacity for commercial leased access by third parties to provide programming that may compete with services offered by the cable operator. As required by the 1992 Cable Act, the FCC has adopted rules regulating the maximum reasonable rate a cable operator may charge for commercial use of the designated channel capacity and the terms and conditions for commercial use of such channels. On February 4, 1997 the FCC released amended rules for leased access. The rules, among other provisions, reduce the maximum rate cable operators can charge for leased access programming carried on a tier. It limits the circumstances under which cable operators are required to open additional leased access channels to accommodate part-time leases, permits resale of leased access time, and establishes a new procedure for complaint resolution. The new leased access rate formula has been appealed by a party seeking even lower rates for leased access. Content Provisions. Under the V-chip provisions of the 1996 Act, cable operators and other video providers are required to carry any program rating information that programmers include in video signals. Cable operators also are subject to new scrambling requirements for sexually explicit programming. On March 24, 1997, the Supreme Court turned down the appeal of Playboy and Spice who were seeking a preliminary injunction to prevent the 1996 Act rules requiring cable operators to either scramble the audio and video feeds of sexually explicit adult programming or other indecent programming, or only carry such programming in "safe harbor" hours. On December 29, 1998, the Court of Appeals in Delaware issued a permanent injunction against the enforcement of the "audio masking" requirement of the Cable Act, finding that the law requiring cable operators to completely block sexually-explicit signals was unconstitutional. The government has filed an appeal. During the appeal process the Company intends to comply with the 1996 Act requirements. In addition, cable operators that provide Internet access or other online services may be subject to new indecency limitations. Legal proceedings have been instituted which challenge these scrambling requirements and indecency limitations on constitutional grounds. Copyright Laws. Cable television systems are subject to federal copyright licensing requirements under the Copyright Act, covering the carriage of broadcast signals. In exchange for filing certain reports and making semi-annual payments (based upon a percentage of revenues) to a federal copyright royalty pool, cable operators obtain a statutory blanket license to retransmit copyrighted material on broadcast signals. The Federal Copyright Royalty Tribunal, which made several adjustments in copyright royalty rates, was eliminated by Congress in 1993. Any future adjustment to the copyright royalty rates will be done through an arbitration process to be supervised by the U.S. Copyright Office. Under the provisions of the Copyright Act, petitions were filed in December 1995 by parties seeking to raise and lower the copyright royalty rates. The Copyright Office has pending proceedings aimed at examining its policies governing the consolidated reporting of commonly owned and contiguous cable television systems. The present policies governing the consolidated reporting of certain cable television systems have often led to substantial increases in the amount of copyright fees owed by the systems affected. These situations have most frequently arisen in the context of cable television system mergers and acquisitions. While it is not possible to predict the outcome of any such proceedings, any changes adopted by the Copyright Office in its current policies may have the effect of reducing the copyright impact of certain transactions involving cable company mergers and cable television system acquisitions. Various bills have been introduced in Congress over the past several years that would eliminate or modify the cable television compulsory license. Without the compulsory license, cable operators might need to negotiate rights from the copyright owners for each program carried on each broadcast station in the channel lineup. Such negotiated agreements could increase the cost to cable operators of carrying broadcast signals. The 1992 Cable Act's retransmission consent provisions expressly provide that retransmission consent agreements between television broadcast stations and cable operators do not obviate the need for cable operators to obtain a copyright license for the programming carried on each broadcaster's signal. Copyright music performed in programming supplied to cable television systems by pay cable networks (such as HBO) and basic cable networks (such as USA Network) has generally been licensed by the networks through private agreements with the American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"), the two major performing rights organizations in the United States. ASCAP and BMI offer "through to the viewer" licenses to the cable networks which cover the retransmission 15 16 of the cable networks' programming by cable television systems to their customers. In 1996 the cable industry concluded negotiations on licensing fees with BMI for the use of music performed in programs locally originated by cable television systems for years 1990 through 1996. In July 1996 the Company and BMI signed the industry agreement. The National Cable Television Association ("NCTA") is negotiating new contracts for 1998 and future years. ASCAP has filed an infringement suit against several cable operators as representatives of cable systems using its music in the pay programming and cable programming networks provided to subscribers. Deletion of Network and Syndicated Programming. Cable television systems that have 1,000 or more customers must, upon the appropriate request of a local television station, delete the simultaneous or non-simultaneous network programming of a distant station when such programming has also been contracted for by the local station on an exclusive basis. FCC regulations also enable television broadcast stations that have obtained exclusive distribution rights for syndicated programming in their market to require a cable system to delete or "black out" such programming from other television stations which are carried by the cable system. The FCC also has commenced a proceeding to determine whether to relax or abolish the geographic limitations on program exclusivity contained in its rules, which would allow parties to set the geographic scope of exclusive distribution rights entirely by contract, and to determine whether such exclusivity rights should be extended to non-commercial educational stations. It is possible that the outcome of these proceedings will increase the amount of programming that cable operators are requested to black out. Equal Employment Opportunity. The 1984 Cable Act includes provisions to ensure that minorities and women are provided equal employment opportunities within the cable television industry. Pursuant to the statute, the FCC has adopted reporting and certification rules that apply to all cable system operators with more than five full-time employees. Failure to comply with the Equal Employment Opportunity ("EEO") requirements can result in the imposition of fines and/or other administrative sanctions, or may, in certain circumstances, be cited by a franchising authority as a reason for denying a franchisee's renewal request. On April 14, 1998, the United States Court of Appeals for the D.C. Circuit issued a decision finding that the EEO rules were not enforceable against the broadcast industry. While this decision could be construed to apply to the cable television industry, the FCC issued an opinion that the EEO rules remain in effect and continue to be binding on the cable television industry. Technical and Customer Service Standards. The 1984 Cable Act empowers the FCC to set certain technical standards governing the quality of cable signals and to preempt local authorities from imposing more stringent technical standards. The 1992 Cable Act requires the FCC to establish minimum technical standards relating to system technical operation and signal quality and to update such standards periodically. A franchising authority may require that an operator's franchise contain provisions enforcing such federal standards. Pursuant to the 1992 Cable Act, the FCC has adopted new customer service standards with which cable operators must comply, upon their adoption by a local franchising authority. Franchising authorities may, through the franchising process or state and/or local ordinance, impose more stringent customer service standards. The 1984 Cable Act also prescribes a standard of privacy protection for cable subscribers. Pole Attachments. The 1984 Cable Act requires the FCC to regulate the rates, terms and conditions imposed by certain public utilities for cable systems' use of utility pole and conduit space unless the Federal Pole Attachment Act provides that state authorities can demonstrate that they adequately regulate cable television pole attachment rates, terms and conditions. In some cases utility companies have increased pole attachment fees for cable systems that have installed fiber optic cables and are using such cables for the distribution of non-video services. The FCC has concluded that, in the absence of state regulation, it has jurisdiction to determine whether utility companies have justified their demand for additional rental fees, and that the 1984 Cable Act does not permit disparate rates based on the type of service provided over the equipment attached to the utility's pole. Further, in the absence of state regulation, the FCC administers such pole attachment rates through use of a formula which it has devised and from time to time revises. The 1996 Act extends the regulation of rates, terms and conditions of pole attachments to telecommunications service providers, and requires the FCC to prescribe regulations to govern the charges for pole attachments used by telecommunications carriers to provide telecommunications services when the parties fail to resolve the dispute over such charges. The 1996 Act, among other provisions, significantly increases future pole attachment rates for cable systems which use pole attachments in connection with the provision of telecommunications services as a result of a new rate formula charged to telecommunications carriers for the non-useable space of each pole. These rates are to be phased in after a five-year period. The FCC recently concluded its rulemaking and issued an order that revises the existing formula for the calculation of pole attachment and conduit occupancy rates charged to cable system operators, resulting in a phased-in increase beginning in 2003 for the fees paid by cable operators to utilities for pole attachments and conduit space to be utilized for telecommunications services. Anti-trafficking Provisions. The 1996 Act also repeals the 1992 Cable Act's anti-trafficking provision which generally required the holding of cable television systems for three years. 16 17 Consumer Equipment. The 1996 Act requires the FCC, in consultation with industry standard-setting organizations, to adopt regulations which would encourage commercial availability to consumers of all services offered by multichannel video programming distributors. The 1996 Act states that the regulations adopted may not prohibit programming distributors from offering consumer equipment, so long as the cable operator's rates for such equipment are not subsidized by charges for the services offered. The 1996 Act further states that the rules also may not compromise the security of the services offered, or the efforts of service providers to prevent theft of service. The FCC may waive these rules so as not to hinder the development of advanced services and equipment. The 1996 Act requires the FCC to examine the market for closed captioned programming. The FCC recently prescribed regulations which ensure that video programming, with certain exceptions, is fully accessible through closed captioning. The 1992 Cable Act includes an "anti-buy-through prohibition" which prohibits cable systems that have addressable technology and addressable converters in place from requiring cable subscribers to purchase service tiers above basic as a condition to purchasing premium movie channels. Cable systems which are not addressable are allowed a 10-year phase-in period to comply. Telephone and Cable Wiring. The FCC recently adopted new procedural guidelines governing the disposition of home run wiring (a line running to an individual subscriber's unit from a common feeder or riser cable) in MDUs. Owners of MDU buildings can use these new rules to require cable operators without contracts to provide cable service to either sell, abandon or remove home run wiring which may carry voice as well as video communications and terminate service to MDU subscribers unless operators retain rights under common or state law or maintain ownership rights in the home run wiring. The FCC is also holding a proceeding to determine whether it should restrict the use of "exclusive" contracts to provide cable service in MDU buildings. The outcome of this proceeding cannot be predicted, but it could have a material effect on the Company's ability to serve more MDU buildings and retain MDU subscribers. FCC Authority and Fines. The Communications Act specifically empowers the FCC to enforce FCC rules and regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities often used in connection with cable operations. State and Local Regulation. Various proposals have been introduced at the state and local levels with regard to the regulation of cable television systems, and a number of states have adopted legislation subjecting cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. State or local franchising authorities, as applicable, have the right to enforce various regulations, impose fines or sanctions, issue orders or seek revocation subject to the limitations imposed upon such franchising authorities by federal, state and local laws and regulations. GENERAL The foregoing does not purport to describe all present and proposed federal, state and local regulations and legislation relating to the cable television industry. Other existing federal regulations, copyright licensing requirements and, in many jurisdictions, state and local franchise requirements, currently are the subject of a variety of judicial proceedings, legislative hearings and administrative and legislative proposals which could change, in varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings nor their impact upon the cable television industry can be predicted at this time. Legislative, administrative or judicial action may change all or portions of the foregoing statements relating to competition and regulation. The Company has not expended material amounts during the last fiscal year on research and development activities. There is no one customer or affiliated group of customers to whom sales are made in an amount which exceeds 10% of the Company's revenue. Compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of material into the environment or otherwise relating to the protection of the environment has had no material effect upon the capital expenditures, results of operations or competitive position of the Company. 17 18 As of December 31, 1998, the Company has approximately 1,025 full-time employees. The Company's operational headquarters is located at 424 Church Street, Suite 1600, Nashville, Tennessee 37219, and its phone number there is (615) 244-2300. The Company considers its relationship with its current employees to be good. The Company does not have foreign operations or export sales. 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 December 31, 1998, the Company's total debt balance was approximately $884.5 million and partners' capital was a deficit balance of approximately $48.9 million. Earnings were inadequate to cover fixed charges by approximately $48.9 million for the year ended December 31, 1998. See Item 8 "Financial Statements and Supplementary Data -- InterMedia Capital Partners IV, L.P. -- Notes to Consolidated Financial Statements." In addition, subject to the restrictions in the bank debt agreements and indenture for the Notes (the "Indenture"), ICP-IV and its subsidiaries (other than InterMedia Partners IV, Capital Corp.) 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 other planned capital expenditures; (ii) the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions 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, 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 Revolving Credit 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 Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." However, in order to satisfy its repayment obligations with respect to the Notes, ICP-IV may be required to refinance the Notes on their maturity. There can be no assurance that financing will be available at that time in order to accomplish any necessary refinancing on terms favorable to the Company or at all. If the Company is unable to service its indebtedness, it will be forced to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all. Management believes that substantial growth in revenues and operating cash flows is not achievable without the Company's continuous investment to finance capital expenditures for expansion of its subscriber base and system development. See Item 7 "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 InterMedia Partners IV, Capital Corp. ("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 18 19 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 had implemented and has substantially completed the Capital Improvement Program. Although the Company has and will continue to upgrade portions of its systems over the next several years, there can be no assurance that the Company's upgrades 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., MMDS and DBS) or have access to significantly greater amounts of capital and an existing communications network (e.g., certain telephone companies). The Company's business requires continuing investment to finance capital expenditures and related expenses for expansion of the Company's subscriber base and system development. There can be no assurance that the Company will be able to fund its capital requirements. The Company's inability to make its 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. See "The Company -- Upgrade Strategy and Capital Expenditures" and See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Future Liquidity and Capital Resources." LIMITED OPERATING HISTORY; DEPENDENCE ON MANAGEMENT ICP-IV was organized in March 1996. The partners of IP-IV transferred their partnership interests to ICP-IV in 1996. Therefore, there is limited historical financial information about the Company upon which to base an evaluation of its performance. Pursuant to the Acquisitions, the Company substantially increased the size of its operations. Therefore, the historical financial data of the Company may not be indicative of the Company's future results of operations. Further, there can be no assurance that the Company will be able to successfully implement its business strategy. The future success of the Company will be largely dependent upon the efforts of senior management. See Item 13 "Certain Relationships and Related Transactions -- Management by ICM-IV LLC." COMPETITION IN CABLE TELEVISION INDUSTRY; RAPID TECHNOLOGICAL CHANGE Cable television systems face competition from other sources of news, information and entertainment, such as off-air television broadcast programming, newspapers, movie theaters, live sporting events, interactive computer programs and home video products, including video tape cassette recorders. Competing sources of video programming include, but are not limited to, off-air broadcast television, DBS, MMDS, SMATV, LMDS and other new technologies. Furthermore, the cable television industry is subject to rapid and significant changes in technology. The effect of any future technological changes on the viability or competitiveness of the Company's business cannot be predicted. See "Competition." 19 20 In addition, the Telecommunications Act of 1996 repealed the cable/telephone cross-ownership ban, and telephone companies are 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 has acquired 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 TCTA and the CTAG 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 TRA 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 the extent of its effect on the Company. See "Competition." REGULATION OF THE CABLE TELEVISION INDUSTRY The cable television industry is subject to extensive regulation at the federal, state and local levels, and many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. In February 1996, Congress passed, and the President signed into law, major telecommunications reform legislation, the Telecommunications Act of 1996. Among other things, the 1996 Act reduces in some circumstances, and by 1999 will eliminate, rate regulation for CPS packages for all cable television systems and immediately eliminates regulation of this service tier for small cable operators. The FCC is undertaking numerous rulemaking proceedings to interpret and implement the provisions of the 1996 Act. The 1996 Act and the FCC's implementing regulations could have a significant effect on the cable television industry. In addition, the 1992 Cable Act imposed substantial regulation on the cable television industry, including rate regulation, and significant portions of the 1992 Cable 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 in 1996, 1997 and 1998 a series of orders 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, and 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 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. See "Legislation and Regulation." RELATED PARTY TRANSACTIONS Conflicts of interests may arise due to certain contractual relationships of the Company and the Company's relationship with its affiliated entities, InterMedia Partners, a California limited partnership ("IP-I"), 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. InterMedia Management, Inc. ("IMI"), which is majority owned by Robert J. Lewis, provides administrative services at cost to the Company and to the operating companies of IP-I, 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 20 21 relationships. Effective January 1, 1998, IMI also provides certain management services to the Company for a fixed fee. 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. See Item 13 "Certain Relationships and Related Transactions." EXPIRATION OF FRANCHISES Three franchises relating to approximately 1.3% of the basic subscribers served by the Systems have expired as of December 31, 1998. The terms of these franchises require the Company to negotiate the renewals of such franchises with the local franchising authorities, and all three franchises are currently in informal renewal negotiations. 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. See "Business -- Franchises." LOSS OF BENEFICIAL RELATIONSHIP WITH TCI The Company's relationship with TCI currently enables the Company to (i) purchase programming services and equipment from a subsidiary of TCI at rates that management believes are generally lower than the Company could obtain through arm's-length negotiations with third parties, (ii) share in TCI's marketing test results, (iii) share in the results of TCI's research and development activities and (iv) consult with TCI's operating personnel with expertise in engineering, technical, marketing, advertising, accounting and regulatory matters. While the Company expects the relationship to continue, TCI is under no obligation to offer such benefits to the Company, and there can be no assurance that such benefits will continue to be available in the future should TCI's ownership in the Company significantly decrease or should TCI for any other reason decide not to continue to offer such benefits to the Company. The loss of the relationship with TCI could adversely affect the financial position and results of operations of the Company. Further, the Bank Facility provides that an event of default will exist if TCI does not own beneficially 35.0% or more of ICP-IV's non-preferred partnership interests. See "Business -- The Company -- Relationship with TCI and InterMedia Management, Inc."; Item 13 "Certain Relationships and Related Transactions -- Certain Other Relationships" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Transactions with Affiliates." PURCHASE OF NOTES UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control, 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 21 22 volatility in the prices of securities similar to the Exchange Notes. There can be no assurance that a 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 has developed a plan to review, assess and resolve its year 2000 problem. The Company has completed a review of its computer and operating systems to identify those systems that could be affected by the year 2000 problem and is developing an implementation plan to resolve the issues. 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 its subscribers. The Company has established a year 2000 project management team and is utilizing both internal and external resources to assess, remediate, test and implement systems for year 2000 readiness. The Company has completed internal surveys, inventories, and an assessment of its 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 has completed the process of requesting compliance letters from all vendors and manufacturers which supply to the Company the items identified in the Company's year 2000 inventories. Based on the responses received from these vendors and information made publicly available on vendors' year 2000 Web sites, the following summarizes vendors' representations regarding the year 2000 status for items that the Company's management believes could have a significant impact on operations if such items are not year 2000 compliant by the end of 1999:
Year 2000 Percent of Items Readiness Inventoried --------- ---------------- Ready 64% Ready by end of 1999 19% Status unknown 14% Not compliant 3%
Of these items, the Company plans to replace those that are not compliant and those for which the status is unknown. Representatives from the Company's year 2000 project management team have attended year 2000 conferences held by TCI in addition to conferences hosted by a major industry technical association, and have reviewed related remediation information received on a number of software products, hardware, equipment and systems. The Company has completed the assessment of its internal hardware and software systems and those systems and devices that manage the distribution of the Company's video and data services to its subscribers. Specifically, the Company completed its review of vendor confirmation letters, performed risk assessments by component of all items inventoried, reviewed system dependencies, developed detailed estimates of remediation costs, assessed timing for remediation activities and made detailed remediation decisions. During early to mid-1999, the Company will continue its remediation, testing and implementation efforts. The Company will address contingency plans based on the results of these efforts. In addition, by June 1999 the Company expects to have completed remediation of its financial information and related systems. The Company's overall progress by phase is as follows:
Expected Completion Phase Complete Date ------------------------------------------------------- Assessment 90.0% May 1999 Remediation 20.0% June 1999 Testing 20.0% August 1999 Implementation 20.0% August 1999
22 23 The completion dates set forth above are based on the Company's current expectations. However, due to the uncertainties inherent in year 2000 remediation, no assurances can be given as to whether such projections will be completed on such dates. Year 2000 expenditures for the year ended December 31, 1998, were not material to the Company's results of operations. Management of the Company currently estimates that year 2000 expenditures for 1999 will be at least $4.5 million. Although no assurances can be given, management currently expects that (i) cash flows from operations will be sufficient to fund the costs associated with year 2000 compliance and (ii) the total projected cost associated with the Company's year 2000 program will not be material to the Company's financial position, results of operations or cash flows. The Company relies heavily on certain significant third party vendors, such as its billing service vendor, to provide services to its subscribers. The Company's billing service vendor has disclosed that it has completed its remediation efforts and system testing. Integration testing with certain other vendors' products is expected to be completed by the end of the second quarter of 1999. Although the Company is in the process of researching the year 2000 readiness of its suppliers and vendors, the Company can make no representation regarding the year 2000 compliance status of systems outside its control, and currently cannot assess the effect on it of any non-compliance by such systems or parties. TCI manages the Company's advertising business and related services. TCI is in the process of remediating systems that control the commercial advertising in its and the Company's cable operations. For updated information regarding the status of TCI's year 2000 program, refer to TCI's most recent filings with the Securities and Exchange Commission. The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations or support functions, including the ability to provide premium, pay-per-view or satellite delivered programming services to subscribers, customer billing and account information, scheduling of installation and repair calls, insertion of advertising spots in the Company's programming, and security and fire protection. The Company expects to address detailed contingency planning for all such significant risks during the second quarter of 1999. Despite the Company's best efforts, there is no assurance that all material risk associated with year 2000 issues will have been adequately identified and corrected by the end of 1999. If critical systems related to the Company's operations are not successfully remediated, the Company could face claims of breach of obligations to provide cable services under local franchise agreements, breech of programming contracts with respect to signal carriage, breech of contracts for cable system sales or exchanges, potential deemed violations of "must carry" requirements under FCC rules and regulations, and potential claims by investors or creditors for financial losses suffered as a result of year 2000 non-compliance. The Company cannot predict the likelihood that any such claims might materialize or the extent of potential losses from any such claims. ITEM 2. PROPERTIES The Company's principal physical assets consist of cable television operating plant and equipment, including signal receiving, encoding and decoding devices, headends and distribution systems and customer drop equipment for each of its cable television systems. The Company's cable distribution plant and related equipment generally are attached to utility poles under pole rental agreements with local public utilities and telephone companies, and in certain locations are buried in underground ducts or trenches. The Company owns or leases real property for signal reception sites and business offices in many of the communities served by the Systems. The Company owns all of its service vehicles. Management believes that its properties are in good operating condition and are suitable and adequate for the Company's business operations. ITEM 3. LEGAL PROCEEDINGS The Company has been named in several certified class actions in various jurisdictions concerning its late fee charges and practices. Certain cable systems owned by the Company charge late fees to customers who do not pay their cable bills on time. These 23 24 late fee cases challenge the amount of the late fees and the practices under which they are imposed. The Plaintiffs raise claims under state consumer protection statutes, other state statutes, and the common law. Plaintiffs generally allege that the late fees charged by the Company's cable systems in the States of Tennessee, South Carolina and Georgia are not reasonably related to the costs incurred by the cable systems as a result of the late payment. Plaintiffs seek to require cable systems to reduce their late fees on a prospective basis and to provide compensation for alleged excessive late fee charges for past periods. These cases are either at the early stages of the litigation process or are subject to a case management order that sets forth a process leading to mediation. Based upon the facts available management believes that, although no assurances can be given as to the outcome of these actions, the ultimate disposition of these matters should not have a material adverse effect upon the financial condition of the Company. Under existing Tennessee laws and regulations, the Company pays an Amusement Tax in the form of a sales tax on programming service revenues generated in Tennessee in excess of charges for the basic and expanded basic levels of service. Under the existing statute, only the service charges or fees in excess of the charges for the "basic cable" television service package are exempt from the Amusement Tax. Related regulations clarify the definition of basic cable to include two tiers of service, which the Company's management and other operators in Tennessee have interpreted to mean both the basic and expanded basic level of services. The Tennessee Department of Revenue ("TDOR") has proposed legislation which would replace the Amusement Tax under the existing statute with a new sales tax on all cable service revenues in excess of twelve dollars per month. The new tax would be computed at a rate approximately equal to the existing effective tax rate. Unless the Company and other cable operators in Tennessee support the proposed legislation, the TDOR has suggested that it would assess additional taxes on prior years' expanded basic service revenues. The TDOR can issue an assessment for prior periods up to three years. The Company estimates that the amount of such an assessment, if made for all periods not previously audited, would be approximately $17 million. The Company's management believes that it is possible but not likely that the TDOR can make such an assessment and prevail in defending it. The Company's management believes it has made a valid interpretation of the current Tennessee statute and regulations and that it has properly determined and paid all sales taxes due. The Company further believes that the legislative history of the current statute and related regulations, as well as the TDOR's history of not making assessments based on audits of prior periods, support the Company's interpretation. The Company and other cable operators in Tennessee are aggressively defending their past practices on calculation and payment of the Amusement Tax and are discussing with the TDOR modifications to their proposed legislation which would clarify the statute and would minimize the impact of such legislation on the Company's results of operations. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for ICP-IV's units of partnership interests, and it is not expected that such a market will develop in the future. ITEM 6. SELECTED FINANCIAL DATA The historical financial and operating data of the Company as of December 31, 1995 and as of and for the years ended December 31, 1996, 1997 and 1998 include the results of operations of the Kingsport System, the Hendersonville System, IPWT, Robin Media Holdings, Inc. ("RMH"), the Greenville/Spartanburg System, the Nashville System and the Miscellaneous Systems only from the dates the systems were acquired by the Company in 1996. Prior to its acquisition of the Systems, the Company had no operating results to report. Selected financial data has not been provided for IPCC because its financial position and results of operations are insignificant. 24 25 As a result of the substantial continuing interest in the Company of the former owners of IPWT, RMH and the Greenville/Spartanburg System (the "Previously Affiliated Entities" or the "Predecessors"), which the Company acquired on July 30, 1996, the historical financial information of the Previously Affiliated Entities has been combined on a historical cost basis through the date of the Company's acquisitions of these systems as if the Previously Affiliated Entities had always been members of the same operating group, except for the Greenville/Spartanburg System, which has been included from January 27, 1995, the date such system was acquired by TCI from an unrelated former cable operator. The selected financial data of the Previously Affiliated Entities presented below include the historical financial information of IPWT and of RMH for each of the two years in the period ended December 31, 1995, for the seven months ended July 31, 1995 and for the period from January 1, 1996 through July 30, 1996, and of the Greenville/Spartanburg System for the period from January 27, 1995 through December 31, 1995, for the period from January 27, 1995 through July 31, 1995 and for the period from January 1, 1996 through July 30, 1996. 25 26 THE COMPANY (IN THOUSANDS, EXCEPT FOR RATIOS AND OPERATING DATA)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1995 1996 1997 1998 ------------ ------------ ---------- ------------ STATEMENT OF OPERATIONS DATA: Revenue................................ $ -- $ 106,417 $ 251,671 $ 277,832 Operating expenses: Program fees......................... -- (22,881) ( 53,903) (62,423) Other operating costs................ -- (35,043) ( 78,213) (82,806) Depreciation and amortization........ -- (64,707) (130,428) (142,608) ------------ ------------ ---------- ------------ Loss from operations................... -- (16,214) ( 10,873) (10,005) Interest and other income.............. -- 6,398 5,148 3,740 Gain on sale/exchange of cable systems........................ -- -- 10,006 42,113 Gain on sale of investments............ -- 286 -- -- Interest expense....................... -- (37,742) ( 78,185) (78,107) Other expense.......................... -- (1,216) (853) (6,607) ------------ ------------ ---------- ------------ Loss before income taxes............... -- (48,488) ( 74,757) (48,866) Income tax benefit (expense)........... -- 2,596 4,026 (1,623) ------------ ------------ ---------- ------------ Net loss before extraordinary items.... -- (45,892) ( 70,731) (50,489) Extraordinary gain on early extinguishments of debt, net of tax........................... -- 18,483 -- -- Minority interest...................... -- (320) (882) (945) ------------ ------------ ---------- ------------ Net loss............................... $ -- $ (27,729) $ (71,613) $ (51,434) ============ ============ ========= ============ BALANCE SHEET DATA (AT END OF PERIOD): Total assets........................... $ 707 $ 996,699 $ 970,764 $ 928,657 Total debt............................. -- 846,000 876,500 884,500 Total partners' capital (deficit)...... (625) 73,816 2,287 (48,872) FINANCIAL RATIOS AND OTHER DATA: EBITDA(1).............................. $ -- $ 48,493 $ 119,555 $ 132,603 EBITDA margin(1)....................... -- 45.6% 47.5% 47.7% Cash flows from operating activities... $ -- $ 37,697 $ 58,627 $ 55,275 Cash flows from investing activities... -- (557,013) (91,209) (67,427) Cash flows from financing activities... -- 528,086 30,200 8,000 Capital expenditures (excluding acquisitions)........................ -- 38,167 129,573 95,212 Ratio of earnings to fixed charges(2).. -- -- -- -- OPERATING STATISTICAL DATA (AT END OF PERIOD, EXCEPT AVERAGES): Homes passed........................... -- 852,043 873,821 932,763 Basic subscribers...................... -- 573,655 577,633 590,629 Basic penetration...................... -- 67.3% 66.1% 63.3% Average monthly revenue per basic subscriber(3).......................... $ -- $ 30.71 $ 36.17 $39.56
26 27 PREVIOUSLY AFFILIATED ENTITIES (IN THOUSANDS, EXCEPT FOR RATIOS AND OPERATING DATA)
SEVEN MONTHS ENDED PERIOD YEAR ENDED DECEMBER 31, JULY 31, 1/1/96 1994 1995 1995 7/30/96 ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenue ................................... $ 73,049 $ 128,971 $ 72,578 $ 81,140 Operating expenses: Program fees............................. (13,189) (24,684) (13,923) (17,080) Other operating costs.................... (25,675) (47,360) (25,663) (30,720) Management and consulting fees .................................. (585) (815) (530) (398) Depreciation and amortization........................... (68,216) (70,154) (41,141) (36,507) --------- --------- --------- --------- Total operating expenses........................... (107,665) (143,013) (81,257) (84,705) --------- --------- --------- --------- Loss from operations........................ (34,616) (14,042) (8,679) (3,565) Interest and other income................... 1,442 1,172 888 209 Gain (loss) on disposal of fixed assets............................. (1,401) (63) 39 (14) Interest expense............................ (44,278) (48,835) (28,157) (47,545) Other expense............................... (194) (644) (656) (123) Equity in net loss of investee................................. -- -- -- -- --------- --------- --------- --------- Loss before income tax benefit ................................. (79,047) (62,412) (36,565) (51,038) Income tax benefit.......................... 19,020 17,502 8,642 14,490 --------- --------- --------- --------- Net loss ................................... $ (60,027) $ (44,910) $ (27,923) $ (36,548) ========= ========= ========= ========= BALANCE SHEET DATA (AT END OF PERIOD): Total assets................................ $ 275,058 $ 590,494 $ 578,870 Total debt.................................. 403,500 411,219 423,659 Total equity (deficit)...................... (166,977) 37,249 10,150 FINANCIAL RATIOS AND OTHER DATA: EBITDA(1)................................... $ 33,600 $ 56,112 $ 32,462 $ 32,942 EBITDA margin(1)............................ 46.0% 43.5% 44.7% 40.6% Cash flows from operating activities............................... $ (112) $ 8,107 $ 8,441 $ (8,169) Cash flows from investing activities............................... 4,871 (24,614) (7,856) (18,737) Cash flows from financing activities............................... (4,784) 18,066 28 24,249 Capital expenditures (excluding acquisitions)................. 12,432 26,301 9,745 18,588 Ratio of earnings to fixed charges(2)............................... -- -- -- -- OPERATING STATISTICAL DATA (AT END OF PERIOD, EXCEPT AVERAGES): Homes passed................................ 332,645 503,246 497,130 512,926 Basic subscribers........................... 227,050 354,436 345,039 360,057 Basic penetration........................... 68.3% 70.4% 69.4% 70.2% Premium service units....................... 151,528 265,216 258,928 264,541 Premium penetration......................... 66.7% 74.8% 75.0% 73.5% Average monthly revenue per basic subscriber(3)...................... $ 27.85 $ 31.08 $ 31.67 $ 32.35
27 28 NOTES TO SELECTED FINANCIAL DATA (1) Earnings before interest, income taxes, depreciation and amortization, gain (loss) on sale of investments, gain (loss) on sale/exchange of cable system, extraordinary gain on early extinguishments of debt, other income (expense) and minority interest. EBITDA margin is EBITDA divided by total revenue. EBITDA and EBITDA margin are commonly used in the cable industry to analyze and compare cable television companies on the basis of operating performance, leverage and liquidity. However, EBITDA and EBITDA margin do not purport to represent cash flows from operating activities in related Statements of Cash Flows or cash flow as a percentage of revenue and should not be considered in isolation or as a substitute for or superior to measures of performance in accordance with generally accepted accounting principles ("GAAP"). (2) In computing the ratio of earnings to fixed charges, earnings consist of income (loss) before income tax expense (benefit) and fixed charges. Fixed charges include interest on long-term borrowings, related amortization of debt issue costs and the portion of rental expense under operating leases deemed to be representative of the interest factor. The Company's earnings for the years ended December 31, 1996, 1997 and 1998 were inadequate to cover fixed charges by $48,488, $74,757 and $48,866 respectively. For the Previously Affiliated Entities, earnings for the years ended December 31, 1994 and 1995, for the seven months ended July 31, 1995 and for the period from January 1, 1996 through July 30, 1996 were inadequate to cover fixed charges by $79,047, $62,412, $36,565 and $51,038, respectively. (3) Average monthly revenue per basic subscriber is calculated as the sum of total revenue per average number of basic subscribers for each month divided by the number of months during the period presented. The average number of basic subscribers for each month is calculated as the sum of the number of basic subscribers as of the beginning of the month and the number of basic subscribers as of the end of the month divided by two. 28 29 ITEM 7. 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. 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, the Previously Affiliated Entities and the Greenville/Spartanburg System. The audited financial statements for the Previously Affiliated Entities present the results of operations for IPWT, RMH and the Greenville/Spartanburg System on a combined basis as if the entities had always been members of the same operating group, except for the Greenville/Spartanburg System, which has been included from January 27, 1995, the date such system was acquired by TCI from TeleCable Corporation ("TeleCable"). OVERVIEW Each of the Systems has generated 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, home shopping commissions and high-speed Internet access services. The Systems have generated increases in revenues during each of the past three years ended December 31, 1998, primarily as a result of internal subscriber growth and rate increases. The Company's ability to increase its basic and expanded basic service rates has been limited by the 1992 Cable Act, which generally became effective on September 1, 1993. However, after 1994, channels have been added in certain of the Company's cable television systems and rate increases have been implemented on the expanded basic tier. Programming fees, which comprise a substantial portion of total operating expenses, have experienced significant industry-wide increases. These factors have had a negative impact on EBITDA margins. EBITDA is defined as earnings before interest, income taxes, depreciation and amortization and other income (expense). EBITDA margin is defined as EBITDA divided by total revenues. EBITDA and EBITDA margin are commonly used in the cable industry to analyze and compare cable television companies on the basis of operating performance, leverage and liquidity. However, EBITDA and EBITDA margin do not purport to represent cash flows from operating activities in related Statements of Cash Flows or cash flow as a percentage of revenue and should not be considered in isolation or as a substitute for or superior to measures of performance in accordance with GAAP. Each of the Company, IPWT and RMH has reported net losses primarily caused by high levels of depreciation and amortization and interest expense. Depreciation and amortization expense also had a significant impact on the operating results of the Greenville/Spartanburg System. Management believes that net losses are common for cable television companies and that the Company will incur net losses in the future. Historically, certain programmers have periodically increased the rates charged for their services. Management believes that such rate increases are common for the cable television industry and that the Company will experience program fee rate increases in the future. Acquisitions During the year ended December 31, 1996, the Company acquired cable television systems serving approximately 567,200 basic subscribers in Tennessee, South Carolina and Georgia through (i) the Company's acquisition on July 30, 1996 of controlling equity interests in IPWT and RMG, (ii) the equity contribution on July 30, 1996 of the Greenville/Spartanburg System to the Company by TCI, (iii) the purchase of the Houston, Texas cable system ("Houston System") and the exchange with TCI on August 1, 1996 of the Houston System for the Nashville System purchased by TCI immediately prior to the exchange, and (iv) the purchases on January 29, 1996, February 1, 1996, May 2, 1996, July 1, 1996, and August 6, 1996 of the Miscellaneous Systems. The Company paid cash of approximately $418.0 million, including related acquisition costs and fees, for the Miscellaneous Acquisitions and the purchase of the Nashville System. The purchase price of the Nashville System of $315.3 million included $300.0 million paid in May 1996 for the Houston System. The Company financed the purchase of the Houston System with non-recourse debt and owned the Houston System temporarily in contemplation of exchanging the Houston System with TCI for the Nashville System. 29 30 TCI managed the Houston System during the Company's ownership period and there was no economic effect to the Company as a result of owning the system. Accordingly, the accounts of the Houston System and the related debt and interest expense have been excluded from the Company's consolidated financial statements for the year ended December 31, 1996. The Miscellaneous Acquisitions and the purchase of the Nashville System have been accounted for as purchases and results of operations are included in the Company's consolidated results only from the dates the systems were acquired. In connection with the Company's acquisitions of RMG and IPWT, the Company paid cash of $0.3 million for its equity interests in RMG and repaid in cash $365.5 million of the acquired entities' indebtedness, including $14.9 million of accrued interest. The Company also paid cash to TCI of $119.8 million in connection with TCI's contribution of the Greenville/Spartanburg System to the Company. The cash payment to TCI has been recorded as an equity distribution in the Company's December 31, 1996 consolidated financial statements. The Company acquired IPWT and extinguished $36.7 million of IPWT's indebtedness in exchange for non-cash consideration consisting of limited partner interests in ICP-IV of $11.7 million and a preferred limited partner interest in ICP-IV of $25.0 million. TCI received non-cash consideration of $117.6 million in the form of a limited partner interest in ICP-IV in exchange for its contribution of the Greenville/Spartanburg System to the Company. IPWT, RMG and the Greenville/Spartanburg System were acquired from entities in which TCI had a significant ownership interest. Because of TCI's substantial continuing interest in these entities as a 49.0% limited partner in ICP-IV, as of the date of the contribution, 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. Pending Sales and Exchange In January 1999 the Company executed a letter of intent with affiliates of Charter Communications, Inc. ("Charter") to sell certain of its cable television systems serving approximately 286,000 basic subscribers as of December 31, 1998, in and around western and eastern Tennessee and Gainesville, Georgia and to exchange its cable systems serving approximately 120,000 basic subscribers as of December 31, 1998 in and around Greenville and Spartanburg, South Carolina for Charter systems serving approximately 140,000 basic subscribers, located in Indiana, Kentucky, Utah and Montana ("Charter Transactions"). The Charter Transactions include the sale of all of the Class A Common Stock of RMG. Also in January 1999 the Company received consents from the preferred and limited partners of ICP-IV, which gave the Company the right to proceed with negotiating the Charter Transactions and which provide for payment of cash distributions to the preferred and limited partners, other than TCI, of approximately $550 million, for redemption of their partner interests ("Final Equity Distributions") upon completion of the Charter Transactions. Expected net proceeds from the Charter Transactions of approximately $850 million and the Final Equity Distributions are subject to certain adjustments. The Company expects to close the Charter Transactions and make the Final Equity Distributions during the third quarter of 1999. Consummation of the Charter Transactions are subject to a number of conditions, including regulatory and lender consents. Use of proceeds from the Charter Transactions, including the Final Equity Distributions, are also subject to lender consents. Upon consummation of the Charter Transactions and the Final Equity Distributions, TCI will own 99.999% of the partner interests in the Company. Rate Regulation and Competition The 1992 Cable Act significantly changed the regulatory environment in which the Company operates. Rate regulations adopted by the FCC in response to the 1992 Cable Act generally became effective on September 1, 1993 and were subsequently amended on several occasions. The 1996 Act eliminates rate regulation on the CPS tier after March 31, 1999. In addition, rates are deregulated on both the basic and CPS tiers when a cable system becomes subject to effective competition, which under the 1996 Act would include the provision, other than by direct broadcast satellite, of comparable video programming by a local exchange carrier in the franchise area. RMH and IPWT have elected to justify their existing basic and CPS tier rates under FCC cost of service rules, which are subject to further revision and regulatory interpretation. The Nashville System, the Greenville/Spartanburg System and the Kingsport System have determined their rates based on a benchmark established by the FCC. Certain of RMH's and IPWT's cost of service cases justifying rates for the CPS tier of service have been found to be reasonable by the FCC and certain other cases are still pending before the FCC. Pursuant to FCC regulations, several local franchises have requested that the FCC review the Systems' basic rate 30 31 justifications. Management believes that the Systems have substantially complied in all respects with related FCC regulations and the outcome of these proceedings will not have a material adverse effect on the financial position and results of operations of the Company. See Item 1 "Certain Factors Affecting Future Results -- Regulation of the Cable Television Industry" and "Legislation and Regulation." The Company is subject to competition from alternative providers of video services, including wireless service providers and local telephone companies. Specifically, the Company is subject to increasing competition in the Multiple Dwelling Unit market from various entities, including satellite master antenna television ("SMATV") companies and other franchised cable operators which are offering bundled services including cable, Internet access and telephony. BellSouth applied for cable franchises in certain of the Company's franchise areas and has acquired 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, BellSouth has recently announced plans to launch its Digital Subscriber Line ("DSL") services which will compete with the Company's high speed Internet access services. The Company cannot predict the extent to which competition will materialize or, if competition materializes, the extent of its effect on the Company. See Item 1 "The Company -- Competition"; "Legislation and Regulation"; and "Certain Factors Affecting Future Results -- Competition in Cable Television Industry; Rapid Technological Change." Transactions with Affiliates TCI's indirect ownership of IPWT and RMH and its direct ownership of the Greenville/Spartanburg System enabled each of these systems to purchase programming services from Satellite Services Inc. ("SSI"), a subsidiary of TCI. During the period from January 1, 1996 through July 30, 1996, IPWT, RMH and the Greenville/Spartanburg System paid, in the aggregate, 85.7% of their program fees to SSI. Due to TCI's equity ownership in the Company, the Company is also able to purchase programming services from SSI. 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 years ended December 31, 1996, 1997 and 1998, the Company paid 76.7%, 76.3% and 75.2%, respectively, of its program fees to SSI. The Company and its affiliated entities InterMedia Partners, a California limited partnership, and InterMedia Partners III, L.P. and InterMedia Capital Partners, VI, L.P. and their consolidated subsidiaries (together the "Related InterMedia Entities") have entered into agreements ("Service Agreements") with InterMedia Management Inc. ("IMI"), pursuant to which IMI provides accounting, operational, marketing, engineering, legal, regulatory compliance and other administrative services at cost. Effective August 5, 1997, IMI owns 95.0% of the equity interests in ICM-IV LLC, the managing general partner of the Company, and IMI is wholly owned by Robert J. Lewis. (See Item 13. "Certain Relationships and Related Transactions.") 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 $3.0 million, $6.3 million and $5.8 million to the Company for the years ended December 31, 1996, 1997 and 1998, respectively, and $0.4 million and $1.5 million to IPWT and RMH, respectively, for the first seven months of 1996. Effective January 1, 1998 IMI also provides certain management services to the Company for an annual fee of $3.4 million. Prior to January 1, 1998, ICM-IV provided such management services to the Company for the same annual fee of $3.4 million. In February 1997 Leo J. Hindery, Jr. was appointed president of TCI. As part of Mr. Hindery's transition to TCI, substantially all of Mr. Hindery's interests in ICM-IV and its general partner IMI, as well as various other management partnerships for the Related 31 32 InterMedia Entities, were converted or sold. Pursuant to these transactions, Mr. Hindery no longer holds a controlling interest in IMI or ICM-IV. (See Item 13. "Certain Relationships and Related Transactions.") RESULTS OF OPERATIONS -- THE COMPANY As described above, the Company acquired all of its cable television systems during the year ended December 31, 1996 ("1996 Acquisitions"). A significant portion of these acquisitions occurred in July and August 1996. Results of operations of the acquired cable television systems have been included in the Company's results of operations only from the dates the systems were acquired. The Company had no operations prior to its first acquisition on January 29, 1996. As a result, the comparability of the Company's results of operations for the years ended 1996 and 1997 is affected by the 1996 Acquisitions.
YEAR ENDED DECEMBER 31, 1996 1997 1998 ----------------------------- ---------------------------- --------------------------- PERCENTAGE PERCENTAGE PERCENTAGE AMOUNT OF REVENUE AMOUNT OF REVENUE AMOUNT OF REVENUE ------------ ------------ ---------- ---------- ---------- --------- STATEMENT OF OPERATIONS DATA: Revenue.......................... $ 106,417 100.0% $ 251,671 100.0% $ 277,832 100.0% Costs and Expenses: Program fees................... (22,881) (21.5) (53,903) (21.4) (62,423) (22.5) Other direct expenses(1)....... (13,148) (12.4) (26,529) (10.5) (26,973) (9.7) Selling, general and administrative expenses(2).................. (20,337) (19.1) (48,334) (19.2) (52,483) (18.9) Management and consult- ing fees..................... (1,558) (1.5) (3,350) (1.3) (3,350) (1.2) Depreciation and amortization................. (64,707) (60.8) (130,428) (51.8) (142,608) (51.3) ------------ ------------ ---------- ---------- ---------- --------- Loss from operations............. (16,214) (15.3) (10,873) (4.3) (10,005) (3.6) Interest and other income........ 6,398 6.0 5,148 2.0 3,740 1.3 Gain on sale/exchange of cable systems.................. 10,006 4.0 42,113 15.2 Gain on sale of investments...... 286 0.3 Interest expense................. (37,742) (35.5) (78,185) (31.1) (78,107) (28.1) Other expense.................... (1,216) (1.1) (853) (0.3) (6,607) (2.4) Income tax benefit (expense)..... 2,596 2.4 4,026 1.6 (1,623) 0.6 Extraordinary gain on early extinguishment of debt, net of tax..................... 18,483 17.4 Minority interest................ (320) (0.3) (882) (0.4) (945) (0.3) ------------ ------------ ---------- ---------- ---------- --------- Net loss......................... $ (27,729) (26.1) $ (71,613) (28.5) $ (51,434) (18.5) ============ ============ ========== ========== ========== ========= OTHER DATA: EBITDA(3)........................ $ 48,493 45.6% $ 119,555 47.5% $ 132,603 47.7%
- ---------- (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, gain (loss) on sale of investments, gain (loss) on sale/exchange of cable systems, extraordinary gain on early extinguishment of debt, other expense and minority interest. EBITDA is a commonly used measure of performance in the cable industry. However, it does not purport to represent cash flows from operating activities in related Consolidated Statements of Cash Flows and should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. For information concerning cash flows from operating, investing and financing activities, see Consolidated Financial Statements included elsewhere in this Form 10-K. 32 33 COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997 Revenues The Company's revenues for the year ended December 31, 1997 increased to $251.7 million as compared with $106.4 million for the year ended December 31, 1996 due primarily to the 1996 Acquisitions. Total revenues for the year ended December 31, 1997 included non-recurring advertising revenue of $2.0 million, earned from certain programmers to promote and launch their new services. The Company also recognized $1.5 million of revenues, representing a portion of the remaining proceeds received during 1997 from such programmers to launch their new services. The Company served approximately 577,600 basic subscribers at December 31, 1997, compared to approximately 573,700 at December 31, 1996. The December 31, 1997 basic subscriber count reflects a reduction of approximately 7,400 basic subscribers resulting from the Company's sale of its cable television assets located in and around Royston and Toccoa, Georgia on December 5, 1997. (See Note 3--"Acquisitions and Sale of Cable Properties" to the Company's Consolidated Financial Statements.) The increase in basic subscribers resulted primarily from household growth. The Company's basic subscriber penetration decreased from 67.3% to 66.1% at December 31, 1996 and 1997, respectively. Average monthly basic service revenue per basic subscriber for the year ended December 31, 1997 was $24.67 compared to $22.32 for 1996. The increase represents rate increases implemented by the Company's cable systems during 1997 and higher effective basic service rates for the systems acquired in July and August 1996, compared to those systems acquired during the six months ended June 30, 1996. A substantial portion of the basic service rate increases was supported by additional channels made available through the Company's Capital Improvement Program. Average monthly pay service revenue per pay unit for the year ended December 31, 1997 was $7.76, compared to $8.75 for 1996. The decrease is due primarily to marketing promotions offered by the Company and the impact of the systems acquired in July and August 1996 with lower average pay service revenue per pay unit than those systems acquired during the first six months of 1996. Program Fees Program fees for the year ended December 31, 1997 increased to $53.9 million, as compared with $22.9 million for the year ended December 31, 1996 due primarily to the 1996 Acquisitions. Program fees for the year ended December 31, 1997 represent 25.3% of basic and pay service revenues compared to 25.1% for the year ended December 31, 1996. Other Direct Expenses Other direct expenses, which include costs related to technical personnel, franchise fees and repairs and maintenance, amounted to $26.5 million for the year ended December 31, 1997 compared to $13.1 million for the year ended December 31, 1996. The increase is primarily a result of the 1996 Acquisitions. Other direct expenses as a percentage of total revenues, before launch support revenue, decreased to 10.7% for the year ended December 31, 1997 compared to 12.4% for the year ended December 31, 1996. The decrease from 1996 is due primarily to a decrease in franchise fee expense. During 1997 certain of the Company's systems began passing through franchise fee expenses to their subscribers. Other direct expenses for the year ended December 31, 1997 include expenses incurred in connection with the Company's consolidation of its regional operations. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses for the year ended December 31, 1997 increased to $48.3 million compared to $20.3 million for the year ended December 31, 1996 due primarily to the 1996 Acquisitions. SG&A expenses as a percentage of total revenues, before non-recurring launch revenue, remained relatively constant at 19.5% for the year ended December 31, 1997 compared to 19.1% for the year ended December 31, 1996. SG&A expenses for the year ended December 31, 1997 include expenses incurred in connection with the Company's consolidation of its regional operations. Management and Consulting Fees Management and consulting fees of $1.6 million and $3.4 million for the years ended December 31, 1996 and 1997, respectively, represent fees charged by ICM-IV. ICM-IV provides management services to the Company for a per annum fee of 1.0% of the Company's total non-preferred capital contributions. 33 34 Depreciation and Amortization Depreciation and amortization expense for the year ended December 31, 1997 increased to $130.4 million compared to $64.7 million for the year ended December 31, 1996 as a result of the 1996 Acquisitions and capital expenditures of $129.6 million for the year ended December 31, 1997, offset by the Company's use of an accelerated depreciation method that results in higher deprecation expense being recognized in the earlier years and lower expense in the later years. Interest and Other Income Interest and other income of $5.1 million for the year ended December 31, 1997 is comprised primarily of $4.0 million of interest income earned on the escrowed securities. Interest and other income also includes $0.4 million of interest income earned on cash and cash equivalents and $0.4 million of rental income recognized from a cable plant leasing arrangement. Interest and other income of $6.4 million for the year ended December 31, 1996 includes the following: (i) equity distribution income of $2.9 million received from a former investee of RMG in August 1996, (ii) $0.4 million of interest income earned on a $15.0 million loan to RMH prior to the Company's acquisition of RMH on July 30, 1996, (iii) $2.2 million of interest income earned on the escrowed securities from July 30, 1996 through December 31, 1996, and (iv) interest earned on cash and cash equivalents of $0.9 million. Gain on Sale of Cable System The gain on sale of cable system of $10.0 million for the year ended December 31, 1997 resulted from the Company's sale of its cable assets serving subscribers in and around Royston and Toccoa, Georgia in December 1997. Interest Expense Interest expense increased to $78.2 million for the year ended December 31, 1997 compared to $37.7 million for the year ended December 31, 1996 due primarily to the 1996 Acquisitions and higher debt balances during 1997 compared to the same periods in 1996. Interest expense for the year ended December 31, 1997 includes interest on borrowings outstanding under the 11.25% senior notes and bank debt, which were incurred to finance the Company's acquisitions in July and August 1996. Interest expense for the year ended December 31, 1996 includes interest on a bridge loan obtained by a subsidiary of ICP-IV for acquisitions of certain cable television systems during the first seven months of 1996 and interest on borrowings outstanding under the 11.25% senior notes and bank debt during the last five months of 1996. 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 $2.6 million and $4.0 million for the year ended December 31, 1996 and 1997, respectively, has been recorded based on RMG's stand alone tax provision. The increase in income tax benefit from 1996 to 1997 is due primarily to the following: (i) an increase in RMG's loss before income tax benefit, reflecting twelve months' results in 1997 versus five months in 1996 as a result of the 1996 Acquisitions, (ii) an increase in RMG's effective tax rate, (iii) non-recurring equity distribution income of $2.9 million recognized in July 1996, offset by (iv) a $10.0 million gain recognized on sale of certain of RMG's cable television assets in December 1997. Prior to ICP-IV's acquisition of RMG on July 30, 1996, the Company had no income tax expense or benefit. Extraordinary Gain on Early Extinguishment of Debt, Net of Tax The extraordinary gain on early extinguishment of debt includes (i) costs paid in July 1996 associated with the prepayment of RMG's long-term debt, net of tax benefit of $1,790, and (ii) the write-off in July 1996 of a debt restructuring credit associated with the restructuring of IPWT's long-term debt in 1994. Minority Interest Minority interest of $0.3 million and $0.9 million for the year ended December 31, 1996 and 1997, respectively, represents five months' and twelve months' accrued dividends, respectively, on RMG's mandatorily redeemable preferred stock held by a subsidiary of TCI as the minority shareholder of RMG's common stock. The mandatorily redeemable preferred stock was issued to TCI upon ICP-IV's acquisition of RMG on July 30, 1996. 34 35 Net Loss The Company's net loss for the year ended December 31, 1997 increased to $71.6 million from $27.7 million for the year ended December 31, 1996. The increase is due primarily to the following: (i) the 1996 Acquisitions, which resulted in significantly higher depreciation, amortization and interest expenses relative to increased revenues, (ii) a non-recurring equity distribution income of $2.9 million received from a former investee of RMG in August 1996, and (iii) an extraordinary gain of $18.5 million recognized in 1996 for the early extinguishment of long-term debt that was assumed in connection with the acquisitions of RMG and IPWT, offset by (iv) a gain on sale of cable television assets in December 1997 of $10.0 million. COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998 Revenues The Company's revenues for the year ended December 31, 1998 increased to $277.8 million as compared with $251.7 million for the year ended December 31, 1997 due primarily to (i) basic subscriber rate increases which resulted in increased revenue of approximately $18.8 million, (ii) increased number of basic subscribers due to household growth, which accounted for approximately $3.8 million, (iii) an increase of approximately $6.5 million in other service revenue, offset by (i) a decrease of approximately $1.0 million in pay service revenues which resulted primarily from moving a program from pay service to expanded basic service during late 1997, offset by increased pay-per-view revenue, and (ii) a decrease of approximately $2.4 million in total revenues as a result of the Company's sale of its cable television assets located in and around Royston and Toccoa, Georgia in December 1997. The increase in other service revenues is due primarily to increases in advertising sales, converter rental income, and data service revenues generated from providing high-speed Internet access over the Company's broadband network, offset by a decrease in non-recurring advertising revenue earned from certain programmers to promote and launch their new services. Prior to September 1997, the Company did not offer high-speed Internet access services to its subscribers. The Company served approximately 590,600 basic subscribers at December 31, 1998, compared to approximately 577,600 basic subscribers at December 31, 1997. Average basic service revenue per basic subscriber for the year ended December 31, 1998 was $27.38 compared to $24.67 for 1997. The increase represents rate increases implemented by the Company's cable systems during late 1997 and during 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 year ended December 31, 1998 increased to $62.4 million, as compared with $53.9 million for the year ended December 31, 1997 due primarily to higher rates charged by certain programmers, increased number of basic subscribers and increased number of channels offered by certain of the Company's systems to their basic subscribers. Average monthly program costs per basic subscriber for the year ended December 31, 1998 was $8.89, compared to $7.76 for the year ended December 31, 1997. Program fees for the year ended December 31, 1998 represent 26.9% of basic and pay service revenues compared to 25.3% for the year ended December 31, 1997. The increase as a percentage of basic and pay service revenues reflect the impact of program fee increases outpacing revenue growth for the year. Other Direct Expenses Other direct expenses increased to $27.0 million for the year ended December 31, 1998 compared to $26.5 million for the year ended December 31, 1997 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. The increases in payroll expense and outside labor costs of $2.5 million were offset by a non-recurring decrease in franchise fee expense of $2.2 million 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 decreased to 9.7% for the year ended December 31, 1998 compared to 10.5% for the year ended December 31, 1997, reflecting the impact of revenue growth outpacing increases in other direct expenses. 35 36 Selling, General and Administrative Selling, general and administrative ("SG&A") expenses for the year ended December 31, 1998 increased to $52.5 million compared to $48.3 million for the year ended December 31, 1997 due primarily to (i) increased payroll costs due to annual wage increases as well as non-recurring market rate adjustments for certain of the Company's job positions and (ii) increased marketing expenses resulting from increased promotions of the Company's new data and digital services as well as additional channels offered in certain of the Company's rebuilt cable systems. The increases in payroll and marketing expenses resulted in an increase in SG&A of $4.2 million. SG&A as a percentage of total revenues remained relatively constant at 18.9% for the year ended December 31, 1998 compared to 19.2% for the year ended December 31, 1997. Depreciation and Amortization Depreciation and amortization expense for the year ended December 31, 1998 increased to $142.6 million compared to $130.4 million for the year ended December 31, 1997 due primarily to capital expenditures of $95.2 million for the year ended December 31, 1998, offset by (i) 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, and (ii) a decrease in amortization expense due to intangible assets, specifically franchise rights, which were fully amortized during 1997 and 1998. Franchise rights are amortized over the lesser of the remaining lives of the franchises or the base twelve-year term of ICP-IV. Interest and Other Income Interest and other income for the year ended December 31, 1998 decreased to $3.7 million compared to $5.1 million for the year ended December 31, 1997. The decrease is due primarily to a decrease in interest income earned on the escrowed investments held to be used by the Company to make semi-annual interest payments on the Notes, which resulted from decreases in the escrowed investment balances. Gain on Sale/Exchange of Cable Systems The gain on exchange of cable systems of $42.1 million for the year ended December 31, 1998 resulted from the Company's exchange of its cable systems located in central and eastern Tennessee for other cable systems located in eastern and western Tennessee in December 1998. The gain on sale of cable system of $10.0 million for the year ended December 31, 1997 resulted from the Company's sale of its cable assets serving subscribers in and around Royston and Toccoa, Georgia in December 1997. Interest Expense Interest expense remained relatively constant at $78.1 million for the year ended December 31, 1998 compared to $78.2 million for the year ended December 31, 1997, despite higher debt balances during 1998 compared to 1997, as a result of lower interest rates. Other Expense Other expense for the year ended December 31, 1998 increased to $6.6 million compared to $0.9 million for the year ended December 31, 1997 due primarily to an increase of $5.8 million in loss recognized from disposal of fixed assets. The increase is due primarily to disposal of assets resulting from increased number of cable plant rebuild projects which were completed during 1998 compared to those which were completed during 1997. Income Tax Expense/Benefit As partnerships, the tax attributes of ICP-IV and its subsidiaries, other than RMG and IPCC, accrue to the partners. Income tax expense of $1.6 million and income tax benefit of $7.2 million for the year ended December 31, 1997 and 1998, respectively, has been recorded based on RMG's stand alone tax provision. RMG had income tax expense for the year ended December 31, 1998, compared to income tax benefit for the year ended December 31, 1997, due primarily to (i) a $26.3 million gain recognized on exchange of its cable system assets on December 31, 1998, and (ii) a decrease in intercompany interest expense, offset by (iii) a decrease in income from operations and (iv) a $10.0 million gain recognized on sale of cable systems in 1997. 36 37 Net Loss The Company's net loss for the year ended December 31, 1998 decreased to $51.4 million from $71.6 million for the year ended December 31, 1997. The decrease is due primarily to increases in EBITDA and gain recognized on sale/exchange of cable television assets, offset by increases in depreciation and amortization and other expense and 1998 income tax expense of $1.6 million, compared to income tax benefit of $4.0 million for the year ended December 31, 1997. RESULTS OF OPERATIONS -- THE PREVIOUSLY AFFILIATED ENTITIES The comparability of results of operations for the Previously Affiliated Entities for the seven months ended July 31, 1995 and the period from January 1, 1996 to July 30, 1996, and the years ended December 31, 1994 and 1995 is affected by the combining of results of operations for the Greenville/Spartanburg System from January 27, 1995 with results of operations for IPWT and RMH (the "1995 Combination"). The following tables set forth for the periods indicated statement of operations and other data of the Previously Affiliated Entities expressed in dollar amounts (in thousands) and as a percentage of revenue.
PERIOD FROM SEVEN MONTHS ENDED JANUARY 1, 1996 TO JULY 31, 1995 JULY 30, 1996 ------------------------- --------------------------- PERCENTAGE PERCENTAGE AMOUNT OF REVENUE AMOUNT OF REVENUE ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenue....................................... $ 72,578 100.0% $ 81,140 100.0% Costs and Expenses: Program fees............................... (13,923) (19.2) (17,080) (21.1) Other direct expenses(1)................... (9,499) (13.1) (10,177) (12.5) Selling, general and administrative expenses(2).............................. (16,164) (22.3) (20,543) (25.3) Management and consulting fees............. (530) (0.7) (398) (0.5) Depreciation and amortization.............. (41,141) (56.7) (36,507) (45.0) --------- ----- --------- ------ Loss from operations.......................... (8,679) (12.0) (3,565) (4.4) Interest and other income..................... 888 1.2 209 0.3 Gain (loss) on disposal of fixed assets....... 39 0.1 (14) -- Interest expense.............................. (28,157) (38.8) (47,545) (58.6) Other expense................................. (656) (0.9) (123) (0.2) Income tax benefit............................ 8,642 11.9 14,490 17.9 --------- ------- --------- ------ Net loss...................................... $ (27,923) (38.5)% $ (36,548) (45.0)% ========= ===== ========= ====== OTHER DATA: EBITDA(3)..................................... $ 32,462 44.7% $ 32,942 40.6%
37 38
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1994 1995 --------------------------- --------------------------- PERCENTAGE PERCENTAGE AMOUNT OF REVENUE AMOUNT OF REVENUE ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Revenue....................................... $ 73,049 100.0% $ 128,971 100.0% Costs and Expenses: Program fees............................... (13,189) (18.1) (24,684) (19.1) Other direct expenses(1)................... (9,823) (13.4) (16,851) (13.1) Selling, general and administrative expenses(2).............................. (15,852) (21.7) (30,509) (23.7) Management and consulting fees................ (585) (0.8) (815) (0.6) Depreciation and amortization................. (68,216) (93.4) (70,154) (54.4) --------- ----- --------- ------ Loss from operations.......................... (34,616) (47.4) (14,042) (10.9) Interest and other income..................... 1,442 2.0 1,172 0.9 Loss on disposal of fixed assets.............. (1,401) (1.9) (63) -- Interest expense.............................. (44,278) (60.6) (48,835) (37.9) Other expense................................. (194) (0.3) (644) (0.5) Income tax benefit............................ 19,020 26.0 17,502 13.6 --------- ----- --------- ------ Net loss...................................... $ (60,027) (82.2)% $ (44,910) (34.8)% ========= ===== ========= ====== OTHER DATA: EBITDA(3)..................................... $ 33,600 46.0% $ 56,112 43.5%
- ---------- (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, gain (loss) on disposal of fixed assets and other income (expense). EBITDA is a commonly used measure of performance in the cable industry. However, it does not purport to represent cash flows from operating activities in related Consolidated Statements of Cash Flows and should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. For information concerning cash flows from operating, investing and financing activities, see Consolidated Financial Statements included elsewhere in this Form 10-K. COMPARISON OF THE SEVEN MONTHS ENDED JULY 31, 1995 AND THE PERIOD FROM JANUARY 1 TO JULY 30, 1996 Revenues. The Previously Affiliated Entities' revenues increased $8.6 million, or by 11.8%, for the seven months ended July 30, 1996 compared with the corresponding period in the prior year. The impact of comparing revenues for the seven months ended July 30, 1996 with revenues for the period from January 27, 1995 to July 31, 1995 for the Greenville/Spartanburg System resulted in a $3.1 million increase in revenues. Additionally, revenues increased $2.8 million due to subscriber growth and $3.6 million due to basic and expanded basic rate increases. As of July 30, 1996, basic subscribers and premium units increased from July 31, 1995 by approximately 15,000 subscribers, or 4.4%, and 5,600 units, or 2.2%, respectively. The increase in basic subscribers primarily reflects the impact of an increase of approximately 15,800 homes passed and higher basic penetration which grew from 69.4% at July 31, 1995 to 70.2% at July 30, 1996. During the three months ended March 31, 1996, each of the Previously Affiliated Entities implemented basic and/or expanded basic rate increases. The rate increases resulted in a 4.2% average increase in overall rates charged for basic and expanded basic services combined. Partially offsetting these revenue increases was a $0.6 million decrease in pay service revenues reflecting the impact of premium discount packages which offer combinations of premium channels at prices that represent significant savings over the price for an individual channel and a $0.4 million decrease in ancillary service revenues. Program Fees. Program fees increased $3.2 million, or by 22.7%, for the seven months ended July 30, 1996 compared with the corresponding period in the prior year. The impact of comparing program fees for the seven months ended July 30, 1996 with program fees for the period from January 27, 1995 to July 31, 1995 for the Greenville/Spartanburg System resulted in a $0.8 million increase in program fees. Additionally, program fees increased $0.6 million due to subscriber growth and $1.8 million due to the net 38 39 impact of higher rates charged by certain programmers and higher pay-per-view program costs. The increase in program fees as a percentage of revenues reflects the impact of program fee increases outpacing revenue growth for the period. Other Direct Expenses. Other direct expenses increased $0.7 million, or by 7.1%, for the seven months ended July 30, 1996 compared with the corresponding period in the prior year. The impact of comparing other direct expenses for the seven months ended July 30, 1996 with the period from January 27, 1995 to July 31, 1995 for the Greenville/Spartanburg System resulted in a $0.7 million increase in expense. Increased labor costs for the RMH and IPWT systems contributed $0.5 million to the increase in costs. RMH labor costs increased primarily due to an increase in workforce driven by basic subscriber growth, and IPWT labor costs increased due to an increase in the average salary per employee. These increases were offset by a $0.5 million reduction in costs primarily due to lower labor costs for the Greenville/Spartanburg System driven by a decrease in workforce and an increase in construction-related activities. Also contributing to the decrease was a reduction in repairs and maintenance expense for the RMH and IPWT systems. Other direct expenses as a percentage of revenues decreased due to proportionately lower increases in costs relative to revenue growth. Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses increased $4.4 million, or by 27.1%, for the seven months ended July 30, 1996 compared with the corresponding period of the prior year. The impact of comparing SG&A for the seven months ended July 30, 1996 with SG&A for the period from January 27, 1995 to July 31, 1995 for the Greenville/Spartanburg System resulted in a $0.6 million increase in SG&A. Other SG&A costs increased by an aggregate amount of $1.7 million due to subscriber growth. Of the remaining increase, $0.4 million represents an increase in the corporate overhead cost allocation from TCI to the Greenville/Spartanburg System which TCI began allocating in May 1995. Also contributing to the higher costs were increases in labor, marketing and advertising sales expense and professional services costs of approximately $0.6 million, $0.7 million, and $0.2 million, respectively. The labor cost increase primarily resulted from increases in the workforce driven by basic subscriber growth. The marketing and advertising sales expense increases resulted from higher levels of marketing activities for each of the Previously Affiliated Entities and an increase in advertising sales activities for the Greenville/Spartanburg System. The increase in professional services reflects increased utilization of outside labor for the RMH system. SG&A as a percentage of revenues increased due to proportionately higher costs for the Greenville/ Spartanburg System in relation to revenue growth. Depreciation and Amortization. Depreciation and amortization decreased $4.6 million, or by 11.3%, for the seven months ended July 30, 1996 compared with the corresponding period of the prior year. The decrease reflects a combined $4.8 million decrease for the IPWT and RMH systems due to their 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. This decrease was offset by (i) an increase in property and equipment placed in service between July 1995 and July 1996 and (ii) the $0.6 million impact of comparing depreciation and amortization for the seven months ended July 30, 1996 with depreciation and amortization for the period from January 27, 1995 to July 31, 1995 for the Greenville/Spartanburg System. Interest and Other Income. Interest and other income consist primarily of interest on RMH notes receivable that were issued in connection with previous sales of cable television systems (the "RMH Seller Notes") and interest earned on cash equivalents. Interest and other income decreased $0.7 million, or by 76.5%, for the seven months ended July 30, 1996 compared with the corresponding period of the prior year. The decrease reflects the effect of collection in June 1995 of the RMH Seller Notes. Interest Expense. Interest expense increased $19.4 million, or by 68.9%, for the seven months ended July 30, 1996 compared with the corresponding period of the prior year because of a $16.4 million increase in interest expense allocations from TCI for the Greenville/Spartanburg System and a $2.8 million increase in interest expense for IPWT. The increase for IPWT primarily reflects the recognition of $3.0 million for contingent interest. Upon completion of the Transactions, conditions were met for an accrual of contingent interest under the terms of IPWT's loan agreement with General Electric Capital Corporation ("GECC"). Income Tax Benefit. Income tax benefit increased $5.8 million, or by 67.7%, for the seven months ended July 30, 1996 compared with the corresponding period of the prior year primarily due to an increase in the taxable loss before income tax benefit coupled with an increase in the effective tax benefit rate for the RMH system, offset by a decrease in the effective tax benefit rate for the Greenville/Spartanburg System. 39 40 RMH has not established a valuation allowance to reduce the deferred tax assets related to its unexpired net operating loss carryforwards. Due to an excess of appreciated asset value over the tax basis of RMH's net assets, management believes it is more likely than not that the deferred tax assets related to the unexpired net operating losses will be realized. Net Loss. Net loss increased $8.6 million, or by 30.9%, for the seven months ended July 30, 1996 compared with the corresponding period of the prior year primarily due to the increase in interest expense partially offset by an increase in EBITDA and the income tax benefit. EBITDA. EBITDA increased $0.5 million, or by 1.5%, for the seven months ended July 30, 1996 compared with the corresponding period of the prior year. Of the increase, $1.0 million represents the impact of comparing EBITDA for the seven months ended July 30, 1995 with EBITDA for the period January 27, 1995 to July 31, 1995 for the Greenville/Spartanburg System. The offsetting decrease is primarily attributable to higher SG&A expenses for the Greenville/Spartanburg System. EBITDA as a percentage of revenues decreased due to increases in program fees and SG&A expenses as a percentage of revenues. COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1995 Revenues. The Previously Affiliated Entities' revenues increased $55.9 million, or 76.6%, for 1995 compared to 1994. The 1995 Combination accounted for $47.2 million of the increase in revenues for 1995 compared to 1994. Excluding the 1995 Combination, internal subscriber growth accounted for approximately $4.8 million of the increase in revenues for 1995 compared to 1994. Basic subscribers increased by approximately 13,000, or 5.8%, for 1995 compared to 1994. The increase in basic subscribers primarily reflects the impact of an increase in homes passed during the two year period and higher basic penetration rates for 1995 compared to 1994. The number of premium units increased by approximately 10,500 units, or 6.9%, for 1995 compared to 1994, reflecting the impact of premium discount packages which offer combinations of premium channels at prices that represent significant savings over the price for individual channels. This volume increase was slightly offset by decreases in revenues of approximately $0.1 million for 1995 compared to 1994, due to the impact of lower rates per subscriber from the premium discount packages. The impact of higher rates due to basic and expanded basic rate increases accounted for approximately $3.9 million of the increase in revenues for 1995 compared to 1994. The FCC ordered a freeze on basic and expanded basic rates for the period April 5, 1993 through May 15, 1994. In compliance with the rate freeze, IPWT and RMH did not increase their basic and expanded basic rates during this period, and chose to maintain their rates through December 30, 1994. During the period from December 31, 1994 through the first quarter of 1995, channels were added and rate increases were implemented on the expanded basic tier. The rate increases resulted in a 7.6% average increase in RMH's and IPWT's overall rates charged for basic and expanded basic services combined. Program Fees. Program fees increased $11.5 million, or 87.2%, for 1995 compared to 1994. Program fees increased $9.1 million for 1995 compared to 1994 due to the 1995 Combination. Excluding the impact of the 1995 Combination, program fees increased in 1995 compared to 1994 by $1.2 million due to subscriber growth and by $1.2 million due to the net impact of (i) new channel additions, (ii) higher rates charged by certain programmers and (iii) higher pay-per-view program costs, slightly offset by lower premium service effective rates due to volume discounts. In 1995, program fees as a percentage of revenues increased compared to 1994 reflecting the impact of the premium discount packages. Other Direct Expenses. Other direct expenses increased $7.0 million, or 71.5%, for 1995 compared to 1994. The 1995 Combination accounted for $6.6 million of the increase for 1995 compared to 1994. Excluding the impact of the 1995 Combination, other direct expenses increased due to internal subscriber growth. Other direct expenses as a percentage of revenues remained relatively constant for the two years ended December 31, 1995. Selling, General and Administrative Expenses. SG&A expenses increased $14.7 million, or 92.5%, for 1995 compared to 1994. The 1995 Combination accounted for $12.1 million of the increase for 1995 compared to 1994. 40 41 The remainder of the 1995 increase resulted from increases in payroll, data processing and marketing costs for IPWT and RMH reflecting the impact of an increase in the average salary per employee, subscriber growth and customer service initiatives. SG&A as a percentage of revenue increased in 1995 compared to 1994 primarily due to proportionately higher costs for the Greenville/Spartanburg System in relation to revenue. Depreciation and Amortization. Depreciation and amortization expense increased $1.9 million, or 2.8%, for 1995 compared to 1994. The increase in 1995 compared to 1994 is primarily due to the impact of the 1995 Combination, offset by (i) the impact of IPWT's and RMH's use of an accelerated depreciation method that results in higher depreciation expense being recognized in the earlier years and lower expense in later years and (ii) the effect of the cost of certain IPWT and RMH franchise rights becoming fully amortized during 1994. Interest and Other Income. Interest and other income consist primarily of interest on RMH Seller Notes and interest earned on cash equivalents. Interest and other income decreased $0.3 million, or 18.7%, for 1995 compared to 1994. The decrease reflects the effect of collection in 1994 of the RMH Seller Notes. Interest Expense. Interest expense increased by $4.6 million, or 10.3%, for 1995 compared to 1994. The increase reflects the impact of (i) the 1995 Combination of $11.8 million and (ii) a $0.9 million increase for RMH due to interest on additional borrowings, offset by an $8.2 million decrease for the IPWT system reflecting the effect of the October 1994 debt restructuring. Income Tax Benefit. The income tax benefit decreased $1.5 million, or 8.0%, for 1995 compared to 1994 due to the impact of a decrease in the taxable loss before income tax benefit, partially offset by a higher effective tax benefit rate. Net Loss. The Previously Affiliated Entities' net loss decreased $15.1 million, or 25.2%, for 1995 compared to 1994 primarily due to an increase in EBITDA and lower depreciation and amortization expense. EBITDA. EBITDA increased $22.5 million, or 67.0%, for 1995 compared to 1994. The 1995 Combination accounted for $19.4 million of the increase for 1995 compared to 1994. The remainder of the 1995 increase reflects the impact of revenue growth partially offset by increases in program fees, other direct and operating expenses and SG&A for the RMH and IPWT systems. EBITDA as a percentage of revenues decreased in 1995 compared to 1994 primarily because of the increases in program fees and SG&A as a percentage of revenues. LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY The following table sets forth certain statement of cash flows information of the Company (in thousands) for the years ended December 31, 1996, 1997 and 1998. The Company consummated acquisitions of cable television systems in January, February, May, July and August 1996. Cash flows from operating activities of the acquired systems have been included only from the dates of acquisition.
YEAR ENDED DECEMBER 31, 1996 1997 1998 ------------- ------------ ------------- STATEMENT OF CASH FLOWS DATA: Cash flows from operating activities.......... $ 37,697 $ 58,627 $ 55,275 Cash flows from investing activities.......... (557,013) (91,209) (67,427) Cash flows from financing activities.......... 528,086 30,200 8,000
YEAR ENDED DECEMBER 31, 1996 The Company's cash balance increased from zero as of January 1, 1996 to $8.8 million as of December 31, 1996. 41 42 Cash Flows from Operating Activities The Company generated cash flows from operating activities of $37.7 million for the year ended December 31, 1996 reflecting (i) income from operations of $48.5 million before non-cash charges to income for depreciation and amortization of $64.7 million; (ii) interest and other income received of $3.8 million; (iii) interest paid of $16.2 million; and (iv) other working capital sources, net of other expenses of approximately $1.6 million. Cash Flows from Investing Activities The Company used cash during the year ended December 31, 1996 of $418.0 million to fund its purchase of the Nashville System and the Miscellaneous Acquisitions and $0.3 million to purchase a controlling common stock interest in RMG. The Company also received cash of $2.2 million as part of IPWT's and RMG's total assets acquired. In April 1996, prior to the Company's purchase of RMG, a subsidiary of the Company loaned $15.0 million to RMG's parent, RMH. The loan is still outstanding and has been eliminated in consolidation as of December 31, 1996. The Company purchased property and equipment of $38.2 million during the year ended December 31, 1996 consisting primarily of cable system upgrades and rebuilds, plant extensions, converters and initial subscriber installations. Under the terms of the related indenture, the Company purchased approximately $88.8 million in pledged securities that, together with interest thereon, represent funds sufficient to provide for payment in full of interest on the Company's $292.0 million of 11.25% senior notes (the "Notes") through August 1, 1999. Proceeds from the securities will be used to make interest payments on the Notes through August 1, 1999. Cash Flows from Financing Activities The Company financed the acquisitions described above and its investment in the pledged securities with proceeds from issuance of the Notes, a $220.0 million bank term loan (the "Term Loan") and borrowings of $338.0 million under a bank revolving credit agreement (the "Revolving Credit Facility" together with the Term Loan, the "Bank Facility"), and $190.6 million in cash contributions from the partners of ICP-IV. The Company subsequently repaid borrowings under the Revolving Credit Facility of $4.0 million. The Company paid debt issue costs of $17.5 million in connection with the offering of the Notes and the bank financing and paid syndication costs of $1.0 million in connection with raising its contributed equity. The Company repaid $365.5 million of RMH's and IPWT's indebtedness, including $14.9 million of accrued interest, upon its acquisition of these entities. The Company paid a call premium and other fees associated with the repayment of RMH's indebtedness of $4.7 million. The Company paid cash to TCI of $119.8 million as repayment of debt assumed upon TCI's contribution of the Greenville/Spartanburg System to the Company. The amount paid has been recorded as a distribution to TCI in the Company's December 31, 1996 consolidated financial statements. YEAR ENDED DECEMBER 31, 1997 The Company's cash balance decreased by $2.4 million from $8.8 million as of January 1, 1997 to $6.4 million as of December 31, 1997. Cash Flows from Operating Activities The Company generated cash flows from operating activities of $58.6 million for the year ended December 31, 1997 reflecting (i) income from operations of $119.6 million before non-cash charges to income for depreciation and amortization of $130.4 million; (ii) interest and other income received of $5.9 million, primarily from its escrowed investments; (iii) interest paid of $75.0 million; (iv) $5.3 million in deferred revenue relating to payments received from certain programmers to launch and promote their new services; and (v) other working capital sources, net of other expenses of $2.8 million. 42 43 Cash Flows from Investing Activities The Company purchased property and equipment of $129.6 million during the year ended December 31, 1997 consisting primarily of cable system upgrades and rebuilds, plant extensions, converters and initial subscriber installations. During the year ended December 31, 1997, the Company also paid approximately $0.4 million for the right to provide cable services to a multiple dwelling unit in Nashville and a multiple dwelling unit in Greenville/Spartanburg. The Company received $28.2 million in proceeds from sale of its escrowed investments upon maturity on January 31 and July 31, 1997. These proceeds and related interest received were used to fund interest payment obligations on the Notes of $33.0 million during the year ended December 31, 1997. The Company also received $11.2 million in proceeds from sale of certain of its cable television assets in and around Royston and Toccoa, Georgia in December 1997. Cash Flows from Financing Activities The Company's cash flows from financing activities for the year ended December 31, 1997 consisted primarily of net borrowings of $30.5 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 sale of certain of its cable television assets located in and around Royston and Toccoa, Georgia, the sale of its escrowed investments and related accrued interest, as described above, borrowings from the bank revolving credit facility and cash available from operations. YEAR ENDED DECEMBER 31, 1998 The Company's cash balance decreased by $4.2 million from $6.4 million as of January 1, 1998 to $2.2 million as of December 31, 1998. Cash Flows from Operating Activities The Company generated cash flows from operating activities of $55.3 million for the year ended December 31, 1998 reflecting (i) income from operations of $131.2 million before non-cash charges to income for depreciation and amortization of $142.6 million and income from launch support payments of $1.4 million; (ii) interest and other income received of $4.4 million, primarily from its escrowed investments; (iii) interest paid of $80.7 million; (iv) $4.4 million received from certain programmers to launch and promote their new services; and (v) non-operating expenses and other working capital uses of $4.0 million, which includes an increase in related party receivables of $6.4 million. (See Note 13-Related Party Transactions to the Consolidated Financial Statements of the Company.) Cash Flows from Investing Activities The Company purchased property and equipment of $95.2 million during the year ended December 31, 1998 consisting primarily of cable system upgrades and rebuilds, plant extensions, converters and initial subscriber installations. During the year ended December 31, 1998, the Company also paid approximately $1.4 million for the right to provide cable services to multiple dwelling units and $1.1 million for an investment in securities held for sale. The Company received $29.6 million in proceeds from sale of its escrowed investments upon maturity on January 31 and July 31, 1998. These proceeds and related interest received were used to fund interest payment obligations on the Notes of $33.0 million during the year ended December 31, 1998. The Company also received $0.7 million in proceeds from exchange of certain of its cable television assets in and around central and eastern Tennessee in December 1998. Cash Flows from Financing Activities The Company's cash flows from financing activities for the year ended December 31, 1998 consisted of net borrowings of $8.0 million under the bank revolving credit facility. 43 44 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 sale of its escrowed investments and related accrued interest, borrowings from the bank revolving credit facility and cash available from operations. HISTORICAL LIQUIDITY AND CAPITAL RESOURCES -- THE PREVIOUSLY AFFILIATED ENTITIES The following table sets forth, for the periods indicated, certain statement of cash flows data of the Previously Affiliated Entities (in thousands). The comparability of statement of cash flows data for the seven months ended July 31, 1995, the period from January 1, 1996 to July 30, 1996, and the years ended December 31, 1994 and 1995 is affected by the 1995 Combination. The Previously Affiliated Entities' most significant capital requirements have been to finance purchases of property and equipment, consisting of cable system upgrades and rebuilds, plant extensions, converters and initial subscriber installations.
SEVEN MONTHS PERIOD FROM ENDED JANUARY 1, 1996 JULY 31, 1995 TO JULY 30, 1996 ------------- ---------------- STATEMENT OF CASH FLOWS DATA: Cash flows from operating activities............ $ 8,441 $ (8,169) Cash flows from investing activities............ (7,856) (18,737) Cash flows from financing activities............ 28 24,249
YEAR ENDED DECEMBER 31, --------------------------------- 1994 1995 ----------- ------------- STATEMENT OF CASH FLOWS DATA: Cash flows from operating activities............ $ (112) $ 8,107 Cash flows from investing activities............ 4,871 (24,614) Cash flows from financing activities............ (4,784) 18,066
SEVEN MONTHS ENDED JULY 31, 1995 The Previously Affiliated Entities showed an increase in cash of $0.6 million from $3.3 million as of January 1, 1995 to $3.9 million as of July 31, 1995. Cash Flows from Operating Activities The Previously Affiliated Entities' cash flows from operating activities of $8.4 million for the seven months ended July 31, 1995 reflect (i) income from operations of $32.5 million before non-cash charges to income for depreciation and amortization of $41.1 million; (ii) interest received of $3.7 million, (iii) interest payments on long-term obligations of approximately $21.2 million; (iv) intercompany interest charges of $6.4 million paid by the Greenville/Spartanburg System to TCI; (v) advances to affiliates of $0.8 million; and (vi) a net increase in cash of $0.6 million representing other working capital changes, net of non-operating expense. Cash Flows from Investing Activities The Previously Affiliated Entities used cash during the seven months ended July 31, 1995 primarily to fund purchases of property and equipment of $5.6 million, $0.9 million and $3.3 million for RMH, IPWT and the Greenville/Spartanburg System, respectively. Collections of $2.6 million were received on the RMH Seller Notes. Cash Flows from Financing Activities During the seven months ended July 31, 1995, the Previously Affiliated Entities' cash flows from financing activities consisted primarily of net borrowings of $1.0 and $0.6 million, respectively, under RMH's and IPWT's revolving credit notes payable and distributions to TCI by the Greenville/Spartanburg System of $1.0 million. 44 45 SEVEN MONTHS ENDED JULY 30, 1996 The Previously Affiliated Entities showed a decrease in cash of $2.7 million from $4.9 million as of January 1, 1996 to $2.2 million as of July 30, 1996. Cash Flows from Operating Activities The Previously Affiliated Entities reported a net deficit in cash flows from operating activities of $8.2 million for the seven months ended July 30, 1996 reflecting (i) income from operations of $32.9 million before non-cash charges to income for depreciation and amortization of $36.5 million; (ii) interest received of $0.2 million, (iii) interest payments on long-term obligations of approximately $21.7 million; (iv) intercompany interest charges of $22.8 million paid by the Greenville/Spartanburg System to TCI; (v) advances to affiliates of $1.0 million, (vi) income tax refunds of $6.4 million and (vii) other working capital uses and non-operating expenses of $2.2 million, including $2.3 million for increases in inventory primarily related to rebuild activity in RMH's Tennessee systems. Cash Flows from Investing Activities The Previously Affiliated Entities used cash during the seven months ended July 30, 1996 primarily to fund purchases of property and equipment of $13.1 million, $0.8 million and $4.7 million for RMH, IPWT and the Greenville/Spartanburg System, respectively. Cash Flow from Financing Activities For the seven months ended July 30, 1996, the Previously Affiliated Entities' principal sources of cash consisted of a loan of $15.0 million from the Company to RMH, and equity contributions from TCI to the Greenville/Spartanburg System of $9.4 million. YEAR ENDED DECEMBER 31, 1994 The Previously Affiliated Entities' cash balance of $3.3 million remained constant at January 1, 1993 and December 31, 1994. Cash Flows from Operating Activities The Previously Affiliated Entities reported a net deficit in cash flows from operating activities of $0.1 million for the year ended December 31, 1994 reflecting (i) income from operations of $33.6 million before non-cash charges to income for depreciation and amortization of $68.2 million; (ii) interest received of $0.7 million; (iii) interest payments on long-term obligations of $43.7 million; (iv) payments received from affiliates of $9.7 million; and (v) other working capital uses and non-operating expenses of $0.4 million. As of December 31, 1994 the Previously Affiliated Entities had negative working capital of $13.8 million due to franchise fees and copyright fees that are paid quarterly and semiannually and due to the timing of interest payments on the RMG Notes. Interest is paid on the RMG Notes semiannually on April 1 and October 1. Cash Flows from Investing Activities During the year ended December 31, 1994, the Previously Affiliated Entities collected $17.8 million on the RMH Seller Notes. The Previously Affiliated Entities used cash primarily for purchases of property and equipment of $11.2 million and $1.3 million for RMH and IPWT, respectively. Cash Flows from Financing Activities During the year ended December 31, 1994, the Previously Affiliated Entities received a capital contribution from IPWT's majority owner of $20.1 million. The Previously Affiliated Entities used cash of $22.1 million to repay IPWT's long-term obligations under the terms of a debt restructuring and $2.6 million to repay borrowings under IPWT's revolving credit note payable. 45 46 YEAR ENDED DECEMBER 31, 1995 The Previously Affiliated Entities' cash balance increased by $1.6 million from $3.3 million as of January 1, 1995 to $4.9 million as of December 31, 1995. Cash Flows from Operating Activities The Previously Affiliated Entities generated cash from operating activities of $8.1 million for the year ended December 31, 1995 reflecting (i) income from operations of $56.2 million before non-cash charges to income for depreciation and amortization of $70.2 million; (ii) interest received of $4.1 million, (iii) interest payments on long-term obligations of $40.4 million; and (iv) intercompany interest charges of $11.8 million paid by the Greenville/Spartanburg System to TCI. As of December 31, 1995 the Previously Affiliated Entities had negative working capital of $13.8 million due to franchise fees and copyright fees that are paid quarterly and semiannually and due to the timing of interest payments on the RMG Notes. Interest is paid on the RMG Notes semiannually on April 1 and October 1. Accounts receivable increased from December 31, 1994 to December 31, 1995 by $2.8 million or 49% as a result of the 1995 Combination. Inventory increased $1.2 million or 71% during 1995 primarily related to rebuild activity in RMH's Tennessee systems. Cash Flows from Investing Activities During the year ended December 31, 1995, the Previously Affiliated Entities received proceeds of $2.6 million from sale of the last RMH Seller Note. The Previously Affiliated Entities used cash primarily to fund purchases of property and equipment of $11.9 million, $1.4 million and $13.4 million for RMH, IPWT and the Greenville/Spartanburg System, respectively. Cash Flows from Financing Activities During the year ended December 31, 1995, the Previously Affiliated Entities received net borrowings of $12.0 million under RMH's revolving credit note payable, repaid $0.4 million under IPWT's revolving credit facility with GECC and received a $6.5 million capital contribution made by TCI to the Greenville/Spartanburg System. FUTURE LIQUIDITY AND CAPITAL RESOURCES The Company's most significant capital needs are to service its debt and to finance cable system upgrades and rebuilds, plant extensions and purchases of converters and other customer premise equipment. Planned capital expenditures also provide for initial subscriber installations, purchases of digital ad insertion equipment and replacement purchases of machinery and equipment. To make the most efficient use of its capital, management continually reassesses the need for modifications in system architecture and detailed technical specifications by considering the Company's current system technical profile, the technological changes in the cable industry, additional revenue potential, competition, cost effectiveness and requirements under franchise agreements. The Company currently estimates that it will make capital expenditures of approximately $162.0 million through 2002. 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 Revolving Credit Facility. The Revolving Credit Facility provides for borrowings up to $475.0 million in the aggregate, with permanent semi-annual commitment reductions ranging from $22,500 to $47,500 beginning in 1999, and matures in 2004. As of December 31, 1998, the Company had $373.0 million outstanding under the Revolving Credit Facility, leaving availability of $102.0 million. The Term Loan also requires semiannual principal payments of $0.5 million starting January 1, 1999 through January 1, 2004 and final principal payments in two equal installments of $107.3 million on July 1, 2004 and January 1, 2005. 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 continues to make available as technological upgrades are completed under the Capital Improvement Program. 46 47 Management believes that, with the Company's ability to 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 and principal payments and planned capital expenditures over the next several years. However, the Company does not expect to 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 is likely to be required to sell a portion of its assets, obtain additional equity contributions or refinance the Notes. There can be no assurance that equity contributions will obtained or financing will be available at that time in order to accomplish any necessary refinancing on terms favorable to the Company. 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 inter-company notes. The obligations of IP-IV under the Bank Facility are guaranteed by IP-IV's subsidiaries. The Bank Facility and the Indenture 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 December 31, 1998 the Company was in compliance with all of the debt covenants as provided by the Bank Facility and the Indenture. Pending Sales and Exchange and Equity Distributions Assuming consummation of the Charter Transactions, expected net proceeds from the Charter Transactions of approximately $850 million combined with cash flows from operations will not be sufficient to meet the Company's obligations under its Bank Facility and the Notes and its obligations to make the Final Equity Distributions. Upon consummation of the Charter Transactions and the Final Equity Distributions, TCI will own 99.999% of the partner interests in the Company. It is the understanding of the Company's management that TCI will address the Company's on-going liquidity needs after the closing of the Charter Transactions and the Final Equity Distributions. Inflation During the periods covered in this discussion, inflation did not have a significant impact on results of operations and financial position of the cable television systems. Periods of high inflation could have an adverse effect to the extent that increased operating costs and increased borrowing costs for variable interest rate debt may not be offset by increases in subscriber rates. 47 48 YEAR 2000 The Company has developed a plan to review, assess and resolve its year 2000 problem. The Company has completed a review of its computer and operating systems to identify those systems that could be affected by the year 2000 problem and is developing an implementation plan to resolve the issues. 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 its subscribers. The Company has established a year 2000 project management team and is utilizing both internal and external resources to assess, remediate, test and implement systems for year 2000 readiness. The Company has completed internal surveys, inventories, and an assessment of its 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 has completed the process of requesting compliance letters from all vendors and manufacturers which supply to the Company the items identified in the Company's year 2000 inventories. Based on the responses received from these vendors and information made publicly available on vendors' year 2000 Web sites, the following summarizes vendors' representations regarding the year 2000 status for items that the Company's management believes could have a significant impact on operations if such items are not year 2000 compliant by the end of 1999:
Year 2000 Percent of Items Readiness Inventoried --------- ----------- Ready 64% Ready by end of 1999 19% Status unknown 14% Not compliant 3%
Of these items, the Company plans to replace those that are not compliant and those for which the status is unknown. Representatives from the Company's year 2000 project management team have attended year 2000 conferences held by TCI in addition to conferences hosted by a major industry technical association, and have reviewed related remediation information received on a number of software products, hardware, equipment and systems. The Company has completed the assessment of its internal hardware and software systems and those systems and devices that manage the distribution of the Company's video and data services to its subscribers. Specifically, the Company completed its review of vendor confirmation letters, performed risk assessments by component of all items inventoried, reviewed system dependencies, developed detailed estimates of remediation costs, assessed timing for remediation activities and made detailed remediation decisions. During early to mid-1999, the Company will continue its remediation, testing and implementation efforts. The Company will address contingency plans based on the results of these efforts. In addition, by June 1999 the Company expects to have completed remediation of its financial information and related systems. The Company's overall progress by phase is as follows:
Expected Completion Phase Complete Date ------------------------------------------------------- Assessment 90.0% May 1999 Remediation 20.0% June 1999 Testing 20.0% August 1999 Implementation 20.0% August 1999
The completion dates set forth above are based on the Company's current expectations. However, due to the uncertainties inherent in year 2000 remediation, no assurances can be given as to whether such projections will be completed on such dates. 48 49 Year 2000 expenditures for the year ended December 31, 1998, were not material to the Company's results of operations. Management of the Company currently estimates that year 2000 expenditures for 1999 will be at least $4.5 million. Although no assurances can be given, management currently expects that (i) cash flows from operations will be sufficient to fund the costs associated with year 2000 compliance and (ii) the total projected cost associated with the Company's year 2000 program will not be material to the Company's financial position, results of operations or cash flows. The Company relies heavily on certain significant third party vendors, such as its billing service vendor, to provide services to its subscribers. The Company's billing service vendor has disclosed that it has completed its remediation efforts and system testing. Integration testing with certain other vendors' products is expected to be completed by the end of the second quarter of 1999. Although the Company is in the process of researching the year 2000 readiness of its suppliers and vendors, the Company can make no representation regarding the year 2000 compliance status of systems outside its control, and currently cannot assess the effect on it of any non-compliance by such systems or parties. TCI manages the Company's advertising business and related services. TCI is in the process of remediating systems that control the commercial advertising in its and the Company's cable operations. For updated information regarding the status of TCI's year 2000 program, refer to TCI's most recent filings with the Securities and Exchange Commission. The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations or support functions, including the ability to provide premium, pay-per-view or satellite delivered programming services to subscribers, customer billing and account information, scheduling of installation and repair calls, insertion of advertising spots in the Company's programming, and security and fire protection. The Company expects to address detailed contingency planning for all such significant risks during the second quarter of 1999. Despite the Company's best efforts, there is no assurance that all material risk associated with year 2000 issues will have been adequately identified and corrected by the end of 1999. If critical systems related to the Company's operations are not successfully remediated, the Company could face claims of breech of obligations to provide cable services under local franchise agreements, breech of programming contracts with respect to signal carriage, breech of contracts for cable system sales or exchanges, potential deemed violations of "must carry" requirements under FCC rules and regulations, and potential claims by investors or creditors for financial losses suffered as a result of year 2000 non-compliance. The Company cannot predict the likelihood that any such claims might materialize or the extent of potential losses from any such claims. 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. (For a description of the above risks and uncertainties, see the Certain Factors that May Affect Future Results section under Item 1 of PART I.) ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to market risk from exposure to changes in interest rates based on its financing activities. The Company manages interest rate risk by maintaining a mix of fixed and variable rate debt that will lower borrowing costs within reasonable risk parameters. Interest rate swap agreements are used to effectively convert variable rate debt to fixed rate debt. At 49 50 December 31, 1997 and 1998, the Company had interest rate swap agreements to pay quarterly interest at fixed rates ranging from 6.28% to 6.3225% and receive quarterly interest at variable rate equal to LIBOR on $120.0 million notional amount of indebtedness, which represented approximately 20.5% and 20.3% of the Company's underlying debt subject to variable interest rates at December 31, 1997 and 1998, respectively. During the years ended December 31, 1996, 1997 and 1998, the Company's net payments pursuant to the interest rate swap agreements were $0.3 million, $0.8 million and $0.8 million, respectively. Based on the Company's variable-rate debt and related interest rate swap agreements outstanding at December 31, 1998, each 100 basis point increase or decrease in the level of interest rates would increase or decrease the Company's annual interest expense and related cash payments by approximately $4.7 million. Such potential increases or decreases are based on certain simplifying assumptions, including a constant level of variable-rate debt and related interest rate swap contracts during the period and, for all maturities, an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the period. 50 51 PART III ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Reference Page Form 10-K -------------- INTERMEDIA CAPITAL PARTNERS IV, L.P. Report of Independent Accountants..................................... 53 Consolidated Balance Sheets as of December 31, 1997 and 1998.......... 54 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998.................................... 55 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1996, 1997 and 1998.............................. 56 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998.................................... 57 Notes to Consolidated Financial Statements............................ 58 Schedule I-- Condensed Financial Information of Registrant............ 128 Schedule II-- Valuation and Qualifying Accounts....................... 133 PREDECESSOR BUSINESSES: Previously Affiliated Entities Report of Independent Accountants..................................... 72 Combined Balance Sheet as of December 31, 1995........................ 73 Combined Statements of Operations for the years ended December 31, 1994 and 1995, and the period from January 1, 1996 to July 30, 1996.................................................... 74 Combined Statement of Changes in Equity for the years ended December 31, 1994 and 1995, and for the period from January 1, 1996 to July 30, 1996....................................................... 75 Combined Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the period from January 1, 1996 to July 30, 1996.................................................... 76 Notes to Combined Financial Statements................................ 77 ROBIN MEDIA HOLDINGS, INC. Report of Independent Accountants..................................... 88 Consolidated Balance Sheet as of December 31, 1995.................... 89 Consolidated Statements of Operations for the years ended December 31, 1994 and 1995, and the period from January 1, 1996 to July 30, 1996.................................................... 90 Consolidated Statement of Shareholder's Deficit for the years ended December 31, 1994 and 1995, and for the period from January 1, 1996 to July 30, 1996............................................... 91 Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995, and the period from January 1, 1996 to July 30, 1996.................................................... 92 Notes to Consolidated Financial Statements............................ 93
51 52 INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P. Report of Independent Accountants..................................... 100 Balance Sheet as of December 31, 1995................................. 101 Statements of Operations for the years ended December 31, 1994 and 1995, and the period from January 1, 1996 to July 30, 1996.......... 102 Statement of Changes in Partners' Capital for the years ended December 31, 1994 and 1995, and for the period from January 1, 1996 to July 30, 1996............................................... 103 Statements of Cash Flows for the years ended December 31, 1994 and 1995, and the period from January 1, 1996 to July 30, 1996...... 104 Notes to Financial Statements......................................... 105 TCI OF GREENVILLE, INC., TCI OF SPARTANBURG, INC. AND TCI OF PIEDMONT, INC. Independent Auditors' Report.......................................... 111 Combined Balance Sheet as of December 31, 1995........................ 112 Combined Statements of Operations and Accumulated Deficit for the period from January 27, 1995 to December 31, 1995 and for the period from January 1, 1996 to July 30, 1996........................ 113 Combined Statements of Cash Flows for the period from January 27, 1995 to December 31, 1995 and for the period from January 1, 1996 to July 30, 1996............................................... 114 Notes to Combined Financial Statements................................ 115
52 53 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of InterMedia Capital Partners IV, L.P. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in partners' capital and of cash flows present fairly, in all material respects, the financial position of InterMedia Capital Partners IV, L.P. and its subsidiaries (the "Company") at December 31, 1997 and December 31, 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Francisco, California March 19, 1999 53 54 INTERMEDIA CAPITAL PARTNERS IV, L.P. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ----------------------- 1997 1998 ---------- --------- ASSETS Cash and cash equivalents . . ................................................. $ 6,388 $ 2,236 Accounts receivable, net of allowance for doubtful accounts of $1,685 and $1,995, respectively....................................... 23,163 22,716 Escrowed investments held to maturity.......................................... 29,359 30,923 Interest receivable on escrowed investments.................................... 1,418 791 Receivable from affiliate...................................................... 686 7,086 Prepaids ...................................................................... 599 695 Other current assets........................................................... 359 217 ---------- --------- Total current assets.................................................. 61,972 64,664 Escrowed investments held to maturity.......................................... 31,148 Intangible assets, net......................................................... 550,726 507,500 Property and equipment, net.................................................... 310,455 340,028 Deferred income taxes.......................................................... 14,221 12,598 Other non-current assets....................................................... 2,242 3,867 ---------- --------- Total assets.......................................................... $ 970,764 $ 928,657 ========== --------- LIABILITIES AND PARTNERS' CAPITAL Current portion of long-term debt.............................................. $ $ 500 Accounts payable and accrued liabilities....................................... 32,708 29,507 Payable to affiliates.......................................................... 3,813 4,702 Deferred revenue............................................................... 15,856 18,946 Accrued interest............................................................... 22,076 17,958 ---------- --------- Total current liabilities............................................. 74,453 71,613 Deferred channel launch revenue................................................ 4,154 6,485 Long-term debt................................................................. 876,500 884,000 Other non-current liabilities.................................................. 131 1,247 ---------- --------- Total liabilities..................................................... 955,238 963,345 ---------- --------- Commitments and contingencies Minority interest Mandatorily redeemable preferred shares........................................ 13,239 14,184 PARTNERS' CAPITAL Preferred limited partnership interest......................................... 24,888 24,888 Junior preferred limited partnership interest.................................. (1,423) General and limited partners' capital.......................................... (20,751) (70,487) Note receivable from partner................................................... (1,850) (1,850) ---------- --------- Total partners' capital............................................... 2,287 (48,872) ---------- --------- Total liabilities and partners' capital............................... $ 970,764 $ 928,657 ========== =========
See accompanying notes to the consolidated financial statements 54 55 INTERMEDIA CAPITAL PARTNERS IV, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1997 1998 ----------- ---------- ---------- REVENUES Basic and cable services................................. $ 73,392 $ 171,622 $ 192,256 Pay service.............................................. 17,932 41,054 40,055 Other service............................................ 15,093 38,995 45,521 ------------ --------- ---------- 106,417 251,671 277,832 ------------ --------- ---------- Costs and expenses Program fees............................................. 22,881 53,903 62,423 Other direct expenses.................................... 13,148 26,529 26,973 Selling, general and administrative expenses............. 20,337 48,334 52,483 Management and consulting fees........................... 1,558 3,350 3,350 Depreciation and amortization............................ 64,707 130,428 142,608 ------------ --------- ---------- 122,631 262,544 287,837 ------------ --------- ---------- Loss from operations..................................... (16,214) (10,873) (10,005) ------------ --------- ---------- OTHER INCOME (EXPENSE): Interest and other income............................. 6,398 5,148 3,740 Gain on sale/exchange of cable systems................ 10,006 42,113 Gain on sale of investments........................... 286 Interest expense...................................... (37,742) (78,185) (78,107) Other expense......................................... (1,216) (853) (6,607) ------------ --------- ---------- (32,274) (63,884) (38,861) ------------ --------- ---------- Loss before income tax benefit, extraordinary item and minority interest............................ (48,488) (74,757) (48,866) Income tax benefit (expense)............................. 2,596 4,026 (1,623) ------------ --------- ---------- Net loss before extraordinary item and minority interest.............................................. (45,892) (70,731) (50,489) Extraordinary gain on early extinguishments of debt, net of tax...................................... 18,483 Minority interest........................................ (320) (882) (945) ------------ --------- ---------- Net loss................................................. (27,729) (71,613) (51,434) OTHER COMPREHENSIVE INCOME: Unrealized holding gains on available-for-sale securities............................................ 275 ------------ --------- ---------- Comprehensive loss....................................... $ (27,729) $ (71,613) $ (51,159) ============ ========= ==========
See accompanying notes to consolidated financial statements 55 56 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, 1995 $ (43) $ $ (7) $ (575) $ $ (625) Cash Contributions ................ 1,913 188,637 190,550 Notes receivable from General Partner ................. 1,850 (1,850) In-kind contributions, historical cost basis ............ 237,805 237,805 Conversion of GECC debt to equity ....................... 25,000 11,667 36,667 Allocation of RMG's and IPWT's historical equity balances .................. (2,719) (239,368) (242,087) Distribution ...................... (119,775) (119,775) Syndication costs ................. (69) (10) (911) (990) Net loss .......................... (311) (27,418) (27,729) ------- -------- --------- --------- -------- --------- Balance at December 31, 1996....... 24,888 716 50,062 (1,850) 73,816 Cash contributions ................ 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 ......... (1,423) 1,423 Net loss .......................... (51,434) (51,434) Other comprehensive income ........ 275 275 ------- -------- --------- --------- -------- --------- Balance at December 31, 1998....... $24,888 $ (1,423) $ $ (70,487) $ (1,850) $ (48,872) ======= ======== ========= ========= ======== =========
See accompanying notes to consolidated financial statements 56 57 INTERMEDIA CAPITAL PARTNERS IV, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1997 1998 ---------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................................... $ (27,729) $ (71,613) $ (51,434) Minority interest.......................................................... 320 882 945 Loss on disposal of fixed assets........................................... 324 263 6,050 Depreciation and amortization.............................................. 65,905 131,830 144,159 Gain on sale of investment................................................. (286) Gain on sale/exchange of cable systems..................................... (10,006) (42,113) Extraordinary gain on early extinguishments of debt, net of tax.......................................................... (18,483) Changes in assets and liabilities: Accounts receivable..................................................... (2,798) (5,569) 460 Receivable from affiliate............................................... 151 237 (6,400) Prepaids................................................................ (1,922) 2,169 (96) Interest receivable..................................................... (2,633) 776 627 Other current assets.................................................... 8 (127) 142 Deferred income taxes................................................... (2,596) (4,311) 1,623 Other non-current assets................................................ 379 (776) (294) Accounts payable and accrued liabilities................................ 4,826 4,395 (1,702) Payable to affiliates................................................... 1,531 405 889 Deferred revenue........................................................ 394 2,977 2,429 Accrued interest........................................................ 20,322 1,754 (4,118) Deferred channel launch revenue......................................... 5,280 2,992 Other non-current liabilities........................................... (16) 61 1,116 ---------- --------- --------- Cash flows from operating activities....................................... 37,697 58,627 55,275 ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of cable systems, net of cash acquired........................... (415,806) Proceeds from sale/exchange of cable systems............................... 11,157 736 Purchase of RMG Class A Common Stock....................................... (329) Property and equipment..................................................... (38,167) (129,573) (95,212) Intangible assets.......................................................... (37) (1,041) (1,479) Notes receivable........................................................... (15,000) Purchases of escrowed investments.......................................... (88,755) Proceeds from maturity of escrowed investments............................. 28,248 29,584 Purchase of investment available for sale ................................. (1,056) Proceeds from sale of investment........................................... 1,081 ---------- --------- --------- Cash flows from investing activities....................................... (557,013) (91,209) (67,427) ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt............................................... 850,000 30,500 8,000 Repayment of long-term debt................................................ (369,504) Call premium and other fees on early extinguishment of debt................ (4,716) Contributed capital........................................................ 190,550 84 Partner distribution....................................................... (119,775) Debt issue costs........................................................... (17,479) (384) Syndication costs.......................................................... (990) ---------- --------- --------- Cash flows from financing activities....................................... 528,086 30,200 8,000 ---------- --------- --------- Net change in cash............................................................. 8,770 (2,382) (4,152) Cash and cash equivalents, beginning of period................................. 8,770 6,388 ---------- --------- --------- Cash and cash equivalents, end of period....................................... $ 8,770 $ 6,388 $ 2,236 ========== ========= =========
See accompanying notes to consolidated financial statements 57 58 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 December 31, 1998, ICP-IV's systems served the following number of basic subscribers and encompassed the following number of homes passed:
BASIC HOMES SUBSCRIBERS PASSED ----------- ------ (UNAUDITED) Nashville/Mid-Tennessee Cluster..... 337,697 536,567 Greenville/Spartanburg Cluster...... 147,419 244,032 Knoxville/East Tennessee Cluster.... 105,513 152,164 ------- ------- Total..................... 590,629 932,763 ======= =======
During 1996, ICP-IV obtained capital contributions from its limited and general partners of $360,000, including cable television properties and debt and equity interests in InterMedia Partners of West Tennessee, L.P. ("IPWT"), an affiliated entity. The limited partner contributions are from various institutional investors and include a preferred limited partner interest of $25,000, which General Electric Capital Corporation ("GECC") received in exchange for a portion of its note receivable from IPWT. ICP-IV is the successor partnership to IP-IV. Upon formation of ICP-IV, the previous general and limited partners of IP-IV became the general and limited partners of ICP-IV. Simultaneously, ICP-IV became the 99.99% limited partner of IP-IV. InterMedia Capital Management, LLC ("ICM-IV LLC"), the .001% general partner of ICP-IV, is the .01% general partner of IP-IV. (See Note 13--Related Party Transactions.) The Company's acquisitions of its cable television systems were structured as leveraged transactions and a significant portion of the assets acquired are intangible assets which are being amortized over one to twelve years. Therefore, as was planned, the Company has incurred substantial book losses. Of the total cumulative loss before income tax benefit, extraordinary items and minority interest of $172,111, non-cash charges have aggregated $306,418. These charges consist of $136,872 of depreciation of property and equipment, $205,022 of amortization of intangible assets, predominately related to franchise rights and goodwill, and $6,637 of loss on disposal of fixed assets, offset by a $42,113 gain on exchange of cable systems. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of ICP-IV and its majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Cash equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Revenue recognition Cable television service revenue is recognized in the period in which the services are provided to customers. Deferred revenue represents revenue billed in advance and deferred until cable service is provided. 58 59 Escrowed investments held to maturity Escrowed investments held to maturity are carried at amortized cost and consist of U.S. Treasury Notes with maturities ranging from one to nineteen 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 9 -- Long-Term Debt). Property and equipment Additions to property and equipment, including new customer installations, are recorded at cost. Self constructed fixed assets include materials, labor and overhead. Costs of disconnecting and reconnecting cable service are expensed. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for major renewals and improvements are capitalized. Capitalized plant is written down to recoverable values whenever recoverability through operations or sale of the systems becomes doubtful. Gains and losses on disposal of property and equipment are included in the Company's statement of operations when the assets are sold or retired from service. Depreciation is computed using the double-declining balance method over the following estimated useful lives:
YEARS ----- Cable television plant............. 5--10 Buildings and improvements......... 10 Furniture and fixtures............. 3--7 Equipment and other................ 3--10
Intangible assets The Company has franchise rights to operate cable television systems in various towns and political subdivisions. Franchise rights are being amortized over the lesser of the remaining lives of the franchises or the base twelve-year term of ICP-IV which expires on December 31, 2007. Remaining franchise lives range from one to eighteen years. Goodwill represents the excess of acquisition cost over the fair value of net tangible and franchise assets acquired and liabilities assumed and is being amortized on a straight line basis over the twelve-year term of ICP-IV. Debt issue costs are included in intangible assets and are being amortized over the terms of the related debt. Costs associated with potential acquisitions are initially deferred. For acquisitions which are completed, related costs are capitalized as part of the purchase price of assets acquired. For those acquisitions not completed, related costs are expensed in the period the acquisition is abandoned. Capitalized intangibles are written down to recoverable values whenever recoverability through operations or sale of the systems becomes doubtful. Each year, the Company evaluates the recoverability of the carrying value of its intangible assets by assessing whether the projected cash flows, including projected cash flows from sale of the systems, is sufficient to recover the unamortized costs of these assets. Interest rate swaps Under an interest rate swap, the Company agrees with another party to exchange interest payments at specified intervals over a defined term. Interest payments are calculated by reference to the notional amount based on the difference between the fixed and variable rates pursuant to the swap agreement. The net interest received or paid as part of the interest rate swap is accounted for as an adjustment to interest expense. Income taxes Income taxes reported in ICP-IV's financial statements represent the tax effects of Robin Media Group, Inc.'s ("RMG") results of operations. RMG, a subsidiary of ICP-IV, is the only entity within the Company's organization structure which reports 59 60 provision/benefit for income taxes. No provision or benefit for income taxes is reported by any of ICP-IV's other subsidiaries or by ICP-IV because, as partnerships, the tax effects of these entities' results of operations accrue to the partners. ICP-IV and its partnership subsidiaries are registered with the Internal Revenue Service as tax shelters under Internal Revenue Code Section 6111(b). RMG accounts for income taxes using the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Partners' capital Syndication costs incurred to raise capital have been charged to partners' capital. Allocation of profits and losses Profits and losses are allocated in accordance with the provisions of ICP-IV's amended and restated partnership agreement, dated August 5, 1997, generally as follows: Losses are allocated first to the partners other than the preferred and the junior preferred limited partners, and thereafter to the preferred and the junior preferred limited partners, in each case to the extent of and in accordance with relative capital contributions; second, to the partners which loaned money to the Partnership to the extent of and in accordance with relative loan amounts; and third, to the partners in accordance with relative capital contributions. Profits are allocated first to the preferred and the junior preferred limited partners in an amount sufficient to yield an 11.75% and a 12.75% return, respectively, compounded semi-annually and annually, respectively, on its capital contributions; second, to the partners which loaned money to the Partnership to the extent of and proportionate to previously allocated losses relating to such loans; third, among the partners, other than the preferred and the junior preferred limited partners, in accordance with relative capital contributions, in an amount sufficient to yield a pre-tax return of 15% per annum on their capital contributions; and fourth, 20% to a certain limited partner and 80% to the limited and general partners, other than the preferred and the junior preferred limited partners, in accordance with relative capital contributions. Use of estimates in the preparation of financial statements 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. Reclassifications Certain amounts in the 1997 statement of cash flows have been reclassified to conform to the 1998 presentation. Disclosures about fair value of financial instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate the fair value: Current assets and current liabilities: The carrying value of receivables, payables, deferred revenue, and accrued liabilities approximates fair value due to their short maturity. Escrowed investments: The fair value of the escrowed investments held to maturity is based on quoted market prices (see Note 4--Escrowed Investments Held to Maturity). 60 61 Long-term debt: The fair value of the Company's borrowings under the bank term loan and revolving credit facility are estimated based on the borrowing rates currently available to the Company for obligations with similar terms. The fair value of the senior notes is based on recent trading prices (see Note 9--Long-term Debt). In June 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. 3. ACQUISITIONS, SALE AND EXCHANGE 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 13--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"). The Company acquired all of the general and limited partner interests of IPWT in exchange for a $13,333 limited partner interest in ICP-IV. Concurrently, GECC transferred to ICP-IV its $55,800 note receivable from IPWT and related interest receivable of $3,356 in exchange for an $11,667 limited partner interest in ICP-IV, a $25,000 preferred limited partner interest in ICP-IV and cash of $22,489. InterMedia Partners V, L.P. ("IP-V"), a former affiliate, owned all of the outstanding equity of RMH prior to the Company's acquisition of a majority of the voting interests in RMH. In conjunction with a recapitalization of RMH, ICP-IV purchased 3,285 shares of RMH's Class A Common Stock for $329. Concurrently, a wholly owned subsidiary of TCI converted its outstanding loan to IP-V into a limited partnership interest and, in dissolution of the IP-V partnership, received 365 shares of RMH Class B Common Stock valued at $37 and 12,000 shares of RMH Redeemable Preferred Stock valued at $12,000. Upon completion of the recapitalization, the Company has 60% of the voting interests of RMH, with TCI owning the remaining 40%. In connection with the acquisition, the Company assumed approximately $331,450 of long-term debt and $11,565 of accrued interest, which was repaid with proceeds from the Financing. Upon consummation of the acquisition, RMH merged into its wholly owned operating subsidiary Robin Media Group, Inc. ("RMG"). All of the RMH stock just described was converted as a result of the merger into capital stock of RMG with the same terms. Affiliates of TCI contributed cash and transferred their interests in the Greenville/Spartanburg System to the Company in exchange for a 49.0% limited partner interest in ICP-IV and an assumption of $119,775 of debt which was simultaneously repaid by the Company with proceeds from the Financing. The cash paid of $119,775 for debt assumed has been recorded as a distribution to TCI in the accompanying consolidated financial statements. 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. The conversion of the 5.4% limited partner interest was recorded at book value at March 31, 1998. After giving effect to the conversion, TCI owns a 49.6% non- 61 62 preferred 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% limited partner 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 13--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. The historical cost basis of RMH's, IPWT's and the Greenville/Spartanburg System's assets purchased and liabilities assumed as of July 30, 1996 was as follows: Current assets......................... $ 19,368 Property and equipment................. 107,504 Franchise rights....................... 270,593 Goodwill .............................. 59,532 Other non-current assets............... 8,124 ---------- Total assets.................. $ 465,121 ========== Current liabilities.................... $ 33,283 Long-term debt......................... 543,434 Other non-current liabilities.......... 87 ---------- Total liabilities............. 576,804 ---------- Mandatorily redeemable preferred stock. 12,000 Minority interest...................... 37 Total equity........................... (123,720) ---------- Total liabilities and equity.. $ 465,121 ==========
On May 8, 1996, the Company acquired the Houston, Texas cable television assets of Prime Cable ("the Prime Houston System") with the intent of exchanging with TCI the Prime Houston System for cable television systems of Viacom serving approximately 147,600 basic subscribers in metropolitan Nashville, Tennessee (the "Nashville System"). The purchase price for the Prime Houston System of approximately $300,000 was financed entirely with non-recourse debt from TCI Communications, Inc. ("TCIC"), a wholly owned subsidiary of TCI, and Bank of America which was repaid with the proceeds from the Financing. As was planned, on July 31, 1996, TCI and TCIC consummated the acquisition of all of Viacom's cable television systems including the Nashville System. On August 1, 1996, the Company acquired the Nashville System in exchange for the Prime Houston System and cash equal to the difference between the fair market values of the systems. The aggregate purchase price of the Nashville System pursuant to the exchange was $315,333. TCI managed the Prime Houston System during the Company's ownership period, and, under the terms of the exchange agreement, the Company was obligated to sell to TCIC and TCIC was obligated to purchase the Prime Houston System from the Company for an amount in cash sufficient to repay the outstanding balances of the TCIC and bank loans in the event that TCI had been unable to complete the Viacom acquisition by October 1, 1996. Under the terms of the various agreements with TCI, the Company could not dispose of and did not have effective control over the use of the Prime Houston assets, and there was no economic effect to the Company from the Prime Houston assets during the Company's ownership of the Prime Houston System. Accordingly, the accounts of the Prime Houston System and the related debt and interest expense have been excluded from the Company's consolidated financial statements. 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 exchange. 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. Total acquisition costs of the Nashville System and the Miscellaneous Tennessee Acquisitions are as follows: 62 63 Cash paid to sellers, net of liabilities assumed $ 415,390 Other acquisition costs........................... 2,644 ---------- Total acquisition costs.................. $ 418,034 ==========
The Company's allocation of acquisition costs for the Nashville System and the Miscellaneous Tennessee Acquisitions is as follows: Current assets......................... $ 8,454 Property and equipment................. 90,421 Franchise rights....................... 306,607 Goodwill .............................. 21,583 Other non-current assets............... 376 ---------- Total assets.................. 427,441 Current liabilities.................... 9,407 ---------- Net assets acquired........... $ 418,034 ==========
Had the acquisitions and the Financing been completed as of January 1, 1996, pro forma revenues, net loss before extraordinary gain on early extinguishment of debt and minority interest and net loss for the year ended December 31, 1996 would have been $228,272 (unaudited), $108,193 (unaudited) and $90,530 (unaudited), respectively. 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. The sale resulted in a gain, calculated as follows: Proceeds from sale..................................... $11,212 Net book value of assets sold.......................... (1,206) ------- Gain on sale........................................... $10,006 =======
Exchange On December 31, 1998, the Company exchanged certain of its cable system assets located in and around central and eastern Tennessee ("Exchanged Assets"), serving approximately 16,000 basic subscribers, for cable system assets located in and around eastern and western Tennessee, serving approximately 15,500 basic subscribers, and cash of $736. The cable system assets received have been recorded at fair market value, allocated as follows: Property and equipment $ 9,478 Franchise rights 37,898 ---------- Total $ 47,376 ==========
The exchange resulted in a gain of $42,113, calculated as the difference between the fair value of the assets received and the net book value of the Exchanged Assets, plus net proceeds received of $736. 63 64 4. ESCROWED INVESTMENTS HELD TO MATURITY The Company's escrowed investments (see Note 9--Long-term Debt) held to maturity consist of U.S. Treasury Notes with fair value amounts and maturities as follows:
DECEMBER 31, ------------------------------------------------------ 1997 1998 ------------------------ ------------------------ CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE ---------- ---------- ---------- ---------- Matures within 1 year............ $ 29,359 $ 29,805 $ 30,923 $ 31,584 Matures between 1 and 2 years.... 31,148 31,552 ---------- ---------- ---------- ---------- Total................... $ 60,507 $ 61,357 $ 30,923 $ 31,584 ========== ========== ========== ==========
5. INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, ------------------------- 1997 1998 ----------- ----------- Franchise rights...................... $ 577,921 $ 614,202 Goodwill.............................. 78,828 78,129 Debt issue costs...................... 17,863 17,863 Other................................. 614 1,900 ----------- ----------- 675,226 712,094 Accumulated amortization.............. (124,500) (204,594) ----------- ----------- $ 550,726 $ 507,500 =========== ===========
6. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, ------------------------- 1997 1998 ----------- ----------- Land.................................. $ 3,204 $ 3,194 Cable television plant................ 251,034 397,954 Data services equipment............... 97 6,961 Buildings and improvements............ 3,369 4,074 Furniture and fixtures................ 3,595 4,894 Equipment and other................... 16,948 15,769 Construction in progress.............. 101,368 26,177 ----------- ----------- 379,615 459,023 Accumulated depreciation.............. (69,160) (118,995) ----------- ----------- $ 310,455 $ 340,028 =========== ===========
64 65 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, ------------------------- 1997 1998 ----------- ----------- Accounts payable...................... $ 3,969 $ 1,789 Accrued program costs................. 2,442 3,170 Accrued franchise fees................ 5,636 6,647 Accrued copyright fees................ 1,089 618 Accrued capital expenditures.......... 8,060 6,524 Accrued payroll costs................. 2,640 2,346 Accrued property and other taxes...... 3,174 1,850 Other accrued liabilities............. 5,698 6,563 ----------- ----------- $ 32,708 $ 29,507 =========== ===========
8. CHANNEL LAUNCH REVENUE During the years ended December 31, 1997 and 1998, the Company received payments of $8,014 and $4,444, respectively, from certain programmers to launch and promote their new channels. Also, during 1998 the Company recorded a receivable from a programmer, of which $1,594 remains outstanding at December 31, 1998, for the launch and promotion of its new channel. Of the total amount received, the Company recognized advertising revenue of $1,998 and $851 during the years ended December 31, 1997 and 1998, respectively, for advertisements provided by the Company to promote the new channels. The remaining payments received from the programmers are being amortized over the respective terms of the program agreements which range between five and ten years. For the year ended December 31, 1997 and 1998, $1,487 and $1,617, respectively, was amortized and recorded as other service revenue. 9. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------------------- 1997 1998 --------- --------- Bank revolving credit facility, $475,000 commitment as of December 31, 1998, interest currently at LIBOR plus 0.88% (6.06%) or ABR (7.75%) payable quarterly, matures July 1, 2004.................... $ 364,500 $ 373,000 Bank term loan; interest at LIBOR plus 1.75% (6.88%) payable quarterly, matures January 1, 2005.................................... 220,000 219,500 11 1/4% senior notes, interest payable semi-annually, due August 1, 2006................................. 292,000 292,000 --------- --------- 876,500 884,500 Less current portion of long-term debt............... (500) --------- --------- Long-term debt ...................................... $ 876,500 $ 884,000 ========= =========
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 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 65 66 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 December 31, 1998, the interest rates were 6.00%, 6.06%, 6.50% and 7.75% on borrowings of $181,000, $182,000, $6,000 and $4,000, 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 6.3225% and receives quarterly interest payments equal to LIBOR. The differential to be paid or received in connection with an individual swap agreement is accrued as interest rates change over the period to which the payments or receipts relate. The agreements expire between May 1999 and February 2000. The estimated fair value of the interest rate swaps 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 1998, the fair market value of the interest rate swaps was $(2,198) and $(4,217), 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 1998, ICP-IV has $61,925 and $31,714, 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. Annual maturities of long-term debt at December 31, 1998 are as follows: 1999 .............................. $ 500 2000 .............................. 1,000 2001 .............................. 54,000 2002 .............................. 83,500 2003 .............................. 96,000 Thereafter ........................ 649,500 --------- $ 884,500 =========
66 67 Based on recent trading prices of the Notes, the fair value of these securities at December 31, 1997 and 1998 are $324,500 and $327,040, 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, 1998 approximate their fair value. 10. MANDATORILY REDEEMABLE PREFERRED SHARES The RMG Redeemable Preferred Stock has an annual dividend of 10.0% and participates in any dividends paid on the common stock at 10.0% of the dividend per share paid on the common stock. The RMG Redeemable Preferred Stock bears a liquidation preference of $12,000 plus any accrued but unpaid dividends at the time of liquidation and is mandatorily redeemable on September 30, 2006 at the liquidation preference amount. RMG also has the right, but not the obligation, to redeem in whole or in part the RMG Redeemable Preferred Stock at the liquidation preference amount on or after September 30, 2001. The accrued dividend on the RMG Redeemable Preferred Stock is included in minority interest as a charge against income (loss). 11. CABLE TELEVISION REGULATION Cable television legislation and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past, and may in the future, materially affect the Company and the cable television industry. The cable industry is currently regulated at the federal and local levels under the Cable Act of 1984, the Cable Act of 1992 (the "1992 Act"), the Telecommunications Act of 1996 (the "1996 Act") and regulations issued by the Federal Communications Commission ("FCC") in response to the 1992 Act. FCC regulations govern the determination of rates charged for basic, expanded basic and certain ancillary services, and cover a number of other areas including customer service and technical performance standards, the required transmission of certain local broadcast stations and the requirement to negotiate retransmission consent from major network and certain local television stations. Among other provisions, the 1996 Act will eliminate rate regulation on the expanded basic tier effective March 31, 1999. Current regulations issued in connection with the 1992 Act empower the FCC and/or local franchise authorities to order reductions of existing rates which exceed the maximum permitted levels and require refunds measured from the date a complaint is filed in some circumstances or retroactively for up to one year in other circumstances. Management believes it has made a fair interpretation of the 1992 Act and related FCC regulations in determining regulated cable television rates and other fees based on the information currently available. However, complaints have been filed with the FCC on rates for certain franchises and certain local franchise authorities have challenged existing and prior rates. Further complaints and challenges could be forthcoming, some of which could apply to revenue recorded in 1996, 1997 and 1998. Management believes, however, that the effect, if any, of these complaints and challenges will not be material to the Company's financial position or results of operations. Many aspects of regulations at the federal and local levels are currently the subject of judicial review and administrative proceedings. In addition, the FCC continues to conduct rulemaking proceedings to implement various provisions of the 1996 Act. It is not possible at this time to predict the ultimate outcome of these reviews or proceedings or their effect on the Company. 12. COMMITMENTS AND CONTINGENCIES The Company is committed to provide cable television services under franchise agreements with remaining terms of up to eighteen 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 has been named in purported and certified class actions in various jurisdictions concerning late fee charges and practices. Certain cable systems owned by the Company charge late fees to customers who do not pay their cable bills on time. These late fee cases challenge the amount of the late fees and the practices under which they are imposed. The Plaintiffs raise claims under state consumer protection statutes, other state statutes, and the common law. Plaintiffs generally allege that the late fees charged by the Company's cable systems in the States of Tennessee, South Carolina and Georgia are not reasonably related to the costs incurred by the cable systems as a result of the late payment. Plaintiffs seek to require cable systems to reduce their late fees on a prospective 67 68 basis and to provide compensation for alleged excessive late fee charges for past periods. These cases are either at the early stages of the litigation process or are subject to a case management order that sets forth a process leading to mediation. Based upon the facts available management believes that, although no assurances can be given as to the outcome of these actions, the ultimate disposition of these matters should not have a material adverse effect upon the financial condition of the Company. Under existing Tennessee laws and regulations, the Company pays an Amusement Tax in the form of a sales tax on programming service revenues generated in Tennessee in excess of charges for the basic and expanded basic levels of service. Under the existing statute, only the service charges or fees in excess of the charges for the "basic cable" television service package are exempt from the Amusement Tax. Related regulations clarify the definition of basic cable to include two tiers of service, which the Company's management and other operators in Tennessee have interpreted to mean both the basic and expanded basic level of services. The Tennessee Department of Revenue ("TDOR") has proposed legislation which would replace the Amusement Tax under the existing statute with a new sales tax on all cable service revenues in excess of twelve dollars per month. The new tax would be computed at a rate approximately equal to the existing effective tax rate. Unless the Company and other cable operators in Tennessee support the proposed legislation, the TDOR has suggested that it would assess additional taxes on prior years' expanded basic service revenues. The TDOR can issue an assessment for prior periods up to three years. The Company estimates that the amount of such an assessment, if made for all periods not previously audited, would be approximately $17 million. The Company's management believes that it is possible but not likely that the TDOR can make such an assessment and prevail in defending it. The Company's management believes it has made a valid interpretation of the current Tennessee statute and regulations and that it has properly determined and paid all sales taxes due. The Company further believes that the legislative history of the current statute and related regulations, as well as the TDOR's history of not making assessments based on audits of prior periods, support the Company's interpretation. The Company and other cable operators in Tennessee are aggressively defending their past practices on calculation and payment of the Amusement Tax and are discussing with the TDOR modifications to their proposed legislation which would clarify the statute and would minimize the impact of such legislation on the Company's results of operations. The Company is subject to other claims and litigation 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. The Company has entered into pole rental agreements and leases certain of its facilities and equipment under noncancelable operating leases. Minimum rental commitments at December 31, 1998 for the next five years and thereafter under these leases are as follows: 1999......................... $ 529 2000......................... 449 2001......................... 415 2002......................... 369 2003......................... 331 Thereafter................... 1,266 ------ $3,359 ======
Rent expense, including pole rental agreements, was $2,157, $4,564 and $4,575 for the years ended December 31, 1996, 1997 and 1998, respectively. 13. RELATED PARTY TRANSACTIONS InterMedia Management, Inc. ("IMI") is the managing member of ICM-IV LLC, 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. 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 $3,036, $6,310 and $5,821 for the years ended December 31, 1996, 1997 and 68 69 1998, respectively. Receivable from affiliates at December 31, 1997 and 1998 includes $686 and $179, respectively, of advances to IMI, net of administrative fees charged by IMI, and operating expenses paid by IMI on behalf ICP-IV's subsidiaries. Effective January 1, 1998, IMI also provides certain management services to ICP-IV and its subsidiaries for a per annum fee of $3,350, of which IMI will defer 20% per annum, payable in each following year, in order to support the Company's debt. Prior to January 1, 1998, ICM-IV provided such management services to the Company for the same per annum fee of $3,350. 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 years ended December 31, 1996, 1997 and 1998 amounted to $17,538, $41,128 and $46,925, respectively. Payable to affiliates includes programming fees payable to the TCI subsidiary of $3,556 and $4,032 at December 31, 1997 and 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 year ended December 31, 1998 amounted to $562. Receivable from affiliates at December 31, 1998 includes $6,907 of receivables from TCI for advertising sales. On April 1, 1996, InterMedia Partners of Tennessee, L.P. ("IPTN"), a subsidiary of IP-IV, loaned $15.0 million to RMH. Interest income for the year ended December 31, 1996 includes $445 which IPTN earned on the note prior to the Company's purchase of RMH on July 30, 1996. As of December 31, 1997 and 1998 the note balance outstanding including accrued interest has been eliminated in consolidation. 14. INCOME TAXES Income tax (expense) benefit is included in the consolidated financial statements as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1997 1998 ------------ ------------- ----------- Continuing operations.................... $ 2,596 $ 4,026 $ (1,623) Extraordinary loss (see Note 15)......... 1,790 ------------ ------------- ----------- $ 4,386 $ 4,026 $ (1,623) ============ ============= ===========
Income tax (expense) benefit consists of the following:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1997 1998 ------------ ------------- ----------- Current federal.......................... $ $ (285) $ Deferred federal......................... 4,257 3,813 (1,454) Deferred state........................... 129 498 (169) ------------ ------------- ----------- $ 4,386 $ 4,026 $ (1,623) ============ ============= ===========
Deferred income taxes relate to temporary differences as follows:
DECEMBER 31, ---------------------------- 1997 1998 ------------ ------------- Property and equipment................... $ (6,786) $ (7,258) Intangible assets........................ (8,336) (12,930) ------------ ------------- (15,122) (20,188) Loss carryforward--federal .............. 29,058 31,547 Loss carryforward--state................. 297 Other ................................... 285 942 ------------ ------------- $ 14,221 $ 12,598 ============ =============
69 70 At December 31, 1998, RMG had net operating loss carryforwards for federal income tax purposes aggregating $92,785 which expire through 2018. RMG is a loss corporation as defined in section 382 of the Internal Revenue Code. Therefore, if certain substantial changes in RMG's ownership should occur, there could be a significant annual limitation on the amount of loss carryforwards which can be utilized. Because of TCI's continuing interest in RMG, management does not believe that the recapitalization of RMG and the partial sale of the recapitalized equity to ICP-IV will impair RMG's ability to utilize its net operating loss carryforwards. The Company's management has not established a valuation allowance to reduce the deferred tax assets related to RMG's unexpired net operating loss carryforwards. Due to an excess of appreciated asset value over the tax basis of RMG's net assets, management believes it is more likely than not that the deferred tax assets related to unexpired net operating losses will be realized. A reconciliation of the tax benefit (expense) computed at the statutory federal rate and the tax benefit reported in the accompanying statements of operations is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1997 1998 ------------ ------------- ----------- Tax benefit at federal statutory rate.... $ 10,810 $ 25,417 $ 16,614 Partnership losses exempt from income taxes................................. (5,287) (20,963) (15,988) State taxes, net of federal benefit...... 127 498 73 Goodwill amortization.................... (1,209) (2,056) (2,309) Realization of acquired tax benefit...... 346 Other.................................... (55) 784 (13) ------------ ------------- ----------- $ 4,386 $ 4,026 $ (1,623) ============ ============= ===========
15. EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT As described in Note 3 - Acquisitions, Sale and Exchange of Cable Properties, in connection with the Company's acquisition of a majority of the voting interest in RMH, the Company assumed approximately $331,450 of long-term debt, which was repaid with the proceeds from the Financing. The repayment of RMH's long-term debt resulted in call premium and fees associated with the defeasance of the debt. Costs associated with the prepayment of the debt resulted in an extraordinary loss on early extinguishment of debt of $2,926, net of tax benefit of $1,790. Also, in connection with the Company's acquisition of the partner interests of IPWT, GECC transferred to ICP-IV its note receivable from IPWT and related interest receivable in exchange for a limited partner and a preferred limited partner interest in ICP-IV and cash. The settlement of IPWT's long-term note payable to GECC resulted in an extraordinary gain on early extinguishment of debt of $21,409, which represented a debt restructuring credit balance as of July 30, 1996. The debt restructuring credit was created in 1994 upon IPWT's restructuring of its GECC debt. 16. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS During the years ended December 31, 1996, 1997 and 1998, the Company paid interest of $16,222, $75,029 and $80,674, respectively. As described in Note 3, during 1996 the Company acquired several cable television systems located in Tennessee and Georgia. In conjunction with the acquisitions, assets acquired and liabilities assumed were as follows: Fair value of assets acquired................................ $ 418,987 Liabilities assumed, net of current assets................... (953) Cash acquired in connection with RMH and IPWT acquisitions............................................... (2,228) ------------ Net cash paid................................................ $ 415,806 ============
70 71 In connection with the Company's sale of its cable television assets located in Royston and Toccoa, Georgia in December 1997, as described in Note 3--Acquisitions, Sale and Exchange of Cable Properties, net cash proceeds received were as follows: Proceeds from sale....................................... $ 11,212 Receivable from buyer ................................... (55) -------- Net proceeds received from buyer ..................... $ 11,157 ========
In connection with the exchange of certain cable assets in and around central and eastern Tennessee on December 31, 1998, as described in Note 3, the Company received cash of $736. 17. EMPLOYEE BENEFIT PLAN The Company participates in the InterMedia Partners Tax Deferred Savings Plan, which covers all full-time employees who have completed at least six months of employment. Such Plan provides for a base employee contribution of 1% and a maximum of 15% of compensation. The Company's matching contributions under such Plan are at the rate of 50% of the employee's contributions, up to a maximum of 5% of compensation. 18. SUBSEQUENT EVENT Pending Sales and Exchange In January 1999 the Company executed a letter of intent with affiliates of Charter Communications, Inc. ("Charter") to sell certain of its cable television systems serving approximately 286,000 basic subscribers as of December 31, 1998, in and around western and eastern Tennessee and Gainesville, Georgia and to exchange its cable systems serving approximately 120,000 basic subscribers as of December 31, 1998 in and around Greenville and Spartanburg, South Carolina for Charter systems serving approximately 140,000 basic subscribers, located in Indiana, Kentucky, Utah and Montana ("Charter Transactions"). The Charter Transactions include the sale of all of the Class A Common Stock of RMG. Also in January 1999 the Company received consents from the preferred and limited partners of ICP-IV, which gave the Company the right to proceed with negotiating the Charter Transactions and which provide for payment of cash distributions to the preferred and limited partners, other than TCI, of approximately $550 million, for redemption of their partner interests ("Final Equity Distributions") upon completion of the Charter Transactions. Expected net proceeds from the Charter Transactions of approximately $850 million and the Final Equity Distributions are subject to certain adjustments. The Company expects to close the Charter Transactions and make the Final Equity Distributions during the third quarter of 1999. Consummation of the Charter Transactions are subject to a number of conditions, including regulatory and lender consents. Use of proceeds from the Charter Transactions, including the Final Equity Distributions, are also subject to lender consents. Assuming consummation of the Charter Transactions, expected net proceeds from the Charter Transactions combined with cash flows from operations will not be sufficient to meet the Company's obligations under its Bank Facility and the Notes and its obligations to make the Final Equity Distributions. Upon consummation of the Charter Transactions and the Final Equity Distributions, TCI will own 99.999% of the partner interests in the Company. It is the understanding of the Company's management that TCI will address the Company's on-going liquidity needs after the closing of the Charter Transactions and the Final Equity Distributions. Total net book value of property and equipment and intangible assets, and total revenues of RMG and the cable television systems to be sold pursuant to the Charter Transactions were approximately $291,000 and $126,000 as of and for the year ended December 31, 1998, respectively. The Company expects to record a significant gain on the sale and exchange of assets and the sale of RMG's Class A Common Stock. 71 72 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of InterMedia Capital Partners IV, L.P. In our opinion, based upon our audits and the report of other auditors, the accompanying combined balance sheet and the related combined statements of operations, of changes in equity and of cash flows present fairly, in all material respects, the combined financial position of the Previously Affiliated Entities, which are comprised of Robin Media Holdings, Inc., InterMedia Partners of West Tennessee, L.P., TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc., at December 31, 1995 and the results of their operations and their cash flows for the years ended December 31, 1995 and 1994 and the period from January 1, 1996 through July 30, 1996, except TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc. which are included from January 27, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the combined financial statements of TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc., which statements reflect total assets of $361,812,000 at December 31, 1995, total revenues of $47,214,000 for the period from January 27, 1995 to December 31, 1995 and total revenues of $30,290,000 for the period from January 1, 1996 through July 30, 1996. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for the opinion expressed above. As described in Note 1, on July 30, 1996, the Previously Affiliated Entities were sold and/or contributed to InterMedia Capital Partners IV, L.P. PRICE WATERHOUSE LLP San Francisco, California March 28, 1997 72 73 PREVIOUSLY AFFILIATED ENTITIES COMBINED BALANCE SHEET (DOLLARS IN THOUSANDS)
DECEMBER 31, 1995 -------------- ASSETS Cash and cash equivalents............................................ $ 4,883 Accounts receivable, net of allowance for doubtful accounts of $853............................................................... 8,330 Receivable from affiliates........................................... 303 Prepaids............................................................. 391 Inventory............................................................ 2,940 Other current assets................................................. 223 -------------- Total current assets........................................... 17,070 Intangible assets, net............................................... 468,713 Property and equipment, net.......................................... 102,668 Investments.......................................................... 795 Other assets......................................................... 1,248 -------------- Total assets................................................... $ 590,494 ============== LIABILITIES AND EQUITY Current portion of long-term debt.................................... $ 4,043 Accounts payable and accrued liabilities............................. 10,692 Deferred revenue..................................................... 3,963 Payable to affiliates................................................ 2,124 Accrued interest..................................................... 10,086 -------------- Total current liabilities...................................... 30,908 Long-term debt....................................................... 407,176 Deferred income taxes................................................ 115,161 -------------- Total liabilities.............................................. 553,245 -------------- Commitments and contingencies Equity............................................................... 37,249 -------------- Total liabilities and equity................................... $ 590,494 ==============
See accompanying notes to the combined financial statements. 73 74 PREVIOUSLY AFFILIATED ENTITIES COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PERIOD FROM FOR THE YEAR ENDED JANUARY 1, DECEMBER 31, 1996 TO ---------------------------- JULY 30, 1994 1995 1996 ------------ ------------ --------------- Basic and cable services........................... $ 52,829 $ 85,632 $ 56,658 Pay services....................................... 12,043 23,942 14,185 Other services..................................... 8,177 19,397 10,297 ------------ ------------ --------------- 73,049 128,971 81,140 ------------ ------------ --------------- Program fees....................................... 13,189 24,684 17,080 Other direct expenses.............................. 9,823 16,851 10,177 Depreciation and amortization...................... 68,216 70,154 36,507 Selling, general and administrative expenses....... 15,852 30,509 20,543 Management and consulting fees..................... 585 815 398 ------------ ------------ --------------- 107,665 143,013 84,705 ------------ ------------ --------------- Loss from operations............................... (34,616) (14,042) (3,565) ------------ ------------ --------------- Other income (expense): Interest and other income....................... 1,442 1,172 209 Gain (loss) on disposal of fixed assets......... (1,401) (63) (14) Interest expense................................ (44,278) (48,835) (47,545) Other expense................................... (194) (644) (123) ------------ ------------ --------------- (44,431) (48,370) (47,473) ------------ ------------ --------------- Loss before income tax benefit..................... (79,047) (62,412) (51,038) Income tax benefit................................. 19,020 17,502 14,490 ------------ ------------ --------------- Net loss........................................... $ (60,027) $ (44,910) $ (36,548) ============ ============ ===============
See accompanying notes to the combined financial statements. 74 75 PREVIOUSLY AFFILIATED ENTITIES COMBINED STATEMENT OF CHANGES IN EQUITY (DOLLARS IN THOUSANDS) Balance at December 31, 1993.......................................................... $ (129,800) Capital contributions to InterMedia Partners of West Tennessee, L.P................... 22,850 Net loss.............................................................................. (60,027) -------------- Balance at December 31, 1994.......................................................... (166,977) January 27, 1995 combining with TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc......................................... 249,136 Net loss.............................................................................. (44,910) -------------- Balance at December 31, 1995.......................................................... 37,249 Capital contribution to TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc................................................................... 9,449 Net loss.............................................................................. (36,548) -------------- Balance July 30, 1996................................................................. $ 10,150 ==============
See accompanying notes to the combined financial statements. 75 76 PREVIOUSLY AFFILIATED ENTITIES COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PERIOD FROM JANUARY 1, FOR THE YEAR ENDED 1996 TO DECEMBER 31, JULY 30, 1994 1995 1996 ------------ ------------ --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................ $ (60,027) $ (44,910) $ (36,548) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation and amortization................. 68,644 70,278 36,585 Loss on sale of note receivable............... 376 Loss (gain) on disposal of fixed assets....... 1,401 63 Deferred income taxes......................... (19,020) (17,601) (8,084) Changes in assets and liabilities: Accounts receivable......................... (455) (282) (345) Receivable from affiliates.................. 8,148 80 (124) Interest receivable......................... (726) 2,569 Prepaids.................................... 7 (39) (94) Inventory................................... (216) (1,221) (2,290) Other assets................................ 177 (212) (164) Accounts payable and accrued liabilities.... 116 2,589 610 Cash overdraft.............................. 35 Deferred revenue............................ 202 163 98 Payable to affiliates....................... 1,531 (317) (834) Accrued interest............................ 106 (3,429) 2,986 ------------ ------------ --------------- Cash flows from operating activities............... (112) 8,107 (8,169) ------------ ------------ --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............. (12,432) (26,301) (18,588) Proceeds from the sale of property and equipment..................................... 44 Investments..................................... (414) (360) Collections and proceeds from sale of notes receivable.................................... 17,764 2,624 Other assets and intangibles.................... (47) (621) (149) ------------ ------------ --------------- Cash flows from investing activities............... 4,871 (24,614) (18,737) ------------ ------------ --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Activity on revolving credit note payable....... (2,600) 11,600 (200) Note payable to affiliate....................... 15,000 Repayment on long-term debt..................... (22,073) Capital contributions........................... 20,050 6,484 9,449 Debt issue costs................................ (161) (18) ------------ ------------ --------------- Cash flows from financing activities............... (4,784) 18,066 24,249 ------------ ------------ --------------- Net change in cash and cash equivalents............ (25) 1,559 (2,657) Cash and cash equivalents, beginning of period..... 3,275 3,324 4,883 ------------ ------------ --------------- Cash and cash equivalents, end of period........... $ 3,250 $ 4,883 $ 2,226 ============ ============ ===============
See accompanying notes to the combined financial statements. 76 77 PREVIOUSLY AFFILIATED ENTITIES NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION The combined financial statements include the financial statements of Robin Media Holdings, Inc. ("Holdings"), InterMedia Partners of West Tennessee, L.P. ("IPWT") and TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc. (collectively "TCI Greenville/Spartanburg"). Holdings, IPWT, and TCI Greenville/Spartanburg are collectively referred to as the "Previously Affiliated Entities." TeleCommunications, Inc. ("TCI") holds substantial direct and indirect ownership interests in each of the entities that comprise the Previously Affiliated Entities. The individual financial statements of the Previously Affiliated Entities have been combined on a historical cost basis for the periods presented as if they had always been members of the same operating group, except for the financial statements of TCI Greenville/Spartanburg, which have been included from January 27, 1995, the date of acquisition by TCI. The Previously Affiliated Entities own and operate cable television systems located in Tennessee, South Carolina and Georgia. The financial position and results of operations of the Previously Affiliated Entities are being presented on a combined basis because of TCI's substantial continuing ownership interests in the Previously Affiliated Entities after the July 30, 1996 acquisitions of the Previously Affiliated Entities by InterMedia Capital Partners IV, L.P. ("ICP-IV"), an affiliated entity formed for the purpose of acquiring cable television systems and consolidating various cable television systems owned by other affiliated entities. As disclosed in Note 2, certain accounting policies of Holdings and IPWT are different from those of TCI Greenville/Spartanburg. ROBIN MEDIA HOLDINGS, INC. Holdings is a Nevada corporation which was organized on August 27, 1991. On April 30, 1992, Holdings commenced operations with the acquisition of all the outstanding common stock of Robin Media Group, Inc. ("RMG") from Jack Kent Cooke Incorporated. Prior to ICP-IV's July 30, 1996 acquisition of Holdings, Holdings was wholly owned by InterMedia Partners V, L.P. ("IP-V"), a California limited partnership. TCI is a limited partner in IP-V. Holdings is solely a holding company with no operations and its only asset was its investment in RMG. Holdings' acquisition of RMG was structured as a leveraged transaction and a significant portion of the assets acquired are intangible assets which are being amortized over one to ten years. Therefore, as was planned, RMG has incurred substantial book losses which have resulted in a net shareholder's deficit. On July 30, 1996, IP-V sold a majority of the voting interests in Holdings to ICP-IV for cash. In connection with the sale, Holding's capital structure was reorganized to provide for three classes of capital stock. As part of the recapitalization, a wholly owned subsidiary of TCI converted its outstanding loan to IP-V into a partnership interest and the IP-V partnership was dissolved. Additionally, ICP-IV provided Holdings with an intercompany loan in an amount sufficient to repay all principal and interest on RMG's outstanding debt. Upon funding on July 30, 1996 of the intercompany loan, Holdings repaid all amounts due on its outstanding debt. On July 31, 1996, Holdings merged with and into RMG, with RMG as the surviving corporation. INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P. IPWT is a California limited partnership which was formed on April 11, 1990 for the purpose of investing in and operating cable television properties. Under the terms of the original partnership agreement, InterMedia Partners ("IP"), a California limited partnership, was the sole general partner, owning an 89% interest in IPWT. The limited partners were IP and Robin Cable Systems of Tucson, an Arizona limited partnership ("Robin-Tucson"), holding interests in the Partnership of 10% and 1%, respectively. TCI is a limited partner in IP. 77 78 On September 11, 1990 IPWT acquired the Western Tennessee properties of U.S. Cable Partners, LP and its affiliates. Funding for this acquisition was provided by General Electric Capital Corporation ("GECC") in the form of a senior subordinated loan. On October 3, 1994, IP sold its interests in Robin-Tucson to an affiliate of TCI. IP contributed additional capital of $20,050 to IPWT from the net sales proceeds and IPWT repaid $30,375 of the senior subordinated loan to GECC including accrued interest. Under IPWT's Amended and Restated Agreement of Limited Partnership entered into on October 3, 1994, GECC converted $2,800 of its loan into a limited partnership interest in IPWT and restructured the remaining balance of the loan (see Note 7). Under the amended partnership agreement IP had an 80.1% general partner interest and a 9.9% limited partner interest, and GECC had a 10% limited partner interest. Losses incurred prior to October 3, 1994 were reallocated between the general and limited partners based upon the change in ownership percentage resulting from the restructuring. IPWT's acquisition of the West Tennessee cable television properties was structured as a leveraged transaction and a significant portion of the assets acquired were intangible assets which are being amortized over one to ten years. Therefore, as was planned, IPWT has incurred substantial book losses, resulting in negative partners' capital. On July 30, 1996, IP and GECC contributed their partner interests in IPWT to ICP-IV in exchange for cash and limited and preferred limited partnership interests in ICP-IV. TCI of Greenville, Inc., TCI of Spartanburg, Inc. and TCI of Piedmont, Inc. TCI Greenville/Spartanburg is an indirectly wholly owned subsidiary of TCI Communications, Inc. ("TCIC") which is a wholly owned subsidiary of TCI. TCI Greenville/Spartanburg was acquired by TCI from TeleCable Corporation on January 27, 1995 and subsequently contributed to TCIC. These combined financial statements include TCI Greenville/Spartanburg's assets, liabilities and equity at December 31, 1995 and its results of operations for the period from January 27, 1995, the date of TCI's acquisition. On July 30, 1996, TCI consummated an agreement with ICP-IV to contribute the TCI Greenville/Spartanburg systems to ICP-IV in exchange for a limited partnership interest in ICP-IV. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of combination The combined financial statements include the accounts of Holdings, IPWT and, from January 27, 1995, TCI Greenville/Spartanburg. All intercompany accounts and transactions between Holdings and IPWT have been eliminated. There are no intercompany accounts or transactions with TCI Greenville/Spartanburg. Cash equivalents The Previously Affiliated Entities consider all highly liquid investments with original maturities of three months or less to be cash equivalents. Revenue recognition Cable television service revenue is recognized in the period in which services are provided to customers. Deferred revenue represents revenue billed in advance and deferred until cable service is provided. Inventory Inventory consists primarily of supplies and is stated at the lower of cost or market determined by the first-in, first-out method. 78 79 Property and equipment Additions to property and equipment, including new customer installations, are recorded at cost. Self-constructed fixed assets include materials, labor and overhead. Costs of disconnecting and reconnecting cable service are expensed. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for major renewals and improvements are capitalized. Holdings and IPWT include gains and losses from disposals and retirements in earnings. TCI Greenville/Spartanburg recognizes gains and losses only in connection with sales of properties in their entirety. At the time of ordinary retirements, sales or other dispositions of property, TCI Greenville/Spartanburg charges the original cost and cost of removal of such property, net of any realized salvage value, to accumulated depreciation. Capitalized plant is written down to recoverable values whenever recoverability through operations or sale of a system becomes doubtful. Depreciation is computed using the double-declining balance method over the following estimated useful lives for Holdings and IPWT:
YEARS ----- Cable television plant.................................... 5-10 Buildings and improvement................................. 10 Furniture and fixtures.................................... 3-7 Equipment and other....................................... 3-10
Depreciation for TCI Greenville/Spartanburg is computed on a straight-line basis using estimated useful lives of 3 to 15 years for cable distribution systems and 3 to 40 years for buildings and support equipment. Intangible assets The Previously Affiliated Entities have franchise rights to operate cable television systems in various towns and political subdivisions. Holdings' and IPWT's franchise rights are being amortized on a straight-line basis over the lesser of the remaining lives of the franchises or the base ten-year term of the IP-V or IP partnership agreements. TCI Greenville/Spartanburg amortizes franchise rights on a straight-line basis over 40 years. Remaining franchise lives range from one to twenty-four years. Goodwill represents the excess of acquisition cost over the fair value of net tangible and franchise assets acquired and liabilities assumed for Holdings and IPWT and is being amortized on a straight-line basis over the ten-year term of IP-V and IP, respectively. Debt issue costs are being amortized over the terms of the related debt. Debt issue costs of $510 are stated net of accumulated amortization of $260 at December 31, 1995. Capitalized intangibles are written down to recoverable values whenever recoverability through operations or sale of the system becomes doubtful. Each year, the Previously Affiliated Entities evaluate the recoverability of the carrying value of intangible assets by assessing whether the projected cash flows, including projected cash flows from sale of the systems, is sufficient to recover the unamortized cost of these assets. Accounts payable and accrued liabilities Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, 1995 ------------ Accounts payable $ 463 Accrued program costs 358 Accrued franchise fees 3,545 Other accrued liabilities 6,326 -------- $ 10,692 ========
79 80 Income taxes Holdings and TCI Greenville/Spartanburg account for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The asset and liability approach used in SFAS 109 requires the recognition of deferred tax assets and liabilities for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and certain other subsidiaries of TCI was implemented effective July 1, 1995. The Tax Sharing Agreement formalizes certain elements of the pre-existing tax sharing arrangement and contains additional provisions regarding the allocation of certain consolidated income tax attributes and the settlement procedures with respect to the intercompany allocation of current tax attributes. Accordingly, all tax attributes generated by TCIC's operations (which include TCI Greenville/Spartanburg) after the effective date including, but not limited to, net operating losses, tax credits, deferred intercompany gains, and the tax basis of assets are inventoried and tracked for the entities comprising TCIC. For the period January 27, 1995 to December 31, 1995 and January 1, 1996 through July 30, 1996, TCI Greenville/Spartanburg was included in the consolidated federal income tax return of TCI. The income tax benefit for TCI Greenville/Spartanburg is based on those items in the consolidated calculation applicable to TCI Greenville/Spartanburg. For tax reporting purposes, the basis in the underlying assets of TCI Greenville/Spartanburg were carried over at their historical basis. No provision or benefit for income taxes is recorded for IPWT because, as a Partnership, the tax effects of IPWT's results of operations accrue to the partners. IPWT is registered with the Internal Revenue Service as a tax shelter under Internal Revenue Code Section 6111(b). Use of estimates in the preparation of financial statements 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. 3. INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, 1995 ------------ Franchise rights.................................. $ 578,445 Goodwill and other intangible assets.............. 104,260 ---------- 682,705 Accumulated amortization.......................... (213,992) ---------- $ 468,713 ==========
80 81 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, 1995 ------------ Land........................................ $ 1,118 Cable television plant...................... 148,960 Buildings and improvements.................. 866 Furniture and fixtures...................... 1,683 Equipment and other......................... 10,810 Construction in progress.................... 4,140 --------- 167,577 Accumulated depreciation.................... (64,909) --------- $ 102,668 =========
5. INVESTMENTS Holdings had a 49% limited partnership interest in InterMedia Partners II, L.P. ("IP-II"), an affiliated entity, which was accounted for under the equity method. Holding's original investment in IP-II was reduced to zero in 1992 as a result of its equity in the net loss of IP-II. Holdings received distributions from IP-II of $406 for the year ended December 31, 1995 which are included in interest and other income in the accompanying Consolidated Statements of Operations. No distributions were received from IP-II for the period from January 1, 1996 through July 30, 1996. On August 30, 1996, Holdings sold its interest in IP-II for cash resulting in a net gain of $2,859. Holdings has a 15% limited partner interest in AVR of Tennessee, L.P., doing business as Hyperion of Tennessee, which is accounted for under the cost method. Holdings contributed $360 to Hyperion of Tennessee during fiscal 1995. During the period from January 1, 1996 through July 30, 1996, Holdings did not make any contributions to Hyperion of Tennessee. On August 1, 1996, Holdings sold a portion of its limited partner interest in Hyperion of Tennessee which resulted in a gain of $286. Subsequent to the sale, Holdings retained a 0.01% limited partner interest in Hyperion of Tennessee. As of December 31, 1995, Holdings was committed to fund additional capital contributions to Hyperion of Tennessee of $755 and to make term loan advances to Hyperion of Tennessee. These future commitments were reduced in proportion to the reduction in Holding's limited partner interest as a result of the sale. The term loan advances are required to fund leasing arrangements for access to fiber optic distribution owned by the respective partners. 6. NOTES RECEIVABLE Notes receivable were issued to Holdings in connection with previous sales of cable television systems. In June 1995, Holdings sold its only remaining note receivable including related accrued interest. At the time of the sale the note had a balance of $5,980 which included $411 of interest earned in 1995. The sale of the note resulted in a loss of $376 which is included in other expense. 7. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, 1995 ------------ HOLDINGS: Revolving credit note payable, $30,000 commitment, interest at LIBOR plus 1.5% payable quarterly, due February 28, 1997...................................... $ 25,000 11 1/8% senior subordinated notes, interest payable semi-annually, due April 1, 1997...................... 271,400 11 5/8% subordinated debentures, interest payable semi-annually, due April 1, 1999...................... 35,050
81 82 IPWT: GECC revolving credit; $7,000 commitment; interest payable quarterly at prime plus 1% or LIBOR plus 2% per annum; matures June 30, 2001....................... 2,000 GECC term loans payable; interest payable quarterly at 7% per annum on $27,000 and at prime plus 1% or LIBOR plus 2% per annum on $27,000; matures June 30, 2001.................................. 54,000 Debt restructuring credit................................ 23,769 ----------- 411,219 Less current portion..................................... 4,043 ----------- $ 407,176 ===========
HOLDINGS RMG's bank revolving credit agreement provided $30,000 of available credit and bore interest either at the bank's reference rate plus 0.5% or at LIBOR plus 1.5% which was payable quarterly. At December 31, 1995, the interest rate on the revolving credit agreement was 7.5%. The revolving credit agreement required RMG to pay a commitment fee of 0.375% per year, payable quarterly, on the unused portion of available credit. The agreement contained various restrictive covenants on Holdings and RMG, including limitations on the payment of dividends. The 11 1/8% senior subordinated notes (the "Notes") and the 11 5/8% subordinated debentures (the "Debentures") were redeemable by RMG at a redemption price of 101.0% and 101.4%, respectively, of the principal amounts, together with accrued interest. The indentures with respect to the Notes and the Debentures contained restrictive covenants on Holdings and RMG including the limitations on dividends, additional debt and mergers and acquisitions. On July 30, 1996, ICP-IV made an intercompany loan to Holdings. The proceeds were used to repay all amounts due on RMG's outstanding existing debt. IPWT On October 3, 1994, in connection with the sale of Robin-Tucson, IPWT restructured its subordinated loan payable to GECC. Under the terms of the restructuring, GECC reduced the face amount of the debt outstanding to $59,000. Because the total estimated future payments on the restructured debt exceeded the carrying amount of the debt at the time of restructuring, no gain was recognized on the debt restructuring and no adjustments were made to the carrying amount of IPWT's debt. The difference of $28,570 between the $59,000 refinanced and the amount of the note at the time of the restructuring was recorded as a debt restructuring credit. During the period from January 1, 1996 through July 30, 1996, a portion of future debt service payments was recorded as reductions of the remaining debt restructuring credit of $23,769 at December 31, 1995. At December 31, 1995, $56,000 was outstanding under the Amended and Restated Loan Agreement with GECC which provided for a revolving credit facility in the amount of $7,000 and term loans in the aggregate amount of $54,000. Borrowings under the revolving credit facility and the term loans generally bore interest either at the Prime rate plus 1% or LIBOR plus 2%; $27,000 of borrowings under the term loans bore interest at a fixed rate of 7%. Interest periods corresponding to interest rate options were generally specified as one, two, or three months for LIBOR loans. The loan agreement required quarterly interest payments, or more frequent interest payments if a shorter period was selected under the LIBOR option, and quarterly payments of .5% per annum on the unused commitment. The loan agreement provided for contingent interest payments generally at 11.11% of excess cash flow, as defined. Contingent interest payments were also required upon the sale of the West Tennessee system or the partnership interest in IPWT. The loan agreements contained non-financial covenants as well as various restrictive covenants. 82 83 On July 30, 1996, all of IPWT's outstanding borrowings payable to GECC were assumed by ICP-IV. As a result, approximately $3,000 was accrued for contingent interest. ICP-IV subsequently settled all of the outstanding debt and recognized a gain on early extinguishment of debt representing the remaining debt restructuring credit balance as of July 30, 1996. 8. EQUITY The combined equity of the Previously Affiliated Entities of $10,150, at July 30, 1996, consists of the following components:
ADDITIONAL COMMON PAID-IN ACCUMULATED HOLDINGS: STOCK CAPITAL DEFICIT TOTAL --------- ---------- ----------- ----------- ------------ Balance at December 31, 1993........... $ 100 $ 10,498 $ (78,395) $ (67,797) Net loss............................... (46,588) (46,588) ---------- ----------- ----------- ------------ Balance at December 31, 1994........... 100 10,498 (124,983) (114,385) Net loss............................... (37,729) (37,729) ---------- ----------- ----------- ------------ Balance at December 31, 1995........... 100 10,498 (162,712) (152,114) Net loss............................... (19,767) (19,767) ---------- ----------- ----------- ------------ Balance at July 30, 1996............... $ 100 $ 10,498 $ (182,479) $ (171,881) ========== =========== =========== ------------
IPWT: GENERAL LIMITED PARTNER PARTNER ----------- ----------- Balance at December 31, 1993....................... $ (55,183) $ (6,820) $ (62,003) Additional capital contributions................... 17,844 5,006 22,850 Adjustment to reallocate losses in connection with the debt restructuring...................... 5,519 (5,519) Net loss........................................... (10,765) (2,674) (13,439) ----------- ----------- ----------- Balance at December 31, 1994....................... (42,585) (10,007) (52,592) Net loss........................................... (2,293) (569) (2,862) ----------- ----------- ----------- Balance at December 31, 1995....................... (44,878) (10,576) (55,454) Net loss........................................... (2,701) (671) (3,372) ----------- ----------- ----------- Balance at July 30, 1996........................... $ (47,579) $ (11,247) $ (58,826) =========== =========== ----------- TCIC ACCUMULATED TCI GREENVILLE/SPARTANBURG: INVESTMENT DEFICIT Balance at January 27, 1995........................ $ 242,652 $ $ 242,652 Increase in TCIC contribution...................... 6,484 6,484 Net loss........................................... (4,319) (4,319) ----------- ----------- ------------ Balance at December 31, 1995....................... $ 249,136 $ (4,319) 244,817 Increase in TCIC contribution...................... 9,449 9,449 Net loss........................................... (13,409) (13,409) ----------- ----------- ------------ Balance at July 30, 1996........................... $ 258,585 $ (17,728) 240,857 =========== =========== ------------ Total combined equity at July 30, 1996........... $ 10,150 ============
On May 26, 1995, Holdings' Board of Directors approved (i) an increase in the number of authorized shares of Holdings' common stock to 100,000,000 shares; (ii) the issuance of up to 10,000,000 shares of Preferred Stock, par value of $.01 per share, the rights, preferences and privileges of which to be determined by the Board of Directors; and (iii) a 100,000 to 1 stock split in the form of a stock dividend. As a result of the above actions, all share data included above has been retroactively restated to give effect to these actions. At December 31, 1995, 10,000,000 shares of common stock were issued and outstanding and no preferred stock was issued or outstanding. In connection with the sale of Holdings to ICP-IV, Holdings' capital structure was reorganized (see Note 1). 9. CABLE TELEVISION REGULATION Cable television legislation and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past, and may in the future, materially affect the Previously Affiliated Entities and the cable television industry. The cable industry is currently regulated at the federal and local levels under the Cable Act of 1984, the Cable Act of 1992 (the "1992 Act"), the Telecommunications Act of 1996 (the "1996 Act") and regulations issued by the Federal Communications 83 84 Commission ("FCC") in response to the 1992 Act. FCC regulations govern the determination of rates charged for basic, expanded basic and certain ancillary services, and cover a number of other areas including customer service and technical performance standards, the required transmission of certain local broadcast stations and the requirement to negotiate retransmission consent from major network and certain local television stations. Among other provisions, the 1996 Act will eliminate rate regulation on the expanded basic tier effective March 31, 1999. Current regulations issued in connection with the 1992 Act empower the FCC and/or local franchise authorities to order reductions of existing rates which exceed the maximum permitted levels and to require refunds received from the date a complaint is filed in some circumstances or retroactively for up to one year in other circumstances. Management believes it has made a fair interpretation of the 1992 Act and related FCC regulations in determining regulated cable television rates and other fees based on the information currently available. However, complaints have been filed with the FCC on rates for certain franchises and certain local franchise authorities have challenged existing and prior rates. Further complaints and challenges could be forthcoming, some of which could apply to revenue recorded in 1996. Management believes, however, that the effect, if any, of these complaints and challenges will not be material to the Previously Affiliated Entities' financial position or results of operations. Many aspects of regulation at the federal and local level are currently the subject of judicial review and administrative proceedings. In addition, the FCC is required to conduct rulemaking proceedings over the next several months to implement various provisions of the 1996 Act. It is not possible at this time to predict the ultimate outcome of these reviews or proceedings or their effect on the Previously Affiliated Entities. 10. COMMITMENTS AND CONTINGENCIES The Previously Affiliated Entities are committed to provide cable television services under franchise agreements with remaining terms of up to twenty-four 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 Previously Affiliated Entities have entered into long-term retransmission agreements with all applicable stations in exchange for in-kind and/or other consideration. The Previously Affiliated Entities are 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 Previously Affiliated Entities' financial condition or results of operations. The Previously Affiliated Entities have entered into pole rental agreements and lease certain of their facilities and equipment under non-cancelable operating leases. Minimum rental commitments at December 31, 1995 for the next five years and thereafter under these leases are as follows: 1996.......................... $ 600 1997.......................... 375 1998.......................... 143 1999.......................... 133 2000.......................... 125 Thereafter.................... 483 ------- $ 1,859 =======
Rent expense, including pole rental agreements, was $1,999 and $2,856 for the years ended December 31, 1994 and 1995, respectively, and $1,722 for the period from January 1, 1996 to July 30, 1996. 11. RELATED PARTY TRANSACTIONS IP-V managed the business of Holdings for an annual management fee paid in cash in equal monthly installments. The annual management fee was $465 for the year ended December 31, 1994. Effective July 1, 1995, the annual fee decreased to $200, resulting in fees of $333 for the full year of 1995 and $117 for the period from January 1, 1996 through July 30, 1996. Management fees payable of $40 are included in payable to affiliates at December 31, 1995. 84 85 InterMedia Capital Management, a California limited partnership ("ICM"), is the general partner of IP. Beginning October 1994, ICM managed the business of IPWT for an annual fee of $482 of which 20% is deferred until each subsequent year in support of IPWT's long-term debt. The remaining 80% is paid in cash in equal monthly installments. Included in payable to affiliates at December 31, 1995 is $96, relating to the ICM annual fee. InterMedia Management, Inc. ("IMI") is wholly owned by the managing general partner of ICM and InterMedia Capital Management V, L.P., the general partners of IP-V. IMI has entered into agreements with Holdings and IPWT to provide accounting and administrative services at cost. During the years ended December 31, 1994 and 1995, administrative fees charged by IMI and paid in cash on a monthly basis were $2,566 and $3,009, respectively. During the period from January 1, 1996 to July 30, 1996, administrative fees charged by IMI and paid in cash on a monthly basis were $1,831. Included in receivables from affiliates are advances to IMI net of administrative fees charged by IMI and operating expenses paid by IMI on behalf of Holdings and IPWT. IPWT payables to IP of $943 were outstanding at December 31, 1995 primarily related to professional fees incurred by IP on behalf of IPWT in connection with the acquisition of the West Tennessee cable television system in 1990. IP will be given a partnership interest in ICP-IV, as defined herein, in exchange for its investment in IPWT including its receivable of $943 (see note 1). TCI and certain subsidiaries provide certain corporate general and administrative services and are responsible for TCI Greenville/Spartanburg's operations. Costs related to these services were allocated on a per subscriber and gross revenue basis that is intended to approximate TCI's proportionate cost of providing such services. The amount presented in the combined statement of operations as management fees represents the allocated expenses from January 27, 1995 to December 31, 1995 and from January 1, 1996 to July 30, 1996. The amounts allocated by TCI are not necessarily representative of the costs that TCI Greenville/Spartanburg would have incurred as stand-alone systems. As affiliates of TCI, the Previously Affiliated Entities are 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 the Previously Affiliated Entities could obtain separately. The TCI subsidiary is under no obligation to continue to offer such volume rates to the Previously Affiliated Entities, and such rates may not continue to be available in the future should TCI's ownership in the Previously Affiliated Entities significantly decrease or if TCI or the programmers should otherwise decide not to offer such participation to the Previously Affiliated Entities. TCI is also an owner of ICP-IV, therefore the transaction with ICP-IV is not expected to affect the programming fees charged to the Previously Affiliated Entities by the TCI affiliates. Programming fees charged by the TCI subsidiary for the years ended December 31, 1994 and 1995 and the period from January 1, 1996 to July 30, 1996 amounted to $11,127, $19,545 and $14,638, respectively. Programming fees are paid to TCI in cash on a monthly basis. Payable to affiliates includes programming fees payable to the TCI subsidiary by Holdings and IPWT of $1,045 at December 31, 1995. TCI Greenville/Spartanburg's amount due to TCIC includes TCIC's funding of current operations, as well as its initial contribution of capital. Interest expense of $11,839 and $22,811 were allocated by TCIC for the period from January 27, 1995 to December 31, 1995 and the period from January 1, 1996 to July 30, 1996, respectively, based on actual interest costs incurred by TCIC and, therefore, does not necessarily reflect the interest expense that TCI Greenville/Spartanburg would have incurred on a stand alone basis. In addition, certain of TCIC's debt is currently secured by the assets of certain of its subsidiaries including TCI Greenville/Spartanburg. Also see Note 15 -- Subsequent Event. 85 86 12. INCOME TAXES The benefit (expense) for income taxes consists of the following:
FOR THE YEAR ENDED DECEMBER 31, PERIOD FROM ---------------------------- JANUARY 1, 1996 1994 1995 TO JULY 30, 1996 --------- ---------- ------------------ Current state and local..................... $ (12) Current intercompany tax allocation......... (87) $ 6,304 Deferred intercompany tax allocation........ 2,021 643 Deferred federal tax........................ $ 16,192 14,324 7,007 Deferred state and local tax................ 2,828 1,256 536 -------- -------- -------- $ 19,020 $ 17,502 $ 14,490 ======== ======== ========
Deferred income taxes relate to temporary differences as follows:
DECEMBER 31, 1995 ----------- Property and equipment.................... $ 13,876 Intangible assets......................... 125,762 Other..................................... 638 ----------- 140,276 ----------- Loss carryforwards........................ (23,570) Other..................................... (1,545) ----------- (25,115) ----------- $ 115,161 ===========
At December 31, 1995, Holdings had net operating loss carryforwards for federal income tax purposes aggregating $69,325 which expire through 2010. Holdings is a loss corporation as defined in Section 382 of the Internal Revenue Code. Therefore, if certain substantial changes in the Holdings' ownership should occur, there could be a significant annual limitation on the amount of loss carryforwards which can be utilized. Because of TCI's continuing interest in Holdings, management does not believe that the recapitalization of Holdings and the partial sale of the recapitalized equity to ICP-IV will impair Holdings' ability to utilize its net operating loss carryforwards. Holdings' management has not established a valuation allowance to reduce the deferred tax assets related to its unexpired net operating loss carryforwards. Due to an excess of appreciated asset value over the tax basis of Holdings' net assets, management believes it is more likely than not that the deferred tax assets related to the unexpired net operating losses will be realized. A reconciliation of the tax benefit computed at the statutory federal rate and the tax benefit reported in the accompanying statements of operations is as follows:
FOR THE YEAR ENDED DECEMBER 31, PERIOD FROM ---------------------------- JANUARY 1, 1996 1994 1995 TO JULY 30, 1996 --------- --------- ---------------- Tax benefit at federal statutory rate....... $ 22,963 $ 20,843 $ 16,377 State taxes, net of federal benefit......... 1,737 1,140 638 Goodwill amortization....................... (3,222) (2,914) (1,634) Tax reserves and other...................... (2,458) (1,567) (891) -------- -------- -------- $ 19,020 $ 17,502 $ 14,490 ======== ======== ========
86 87 13. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS During the years ended December 31, 1994 and 1995, the Previously Affiliated Entities paid interest of approximately $43,744 and $40,301, respectively. During the period from January 1, 1996 to July 30, 1996, the Previously Affiliated Entities paid interest of approximately $22,192. 14. EMPLOYEE BENEFIT PLAN Holdings and IPWT participate in the InterMedia Partners Tax Deferred Savings Plan, which covers all full-time employees who have completed at least one year of employment. Such Plan provides for a base employee contribution of 1% and a maximum of 15% of compensation. Matching contributions under such Plan are at the rate of 50% of the employee's contributions, up to a maximum of 3% of compensation. 15. SUBSEQUENT EVENT In February 1997, Leo J. Hindery, Jr., the managing general partner of InterMedia Capital Management IV ("ICM-IV") and various other affiliated InterMedia partnerships, was appointed President of TCI. As part of Mr. Hindery's transition, TCI is negotiating for the purchase of Mr. Hindery's interests in IMI, InterMedia Capital Management, a California limited partnership and the general partner of InterMedia ("ICM") and ICM-IV as well as various other affiliated InterMedia partnerships. Through ICM-IV and ICM, Mr. Hindery has managed IP, ICP-IV, IP-V and their subsidiaries as well as other affiliated InterMedia partnerships. Upon the completion of the transaction, Mr. Hindery will no longer hold a controlling interest in IMI, ICM-IV or any of the various InterMedia corporations or partnerships. The transition is expected to be completed in 1997. 87 88 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of Robin Media Holdings, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of shareholder's deficit, and of cash flows present fairly, in all material respects, the financial position of Robin Media Holdings, Inc. and its subsidiary at December 31, 1995 and the results of their operations and their cash flows for the years ended December 31, 1995 and 1994 and the period from January 1, 1996 to July 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above. As described in Note 2, on July 30, 1996, the Company was recapitalized and a portion of the recapitalized equity was sold to InterMedia Capital Partners IV, L.P. PRICE WATERHOUSE LLP San Francisco, California March 28, 1997 88 89 ROBIN MEDIA HOLDINGS, INC. CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1995 -------------- ASSETS Cash and cash equivalents........................................................ $ 1,832 Accounts receivable, net of allowance for doubtful accounts of $392.............. 4,835 Receivable from affiliates....................................................... 387 Prepaids ........................................................................ 373 Inventory........................................................................ 2,751 Other current assets............................................................. 223 -------------- Total current assets.................................................... 10,401 Intangible assets, net........................................................... 134,020 Property and equipment, net...................................................... 53,864 Investments...................................................................... 795 Other assets..................................................................... 1,120 -------------- Total assets............................................................ $ 200,200 ============== LIABILITIES AND SHAREHOLDER'S DEFICIT Accounts payable and accrued liabilities......................................... $ 5,817 Deferred revenue................................................................. 3,114 Payable to affiliates............................................................ 968 Accrued interest................................................................. 9,043 -------------- Total current liabilities............................................... 18,942 Long-term debt................................................................... 331,450 Deferred income taxes............................................................ 1,922 -------------- Total liabilities....................................................... 352,314 -------------- Commitments and contingencies Shareholder's deficit: Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued Common stock, $.01 par value; 100,000,000 shares authorized, 10,000,000 shares issued and outstanding................................... 100 Additional paid-in capital.................................................... 10,498 Accumulated deficit........................................................... (162,712) -------------- (152,114) -------------- Total liabilities and shareholder's deficit............................. $ 200,200 ==============
See accompanying notes to the consolidated financial statements. 89 90 ROBIN MEDIA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
PERIOD FROM JANUARY 1, FOR THE YEAR ENDED 1996 DECEMBER 31, TO JULY 30, 1994 1995 1996 ----------- ----------- ------------ Basic and cable services.................... $ 42,910 $ 49,325 $ 31,427 Pay services................................ 10,036 11,438 6,640 Other services.............................. 6,347 6,050 3,703 ----------- ----------- ------------ 59,293 66,813 41,770 ----------- ----------- ------------ Program fees................................ 10,667 12,620 8,231 Other direct expenses....................... 7,887 8,358 5,267 Depreciation and amortization............... 57,562 47,514 24,854 Selling, general and administrative expenses.................................. 12,623 14,904 8,871 Management and consulting fees.............. 465 333 117 ----------- ----------- ------------ 89,204 83,729 47,340 ----------- ----------- ------------ Loss from operations........................ (29,911) (16,916) (5,570) ----------- ----------- ------------ Other income (expense): Interest and other income................ 1,386 1,090 176 Loss on disposal of fixed assets......... (1,344) (73) (14) Interest expense......................... (35,545) (36,462) (21,642) Other expense............................ (194) (644) (163) ----------- ----------- ------------ (35,697) (36,089) (21,643) ----------- ----------- ------------ Loss before income tax benefit.............. (65,608) (53,005) (27,213) Income tax benefit.......................... 19,020 15,276 7,446 ----------- ----------- ------------ Net loss.................................... $ (46,588) $ (37,729) $ (19,767) =========== =========== ============
See accompanying notes to the consolidated financial statements. 90 91 ROBIN MEDIA HOLDINGS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDER'S DEFICIT (DOLLARS IN THOUSANDS)
ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ---------- ------------ ---------- ----------- Balance at December 31, 1993. $ 100 $ 10,498 $ (78,395) $ (67,797) Net loss................... (46,588) (46,588) ---------- ------------ ---------- ----------- Balance at December 31, 1994. 100 10,498 (124,983) (114,385) Net loss................... (37,729) (37,729) ---------- ------------ ---------- ----------- Balance at December 31, 1995. 100 10,498 (162,712) (152,114) Net loss................... (19,767) (19,767) ---------- ------------ ---------- ----------- Balance at July 30, 1996... $ 100 $ 10,498 $(182,479) $ (171,881) ========== =========== ========= ===========
See accompanying notes to the consolidated financial statements. 91 92 ROBIN MEDIA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
PERIOD FROM JANUARY 1, FOR THE YEAR ENDED 1996 DECEMBER 31, TO JULY 30, 1994 1995 1996 ---------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................... $ (46,588) $ (37,729) $ (19,767) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation and amortization........................ 57,674 47,614 24,919 Loss on sale of note receivable...................... 376 Loss on disposal of fixed assets..................... 1,344 73 Deferred income taxes................................ (19,020) (15,276) (7,344) Changes in assets and liabilities: Accounts receivable................................ 129 (584) (452) Receivable from affiliates......................... (345) 33 (67) Interest receivable................................ (726) 2,569 Prepaids........................................... 11 (57) (57) Inventory.......................................... (204) (1,246) (2,279) Other current assets............................... 194 (130) (197) Accounts payable and accrued liabilities........... 126 1,487 (38) Deferred revenue................................... 161 158 71 Payable to affiliates.............................. 334 40 143 Accrued interest................................... 38 397 3,023 ---------- ----------- ------------ Cash flows from operating activities...................... (6,872) (2,275) (2,045) ---------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.................... (11,156) (11,877) (13,146) Investments............................................ (435) (360) Collections of and proceeds from sale of notes receivable 17,764 2,624 Other assets and intangibles........................... (47) (621) (149) ---------- ----------- ------------ Cash flows from investing activities...................... 6,126 (10,234) (13,295) ---------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Activity on revolving credit note payable.............. 12,000 Note payable to affiliate.............................. 15,000 Debt issue costs....................................... (11) ---------- ----------- ------------ Cash flows from financing activities...................... 11,989 15,000 ---------- ----------- ------------ Net change in cash and cash equivalents................... (746) (520) (340) Cash and cash equivalents, beginning of period............ 3,098 2,352 1,832 ---------- ----------- ------------ Cash and cash equivalents, end of period.................. $ 2,352 $ 1,832 $ 1,492 ========== =========== ============
See accompanying notes to the consolidated financial statements. 92 93 ROBIN MEDIA HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. THE COMPANY AND BASIS OF PRESENTATION Robin Media Holdings, Inc., a Nevada corporation (the "Company"), was organized on August 27, 1991. On April 30, 1992, the Company commenced operations with the acquisition of all the outstanding common stock of Robin Media Group, Inc. ("RMG") from Jack Kent Cooke Incorporated. Prior to the sale of the Company on July 30, 1996 (see note 2), the Company was wholly owned by InterMedia Partners V, L.P. ("IP-V"), a California limited partnership. The Company's only asset is its investment in RMG. Therefore, the Company's consolidated balance sheets for all periods presented reflect only RMG's assets and liabilities and its consolidated statements of operations reflect only the results of RMG's operations. RMG owns and operates cable television systems in Tennessee and Georgia. The Company's acquisition of RMG was structured as a leveraged transaction and a significant portion of the assets acquired are intangible assets which are being amortized on a straight-line basis over one to ten years. Therefore, as was planned, the Company has incurred substantial book losses which have resulted in a net shareholder's deficit. 2. CHANGES IN OWNERSHIP On July 30, 1996, IP-V sold a majority of the voting interests in RMH to InterMedia Capital Partners IV, L.P., a California limited partnership ("ICP-IV"). ICP-IV is an affiliated entity formed for the purpose of acquiring cable television systems and consolidating various cable television systems owned by other affiliated entities. In connection with the sale, RMH's capital structure was reorganized to provide for three classes of capital stock. As part of the recapitalization, a wholly owned subsidiary of TeleCommunications, Inc. ("TCI") converted its outstanding loan to IP-V into a partnership interest and the IP-V partnership was dissolved. Additionally, ICP-IV provided RMH with an intercompany loan in an amount sufficient to repay all principal and interest on the Company's outstanding debt. Upon funding on July 30, 1996 of the intercompany loan, the Company repaid all amounts due on its outstanding debt. On July 31, 1996, RMH merged with and into RMG, with RMG as the surviving corporation. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary RMG. All intercompany accounts and transactions have been eliminated. Cash equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Revenue recognition Cable television service revenue is recognized in the period in which services are provided to customers. Deferred revenue represents revenue billed in advance and deferred until cable service is provided. Inventory Inventory consists primarily of supplies and is stated at the lower of cost or market determined by the first-in, first-out method. 93 94 Property and equipment Additions to property and equipment, including new customer installations, are recorded at cost. Self-constructed fixed assets include materials, labor and overhead. Costs of disconnecting and reconnecting cable service are expensed. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for major renewals and improvements are capitalized. Gains and losses from disposals and retirements are included in earnings. Capitalized plant is written down to recoverable values whenever recoverability through operations or sale of the system becomes doubtful. Depreciation is computed using the double-declining balance method over the following estimated useful lives:
YEARS ----- Cable television plant................................ 5-10 Buildings and improvements............................ 10 Furniture and fixtures................................ 3-7 Equipment and other................................... 3-10
Intangible assets RMG has franchise rights to operate cable television systems in various towns and political subdivisions. Franchise rights are being amortized on a straight-line basis over the lesser of the remaining lives of the franchises or the base ten-year term of IP-V which expires on December 31, 2002. Remaining franchise lives range from one to seventeen years. Goodwill represents the excess of acquisition cost over the fair value of net tangible and franchise assets acquired and liabilities assumed and is being amortized on a straight-line basis over the ten-year term of IP-V. Capitalized intangibles are written down to recoverable values whenever recoverability through operations or sale of the system becomes doubtful. Each year, the Company evaluates the recoverability of the carrying value of its intangible assets by assessing whether the projected cash flows, including projected cash flows from sale of the systems, is sufficient to recover the unamortized cost of these assets. Debt issue costs are being amortized over the term of the related debt (see Note 8). Debt issue costs of $358 are stated net of accumulated amortization of $231 at December 31, 1995. Accounts payable and accrued liabilities Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, 1995 ---------- Accounts payable.................................. $ 179 Accrued program costs............................. 315 Accrued franchise fees............................ 1,615 Other accrued liabilities......................... 3,708 ---------- $ 5,817 ==========
Use of estimates in the preparation of financial statements 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. 94 95 Long-lived assets and long-lived assets to be disposed of RMH has adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." RMH reviews property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment losses have been recognized by RMH. 4. INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, 1995 ----------- Franchise rights..................................... $ 202,573 Goodwill............................................. 92,978 Other................................................ 370 ----------- 295,921 Accumulated amortization............................. (161,901) ----------- $ 134,020 ===========
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, 1995 ----------- Land................................................... $ 407 Cable television plant................................. 81,667 Buildings and improvements............................. 659 Furniture and fixtures................................. 1,391 Equipment and other.................................... 5,251 Construction in progress............................... 4,035 ----------- 93,410 Accumulated depreciation............................... (39,546) ----------- $ 53,864 ===========
6. INVESTMENTS RMG had a 49% limited partnership interest in InterMedia Partners II, L.P. ("IP-II"), an affiliated entity, which was accounted for under the equity method. RMG's original investment in IP-II was reduced to zero in 1992 as a result of its equity in the net loss of IP-II. The Company received distributions from IP-II of $406 for the year ended December 31, 1995 which are included in interest and other income in the accompanying Consolidated Statements of Operations. No distributions were received from IP-II for the period from January 1, 1996 through July 30, 1996. On August 30, 1996, the Company sold its investment in IP-II for cash resulting in a net gain of $2,859. RMG has a 15% limited partner interest in AVR of Tennessee, L.P., doing business as Hyperion of Tennessee, which is accounted for under the cost method. RMG contributed $360 to Hyperion of Tennessee during fiscal 1995. During the period from January 1, 1996 through July 30, 1996, the Company did not make any contributions to Hyperion of Tennessee. On August 1, 1996, the Company sold a portion of its limited partner interest in Hyperion of Tennessee which resulted in a gain of $286. Subsequent to the sale, the Company retained a 0.01% limited partner interest in Hyperion of Tennessee. As of December 31, 1995, the Company was committed to fund additional capital contributions to Hyperion of Tennessee of $755 and to make term loan advances to Hyperion of Tennessee. These future commitments were reduced in proportion to the reduction in the Company's limited partner interest as a result of the sale. The term loan advances are required to fund leasing arrangements for access to fiber optic distribution owned by the respective partners. 95 96 7. NOTES RECEIVABLE Notes receivable were issued to RMG in connection with previous sales of cable television systems. In June 1995, RMG sold its only remaining note receivable including related accrued interest. At the time of the sale the note had a balance of $5,980 which included $411 of interest earned in 1995. The sale of the note resulted in a loss of $376 which is included in other expense. 8. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, 1995 ------------- Revolving credit note payable, $30,000 commitment, interest at LIBOR plus 1.5% payable quarterly, due February 28, 1997....................................................... $ 25,000 11 1/8% senior subordinated notes, interest payable semi-annually, due April 1, 1997............................................ 271,400 11 5/8% subordinated debentures, interest payable semi-annually, due April 1, 1999............................................ 35,050 ------------- $ 331,450 =============
RMG's bank revolving credit agreement provides $30,000 of available credit and bore interest either at the bank's reference rate plus 0.5% or at LIBOR plus 1.5% which was payable quarterly. At December 31, 1995, the interest rate on the revolving credit agreement was 7.5%. The revolving credit agreement required RMG to pay a commitment fee of 0.375% per year, payable quarterly, on the unused portion of available credit. The agreement contained various restrictive covenants on the Company and RMG, including limitations on the payment of dividends. The 11 1/8% senior subordinated notes (the "Notes") and the 11 5/8% subordinated debentures (the "Debentures") were redeemable by RMG at a redemption price of 101.0% and 101.4%, respectively, of the principal amounts, together with accrued interest. The indentures with respect to the Notes and the Debentures contained restrictive covenants on RMG including limitations on dividends, additional debt and mergers and acquisitions. On July 30, 1996, ICP-IV made an intercompany loan to the Company. The proceeds were used to repay all amounts due on the Company's outstanding debt. 9. COMMON STOCK On May 26, 1995, the Company's Board of Directors approved (i) an increase in the number of authorized shares of the Company's common stock to 100,000,000 shares; (ii) the issuance of up to 10,000,000 shares of Preferred Stock, par value of $.01 per share, the rights, preferences and privileges of which are to be determined by the Board of Directors; and (iii) a 100,000 to 1 stock split in the form of a stock dividend. As a result of the above actions, all share and per share data included in the consolidated financial statements has been retroactively restated to give effect to these actions. In connection with the sale of the Company to ICP-IV, the Company's capital structure was reorganized (see Note 2). 10. CABLE TELEVISION REGULATION Cable television legislation and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past, and may in the future, materially affect RMG and the cable television industry. The cable industry is currently regulated at the federal and local levels under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the Telecommunications Act of 1996 ("the 1996 Act") and regulations issued by the Federal Communications Commission ("FCC") in response to the 1992 Act. FCC regulations govern the determination of rates charged for basic, expanded basic and certain ancillary services, and cover a number of other areas including customer service and technical performance standards, the 96 97 required transmission of certain local broadcast stations and the requirement to negotiate retransmission consent from major network and certain local television stations. Among other provisions, the 1996 Act will eliminate rate regulation on the expanded basic tier effective March 31, 1999. Current regulations issued in connection with the 1992 Act empower the FCC and/or local franchise authorities to order reductions of existing rates which exceed the maximum permitted levels and require refunds measured from the date a complaint is filed in some circumstances or retroactively for up to one year in other circumstances. Management believes it has made a fair interpretation of the 1992 Act and related FCC regulations in determining regulated cable television rates and other fees based on the information currently available. However, complaints have been filed with the FCC on rates for certain franchises and certain local franchise authorities have challenged existing and prior rates. Further complaints and challenges could be forthcoming, some of which could apply to revenue recorded in 1996. Management believes, however, that the effect, if any, of these complaints and challenges will not be material to the Company's financial position or results of operations. Many aspects of regulation at the federal and local level are currently the subject of judicial review and administrative proceedings. In addition, the FCC is required to conduct rulemaking proceedings over the next several months to implement various provisions of the 1996 Act. It is not possible at this time to predict the ultimate outcome of these reviews or proceedings or their effect on the Company. 11. COMMITMENTS AND CONTINGENCIES RMG is committed to provide cable television services under franchise agreements with remaining terms of up to sixteen 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. RMG has entered into long-term retransmission agreements with all applicable stations in exchange for in-kind and/or other consideration. The Company is subject to litigation and other claims in the ordinary course of business. In the opinion of management, the ultimate outcome of any existing litigation or other claims will not have a material adverse effect on the Company's financial condition or results of operations. RMG has entered into pole rental agreements and leases certain of its facilities and equipment under noncancelable operating leases. Minimum rental commitments at December 31, 1995 for the next five years and thereafter under these leases are as follows: 1996......................... $ 537 1997......................... 334 1998......................... 118 1999......................... 114 2000......................... 110 Thereafter................... 458 -------- $ 1,671 ========
Rent expense, including pole rental agreements, was $1,612 and $1,821 for the years ended December 31, 1994 and 1995 respectively, and $1,089 for the period from January 1, 1996 to July 30, 1996. 12. RELATED PARTY TRANSACTIONS IP-V managed the business of RMG for an annual management fee paid in cash in equal monthly installments. During 1994, the annual management fee was $465. Effective July 1, 1995, the annual fee decreased to $200, resulting in fees of $333 for the full year of 1995 and $117 for the period from January 1, 1996 to July 30, 1996. Management fees payable of $40 are included in payable to affiliates at December 31, 1995. 97 98 InterMedia Management, Inc. ("IMI") is wholly owned by the managing general partner of InterMedia Capital Management V, L.P., the general partner of IP-V. IMI has entered into an agreement with RMG to provide accounting and administrative services at cost. During the years ended December 31, 1994 and 1995, administrative fees charged by IMI and paid in cash on a monthly basis were $2,000 and $2,385, respectively. During the period from January 1, 1996 to July 30, 1996, administrative fees charged by IMI and paid in cash on a monthly basis were $1,463. Receivables from affiliates represent advances to IMI net of administrative fees charged by IMI and operating expenses paid by IMI on behalf of RMG. As an affiliate of TCI, RMG 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 RMG could obtain separately. The TCI subsidiary is under no obligation to continue to offer such volume rates to RMG, and such rates may not continue to be available in the future should TCI's ownership in RMG significantly decrease or if TCI or the programmers should otherwise decide not to offer such participation to RMG. Because TCI is also an owner of ICP-IV, the sale of a majority of the voting interests of the Company to ICP-IV is not expected to affect the favorable rates available to the Company through its relationship with TCI. Programming fees charged by the TCI subsidiary for the years ended December 31, 1994 and 1995 and the period from January 1, 1996 to July 30, 1996 amounted to $8,977, $10,206, and $6,560, respectively. Programming fees are paid to the TCI subsidiary in cash on a monthly basis. Payable to affiliates includes programming fees payable to the TCI subsidiary of $836 at December 31, 1995. Also see Note 16 -- Subsequent Events. 13. INCOME TAXES The benefit for income taxes consists of the following:
FOR THE YEAR ENDED DECEMBER 31, PERIOD FROM ------------------------ JANUARY 1, 1996 TO 1994 1995 JULY 30, 1996 ---------- -------- ------------------ Deferred federal tax benefit.................. $ 16,192 $14,324 $ 7,007 Deferred state tax benefit.................... 2,828 952 439 --------- ------- -------- $ 19,020 $15,276 $ 7,446 ========= ======= ========
Deferred income taxes relate to temporary differences as follows:
DECEMBER 31, 1995 ------------ Property and equipment........................ $ 10,461 Intangible assets............................. 16,412 --------- 26,873 --------- Loss carryforwards............................ (23,570) Other......................................... (1,381) --------- (24,951) --------- $ 1,922 =========
At December 31, 1995, the Company had net operating loss carryforwards for federal income tax purposes aggregating $69,325 which expire through 2010. The Company is a loss corporation as defined in section 382 of the Internal Revenue Code. Therefore, if certain substantial changes in the Company's ownership should occur, there could be a significant annual limitation on the amount of loss carryforwards which can be utilized. Because of TCI's continuing interest in the Company, management does not believe that the recapitalization of the Company and the partial sale of the recapitalized equity to ICP-IV will impair the Company's ability to utilize its net operating loss carryforwards. The Company's management has not established a valuation allowance to reduce the deferred tax assets related to its unexpired net operating loss carryforwards. Due to an excess of appreciated asset value over the tax basis of the Company's net assets, management believes it is more likely than not that the deferred tax assets related to the unexpired net operating losses will be realized. 98 99 A reconciliation of the tax benefit computed at the statutory federal rate and the tax benefit reported in the accompanying statements of operations is as follows:
FOR THE YEAR ENDED DECEMBER 31, PERIOD FROM ------------------------ JANUARY 1, 1996 TO 1994 1995 JULY 30, 1996 -------- -------- ------------------ Tax benefit at federal statutory rate......................................... $22,963 $18,552 $ 9,218 State taxes, net of federal benefit........... 1,737 950 575 Goodwill amortization......................... (3,222) (2,914) (1,634) Tax reserves and other........................ (2,458) (1,312) (713) ------- ------- ------- $19,020 $15,276 $ 7,446 ======= ======= =======
14. SUPPLEMENTAL INFORMATION TO CONSOLIDATED STATEMENTS OF CASH FLOWS During the years ended December 31, 1994 and 1995, the Company paid interest of approximately $35,395 and $35,965, respectively. During the period from January 1, 1996 to July 30, 1996, the Company paid interest of approximately $19,064. 15. EMPLOYEE BENEFIT PLAN The Company participates in the InterMedia Partners Tax Deferred Savings Plan, which covers all full-time employees who have completed at least one year of employment. Such Plan provides for a base employee contribution of 1% and a maximum of 15% of compensation. The Company's matching contributions under the Plan are at the rate of 50% of the employee's contributions, up to a maximum of 3% of compensation. 16. SUBSEQUENT EVENTS In February 1997, Leo J. Hindery, Jr., the managing general partner of InterMedia Capital Management IV ("ICM-IV") and various other affiliated InterMedia partnerships, was appointed President of TCI. As part of Mr. Hindery's transition, TCI is negotiating for the purchase of Mr. Hindery's interests in IMI, InterMedia Capital Management, a California limited partnership and general partner of InterMedia ("ICM") and ICM-IV as well as various other affiliated InterMedia partnerships. Through ICM-IV and ICM-V, Mr. Hindery has managed ICP-IV, IP-V and their subsidiaries as well as other affiliated InterMedia partnerships. Upon the completion of the transaction, Mr. Hindery will no longer hold a controlling interest in any of the various InterMedia corporations or partnerships. The transition is expected to be completed in 1997. 99 100 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of InterMedia Partners of West Tennessee, L.P. In our opinion, the accompanying balance sheet and the related statements of operations, of changes in partners' capital and of cash flows present fairly, in all material respects, the financial position of InterMedia Partners of West Tennessee, L.P., (the "Partnership") at December 31, 1995 and the results of its operations and its cash flows for the years ended December 31, 1995 and 1994 and the period from January 1, 1996 to July 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion expressed above. As described in Note 1, on July 30, 1996 the Partnership was contributed to InterMedia Capital Partners IV, L.P. PRICE WATERHOUSE LLP San Francisco, California March 28, 1997 100 101 INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P. BALANCE SHEET (DOLLARS IN THOUSANDS)
DECEMBER 31, 1995 ------------ ASSETS Cash and cash equivalents................................ $ 1,115 Accounts receivable, net of allowance for doubtful accounts of $33............................... 924 Receivable from affiliates............................... 24 Prepaids................................................. 18 Inventory................................................ 189 ------------ Total current assets........................... 2,270 Intangible assets, net................................... 14,930 Property and equipment, net.............................. 11,344 Other assets............................................. 46 ------------ Total assets................................... $ 28,590 ============ LIABILITIES AND PARTNERS' CAPITAL Current portion of long-term debt........................ $ 4,043 Accounts payable and accrued liabilities................. 1,119 Deferred revenue......................................... 849 Payable to affiliates.................................... 1,264 Accrued interest......................................... 1,043 ------------ Total current liabilities...................... 8,318 Long-term debt........................................... 75,726 ------------ Total liabilities.............................. 84,044 ------------ Commitments and contingencies PARTNERS' CAPITAL General partner.......................................... (44,878) Limited partner.......................................... (10,576) ------------ Total partners' capital.................................. (55,454) ------------ Total liabilities and partners' capital........ $ 28,590 ============
See accompanying notes to the financial statements. 101 102 INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P. STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, PERIOD FROM ---------------------- JANUARY 1, 1996 1994 1995 TO JULY 30, 1996 --------- ---------- ---------------- Basic and cable services....................................... $ 9,919 $ 10,830 $ 6,783 Pay services................................................... 2,007 2,263 1,289 Other services................................................. 1,830 1,851 1,008 -------- --------- ----------- 13,756 14,944 9,080 -------- --------- ----------- Program fees................................................... 2,522 2,980 1,896 Other direct expenses.......................................... 1,936 1,897 1,199 Depreciation and amortization.................................. 10,654 8,501 3,947 Selling, general and administrative expenses................... 3,229 3,504 2,110 Management and consulting fees................................. 120 482 281 -------- --------- ----------- 18,461 17,364 9,433 -------- --------- ----------- Loss from operations........................................... (4,705) (2,420) (353) -------- --------- ----------- Other income (expense): Interest and other income.................................... 33 Gain (loss) on disposal of fixed assets...................... (57) 10 Interest expense............................................. (8,733) (534) (3,092) Other income................................................. 56 82 40 -------- --------- ----------- (8,734) (442) (3,019) -------- --------- ----------- Net loss....................................................... $(13,439) $ (2,862) $ (3,372) ======== ========= =========== Net loss allocation General partner.............................................. $(10,765) $ (2,293) $ (2,701) Limited partner.............................................. (2,674) (569) (671) -------- --------- ----------- $(13,439) $ (2,862) $ (3,372) ======== ========= ===========
See accompanying notes to the financial statements. 102 103 INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P. STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DOLLARS IN THOUSANDS)
GENERAL LIMITED PARTNER PARTNER TOTAL ------------ ------------ ------------ Balance at December 31, 1993.................................... $ (55,183) $ (6,820) $ (62,003) Additional capital contributions................................ 17,844 5,006 22,850 Adjustment to reallocate losses in connection with the debt restructuring (see Note 5)...................... 5,519 (5,519) Net loss........................................................ (10,765) (2,674) (13,439) ------------ ------------ ------------ Balance at December 31, 1994.................................... (42,585) (10,007) (52,592) Net loss........................................................ (2,293) (569) (2,862) ------------ ------------ ------------ Balance at December 31, 1995.................................... (44,878) (10,576) (55,454) Net loss........................................................ (2,701) (671) (3,372) ------------ ------------ ------------ Balance at July 30, 1996........................................ $ (47,579) $ (11,247) $ (58,826) ============ ============ ============
See accompanying notes to the financial statements. 103 104 INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, PERIOD FROM -------------------- JANUARY 1, 1996, 1994 1995 TO JULY 30, 1996 -------- -------- ---------------- Cash flows from operating activities: Net loss ................................................... $(13,439) $ (2,862) $ (3,372) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation and amortization ........................... 10,970 8,525 3,960 Loss (gain) on disposal of fixed assets ................. 57 (10) Changes in assets and liabilities: Accounts receivable ................................... (584) 400 113 Receivable from affiliates ............................ 8,493 39 (57) Prepaids .............................................. (4) 18 (37) Inventory ............................................. (12) 25 (11) Other assets .......................................... (17) (2) Accounts payable and accrued liabilities .............. (10) (13) 997 Deferred revenue ...................................... 41 5 27 Payable to affiliates ................................. 1,197 (349) (977) Accrued interest and debt restructuring credit ........ 68 (3,826) (37) -------- -------- -------- Cash flows from operating activities.......................... 6,760 1,950 606 -------- -------- -------- Cash flows from investing activities: Purchases of property and equipment ........................ (1,276) (1,370) (787) Proceeds from sale of property and equipment ............... 44 Other assets ............................................... 21 -------- -------- -------- Cash flows from investing activities ......................... (1,255) (1,326) (787) -------- -------- -------- Cash flows from financing activities: Activity on revolving credit note payable .................. (2,600) (400) (200) Debt issue costs ........................................... (161) (7) Repayment on long-term debt ................................ (22,073) Capital contributions ...................................... 20,050 -------- -------- -------- Cash flows from financing activities ......................... (4,784) (407) (200) -------- -------- -------- Net change in cash and cash equivalents ...................... 721 217 (381) Cash and cash equivalents, beginning of period ............... 177 898 1,115 -------- -------- -------- Cash and cash equivalents, end of period ..................... $ 898 $ 1,115 $ 734 ======== ======== ========
See accompanying notes to the financial statements. 104 105 INTERMEDIA PARTNERS OF WEST TENNESSEE, L.P. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. THE COMPANY AND BASIS OF PRESENTATION InterMedia Partners of West Tennessee, L.P. (the "Partnership"), a California limited partnership, was formed on April 11, 1990 for the purpose of investing in and operating cable television properties. The Company owns and operates cable television properties located in Tennessee. Under the terms of the original partnership agreement, InterMedia Partners, a California limited partnership ("IP"), was the sole general partner, owning an 89% interest in the Partnership. The limited partners were IP and Robin Cable Systems of Tucson, an Arizona limited partnership ("Robin-Tucson"), holding interests in the Partnership of 10% and 1%, respectively. On September 11, 1990 the Partnership acquired the Western Tennessee properties of U.S. Cable Partners, LP and its affiliates. Funding for this acquisition was provided by General Electric Capital Corporation ("GECC") in the form of a senior subordinated loan. On October 3, 1994, IP sold its interest in Robin-Tucson to an affiliate of Tele-Communications, Inc. ("TCI"). IP contributed additional capital of $20,050 from the net sales proceeds and the Partnership repaid $30,375 of the senior subordinated loan to GECC including accrued interest. Under an Amended and Restated Agreement of Limited Partnership entered into on October 3, 1994, GECC converted $2,800 of its loan into a limited partnership interest in the Partnership, and restructured the remaining balance of the loan (see Note 5). Under the revised partnership agreement IP had an 80.1% general partner and 9.9% limited partner interest, and GECC had a 10% limited partner interest. Losses incurred prior to October 3, 1994 were reallocated between the general and limited partners based upon the change in ownership percentage resulting from the restructuring. The Partnership's acquisition of the West Tennessee cable television properties was structured as a leveraged transaction and a significant portion of the assets acquired were intangible assets which are being amortized over one to ten years. Therefore, as was planned, the Partnership has incurred substantial book losses, resulting in negative partners' capital. On July 30, 1996, IP and GECC contributed their partner interests in the Partnership to InterMedia Capital Partners IV, L.P., a California limited partnership ("ICP-IV") in exchange for cash and limited partner interests. ICP-IV is an affiliated entity formed for the purpose of acquiring cable television systems and consolidating various cable television systems owned by other affiliated entities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents The Partnership considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Revenue recognition Cable television service revenue is recognized in the period in which services are provided to customers. Deferred revenue represents revenue billed in advance and deferred until cable service is provided. Inventory Inventory consists primarily of supplies and is stated at the lower of cost or market determined by the first-in, first-out method. Property and equipment Additions to property and equipment, including new customer installations, are recorded at cost. Self-constructed fixed assets include materials, labor and overhead. Costs of disconnecting and reconnecting cable service are expensed. Expenditures for 105 106 maintenance and repairs are charged to expense as incurred. Expenditures for major renewals and improvements are capitalized. Gains and losses from disposals and retirements are included in earnings. Capitalized plant is written down to recoverable values whenever recoverability through operations or sale of the system becomes doubtful. Depreciation is computed using the double-declining balance method over the following estimated useful lives:
YEARS ----- Cable television plant............................... 5-10 Buildings and improvements........................... 10 Furniture and fixtures............................... 3-7 Equipment and other.................................. 3-10
Intangible assets The Partnership has franchise rights to operate cable television systems in various towns and political subdivisions. Franchise rights are being amortized on a straight-line basis over the lesser of the remaining lives of the franchises or the base ten-year term of the IP partnership agreement which expires in July 1998. Remaining franchise lives range from one to nineteen years. Goodwill represents the excess of acquisition cost over the fair value of net tangible and franchise assets acquired and liabilities assumed and is being amortized on a straight-line basis over the ten-year term of IP. Capitalized intangibles are written down to recoverable values whenever recoverability through operations or sale of the system becomes doubtful. Each year, the Partnership evaluates the recoverability of the carrying value of its intangible assets by assessing whether the projected cash flows, including projected cash flows from sale of the systems, is sufficient to recover the unamortized cost of these assets. Debt issue costs are being amortized over the terms of the related debt. Debt issue costs of $152 are stated net of accumulated amortization of $29 at December 31, 1995. Long-lived assets and long-lived assets to be disposed of The Partnership has adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Partnership reviews property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment losses have been recognized by the Partnership. Accounts payable and accrued liabilities Accounts payable and accrued liabilities consist of the following:
DECEMBER 31, 1995 ------------ Accounts payable................................... $ 14 Accrued program costs.............................. 43 Accrued franchise fees............................. 208 Other accrued liabilities.......................... 854 ------- $ 1,119
Income taxes No provision or benefit for income taxes is reported in the accompanying financial statements because, as a partnership, the tax effects of the Partnership's results of operations accrue to the partners. The Partnership is registered with the Internal Revenue Service as a tax shelter under Internal Revenue Code Section 6111(b). 106 107 Allocation of profits and losses In accordance with the terms of the Partnership's partnership agreement, profits and losses generally were allocated proportionately with each partner's percentage interest in the Partnership. The percentage interest of the general partner is 80.1%, and that of the limited partners is 19.9%. Use of estimates in the preparation of financial statements 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. 3. INTANGIBLE ASSETS Intangible assets consist of the following:
DECEMBER 31, 1995 ------------ Franchise rights............................................ $ 48,610 Goodwill and other assets................................... 10,912 --------- 59,522 Accumulated amortization.................................... (44,592) --------- $ 14,930 =========
4. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, 1995 ------------ Land........................................................ $ 138 Cable television plant...................................... 28,742 Buildings and improvements.................................. 207 Furniture and fixtures...................................... 292 Equipment and other......................................... 1,971 Construction in progress.................................... 105 --------- 31,455 Accumulated depreciation.................................... (20,111) --------- $ 11,344 =========
5. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, 1995 ------------ GECC revolving credit; $7,000 commitment; interest payable quarterly at prime plus 1% or LIBOR plus 2% per annum; matures June 30, 2001...................... $ 2,000 GECC term loan payable; interest payable quarterly at 7% per annum on $27,000 and at prime plus 1% or LIBOR plus 2% per annum on $27,000; matures June 30, 2001........................................................................... 54,000 Debt restructuring credit........................................................ 23,769 ------- Total debt and debt restructuring credit......................................... 79,769 Less current portion............................................................. 4,043 ------- $75,726 =======
On October 3, 1994, in connection with the sale of Robin-Tucson, the Partnership restructured its subordinated loan payable to GECC. Under the terms of the restructuring, GECC reduced the face amount of the debt outstanding to $59,000. Because the total estimated future payments on the restructured debt exceeded the carrying amount of the debt at the time of restructuring, no gain was recognized on the debt restructuring and no adjustments were made to the carrying amount of the Partnership's debt. The difference 107 108 of $28,570 between the $59,000 refinanced and the amount of the note at the time of the restructuring was recorded as a debt restructuring credit. During the period from January 1, 1996 through July 30, 1996, a portion of the future debt service payments was recorded as reductions of the remaining debt restructuring credit of $23,769 at December 31, 1995. At December 31, 1995, $56,000 was outstanding under the Amended and Restated Loan Agreement with GECC which provided for a revolving credit facility in the amount of $7,000 and term loans in the aggregate amount of $54,000. Borrowings under the revolving credit facility and the term loans generally bore interest either at the Prime rate plus 1% or LIBOR plus 2%; $27,000 of the borrowings under the term loans bore interest at a fixed rate of 7%. Interest periods corresponding to interest rate options were generally specified as one, two, or three months for LIBOR loans. The loan agreement required quarterly interest payments, or more frequent interest payments if a shorter period was selected under the LIBOR option, and quarterly payments of .5% per annum on the unused commitment. The loan agreement provided for contingent interest payments generally at 11.11% of excess cash flow, as defined. Contingent interest payments were also required upon the sale of the West Tennessee system or the partnership interest in the Partnership. The loan agreements contained non-financial covenants as well as various restrictive covenants. On July 30, 1996, all of the Partnership's outstanding borrowings payable to GECC were assumed by ICP-IV. As a result, approximately $3,000 was accrued for contingent interest. ICP-IV subsequently settled all of the outstanding debt and recognized a gain on early extinguishment of debt representing the remaining debt restructuring credit balance as of July 30, 1996. 6. CABLE TELEVISION REGULATION Cable television legislation and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past, and may in the future, materially affect the Partnership and the cable television industry. The cable industry is currently regulated at the federal and local levels under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the Telecommunications Act of 1996 ("the 1996 Act") and regulations issued by the Federal Communications Commission ("FCC") in response to the 1992 Act. FCC regulations govern the determination of rates charged for basic, expanded basic and certain ancillary services, and cover a number of other areas including customer service and technical performance standards, the required transmission of certain local broadcast stations and the requirement to negotiate retransmission consent from major network and certain local television stations. Among other provisions, the 1996 Act will eliminate rate regulation on the expanded basic tier effective March 31, 1999. Current regulations issued in connection with the 1992 Act empower the FCC and/or local franchise authorities to order reductions of existing rates which exceed the maximum permitted levels and require refunds measured from the date a complaint is filed in some circumstances or retroactively for up to one year in other circumstances. Management believes it has made a fair interpretation of the 1992 Act and related FCC regulations in determining regulated cable television rates and other fees based on the information currently available. No complaints have been filed with the FCC on rates for expanded basic services and local franchise authorities have not challenged existing and prior rates. Complaints and challenges could be forthcoming, some of which could apply to revenue recorded in 1996. Management believes, however, that the effect, if any, of such complaints and challenges will not be material to the Partnership's financial position or results of operations. Many aspects of regulation at the federal and local level are currently the subject of judicial review and administrative proceedings. In addition, the FCC is required to conduct rulemaking proceedings over the next several months to implement various provisions of the 1996 Act. It is not possible at this time to predict the ultimate outcome of these reviews or proceedings or their effect on the Partnership. 7. COMMITMENTS AND CONTINGENCIES The Partnership is committed to provide cable television services under franchise agreements with remaining terms of up to twenty-three years. Franchise fees of up to 5% of gross revenues are payable under these agreements. 108 109 Current FCC regulations require that cable television operators obtain permission to retransmit major network and certain local television station signals. The Partnership has entered into long-term retransmission agreements with all applicable stations in exchange for in-kind and/or other consideration. The Partnership 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 Partnership's financial condition or results of operations. The Partnership has entered into pole rental agreements and leases certain of its facilities and equipment under non-cancelable operating leases. Minimum rental commitments at December 31, 1995 for the next five years and thereafter under these leases are as follows: 1996........................... $ 63 1997........................... 41 1998........................... 25 1999........................... 19 2000........................... 15 Thereafter..................... 25 ------ $ 188 ======
Rent expense, including pole rental agreements, was $387 and $525 for the years ended December 31, 1994 and 1995, respectively, and $279 for the period from January 1, 1996 to July 30, 1996. 8. RELATED PARTY TRANSACTIONS InterMedia Capital Management, a California limited partnership ("ICM"), is the general partner of IP. Beginning October 1994, ICM managed the business of the Partnership for an annual fee of $482 of which 20% is deferred until each subsequent year in support of the Partnership's long-term debt. The remaining 80% is paid in cash in equal monthly installments. Included in payable to affiliates at December 31, 1995 is $96 relating to the ICM annual fee. InterMedia Management, Inc. ("IMI") is wholly owned by the managing general partner of ICM. IMI has entered into an agreement with the Partnership to provide accounting and administrative services at cost. During the years ended 1994 and 1995, administrative fees charged by IMI were $566 and $625, respectively. During the period from January 1, 1996 to July 30, 1996, administrative fees charged by IMI and paid in cash on a monthly basis were $368. Receivables from affiliates represent advances to IMI net of administrative fees charged by IMI and operating expenses paid by IMI on behalf of the Partnership. IMI charges are paid in cash on a monthly basis. As an affiliate of TCI, the Partnership 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 the Partnership could obtain separately. The TCI subsidiary is under no obligation to continue to offer such volume rates to the Partnership, and such rates may not continue to be available in the future should TCI's ownership in the Partnership significantly decrease or if TCI or the programmers should otherwise decide not to offer such participation to the Partnership. Because TCI is also an owner of ICP-IV, the contributions of the Partnership to ICP-IV are not expected to affect the favorable rates available to the Partnership through its relationship with TCI. Programming fees charged by the TCI subsidiary for the years ended December 31, 1994 and 1995 amounted to $2,150 and $2,573, respectively, and $1,605 for the period from January 1, 1996 to July 30, 1996. Programming fees are paid to the TCI subsidiary in cash on a monthly basis. Payable to affiliates includes programming fees payable to the TCI subsidiary of $209 at December 31, 1995. Also see Note 11. Payables to IP of $943 were outstanding at December 31, 1995, primarily related to professional fees incurred by IP on behalf of IPWT in connection with the acquisition of the West Tennessee cable television system in 1990. IP was given a partnership interest in ICP-IV, as described herein, in exchange for its investment in the Partnership including its receivable of $943. 109 110 9. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS During the years ended December 31, 1994 and 1995, the Partnership paid interest of approximately $8,349 and $4,336, respectively. During the period from January 1, 1996 to July 30, 1996, the Partnership paid interest of approximately $3,128. 10. EMPLOYEE BENEFIT PLAN The Partnership participates in the InterMedia Partners Tax Deferred Savings Plan, which covers all full-time employees who have completed at least one year of employment. Such Plan provides for a base employee contribution of 1% and a maximum of 15% of compensation. The Partnership's matching contributions under such Plan are at the rate of 50% of the employee's contributions, up to a maximum of 3% of compensation. 11. SUBSEQUENT EVENT In February 1997, Leo J. Hindery, Jr., the managing general partner of InterMedia Capital Management IV ("ICM-IV") and various other affiliated InterMedia partnerships, was appointed President of TCI. As part of Mr. Hindery's transition, TCI is negotiating for the purchase of Mr. Hindery's interests in IMI, InterMedia Capital Management, a California limited partnership and the general partner of InterMedia ("ICM") and ICM-IV as well as various other affiliated InterMedia partnerships. Through ICM-IV and ICM, Mr. Hindery has managed ICP-IV, IP and their subsidiaries as well as other affiliated InterMedia partnerships. Upon the completion of the transaction, Mr. Hindery will no longer hold a controlling interest in any of the various InterMedia corporations or partnerships. The transition is expected to be completed in 1997. 110 111 INDEPENDENT AUDITORS' REPORT The Board of Directors TCI of Greenville, Inc., TCI of Spartanburg, Inc., and TCI of Piedmont, Inc.: We have audited the accompanying combined balance sheet of TCI of Greenville, Inc., TCI of Spartanburg, Inc., and TCI of Piedmont, Inc. (the "Systems") (indirect wholly-owned subsidiaries of TCI Communications, Inc.) as of December 31, 1995, and the combined statements of operations and accumulated deficit and cash flows for the periods from January 1, 1996 to July 30, 1996 and from January 27, 1995 to December 31, 1995. These combined financial statements are the responsibility of the Systems' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of TCI of Greenville, Inc., TCI of Spartanburg, Inc., and TCI of Piedmont, Inc. as of December 31, 1995 and the results of their operations and their cash flows for the periods from January 1, 1996 to July 30, 1996 and from January 27, 1995 to December 31, 1995 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Denver, Colorado March 17, 1997 111 112 TCI OF GREENVILLE, INC., TCI OF SPARTANBURG, INC., AND TCI OF PIEDMONT, INC. (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.) COMBINED BALANCE SHEET ASSETS
DECEMBER 31, 1995 --------- (AMOUNTS IN THOUSANDS) Cash................................................... $ 1,936 Trade and other receivables, net of allowance for doubtful accounts of $426,000........................ 2,571 Property and equipment, at cost: Land................................................. 573 Cable distribution systems........................... 38,551 Support equipment and buildings...................... 3,588 --------- 42,712 Less accumulated depreciation........................ (5,252) --------- 37,460 --------- Franchise costs........................................ 327,262 Less accumulated amortization........................ (7,499) --------- 319,763 --------- Other assets........................................... 82 --------- $ 361,812 ========= LIABILITIES AND PARENT'S INVESTMENT Accounts payable....................................... $ 270 Accrued liabilities (note 2)........................... 3,486 Deferred income taxes (note 4)......................... 113,239 --------- Total liabilities............................ 116,995 --------- Parent's investment: Due to TCI Communications, Inc. (TCIC) (note 3)...... 249,136 Accumulated deficit.................................. (4,319) --------- 244,817 --------- $ 361,812 =========
Commitments and contingencies (note 5) See accompanying notes to combined financial statements. 112 113 TCI OF GREENVILLE, INC., TCI OF SPARTANBURG, INC., AND TCI OF PIEDMONT, INC. (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.) COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
PERIOD FROM PERIOD FROM JANUARY 27 TO JANUARY 1, 1996 DECEMBER 31, TO JULY 30, 1996 1995 ---------------- ------------- (AMOUNTS IN THOUSANDS) Revenue: Basic and cable services............... $ 18,448 $ 25,477 Pay services........................... 6,256 10,241 Other services......................... 5,586 11,496 -------- -------- 30,290 47,214 -------- -------- Operating costs and expenses: Program fees (note 3).................. 6,953 9,084 Other direct expenses.................. 3,711 6,596 Selling, general and administrative.... 8,457 10,483 Allocated general and administrative costs (note 3)..................... 1,105 1,618 Amortization........................... 4,772 7,499 Depreciation........................... 2,934 6,640 -------- -------- 27,932 41,920 -------- -------- Operating income............... 2,358 5,294 Interest expense to TCIC (note 3)........ (22,811) (11,839) -------- -------- Loss before income tax benefit........................... (20,453) (6,545) Income tax benefit (note 4).............. 7,044 2,226 -------- -------- Net loss....................... (13,409) (4,319) Accumulated deficit: Beginning of period.................... (4,319) -- -------- -------- End of period.......................... $(17,728) $ (4,319) ======== ========
See accompanying notes to combined financial statements. 113 114 TCI OF GREENVILLE, INC., TCI OF SPARTANBURG, INC., AND TCI OF PIEDMONT, INC. (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.) COMBINED STATEMENTS OF CASH FLOWS
PERIOD FROM PERIOD FROM JANUARY 27 TO JANUARY 1, 1996 TO DECEMBER 31, JULY 30, 1996 1995 ------------------ ------------- (AMOUNTS IN THOUSANDS) Cash flows from operating activities: Net loss.................................... $(13,409) $ (4,319) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization............ 7,706 14,139 Deferred tax benefit..................... (740) (2,325) Changes in assets and liabilities: Change in receivables, net............. (6) (98) Change in other assets................. 33 (80) Change in cash overdraft............... 35 -- Change in accounts payable............. 313 150 Change in accrued liabilities.......... (662) 965 -------- -------- Net cash provided by (used in) operating activities.... (6,730) 8,432 -------- -------- Cash flows used in investing activities-- Capital expended for property and equipment................................... (4,655) (13,054) -------- -------- Cash flows from financing activities-- Increase in due to TCIC..................... 9,449 6,484 -------- -------- Net increase (decrease) in cash. (1,936) 1,862 Cash at beginning of period................... 1,936 74 -------- -------- Cash at end of period......................... $ -- $ 1,936 ======== ========
See accompanying notes to combined financial statements. 114 115 TCI OF GREENVILLE, INC., TCI OF SPARTANBURG, INC., AND TCI OF PIEDMONT, INC. (INDIRECT WHOLLY-OWNED SUBSIDIARIES OF TCI COMMUNICATIONS, INC.) NOTES TO COMBINED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION The combined financial statements include the operations, assets and liabilities of TCI of Greenville, Inc., TCI of Spartanburg, Inc., and TCI of Piedmont, Inc. (the "Systems") which are indirect wholly-owned subsidiaries of TCI Communications, Inc. ("TCIC" or "Parent") which is a subsidiary of Tele-Communications, Inc. ("TCI"). The Systems develop and operate cable television systems in South Carolina. The Systems were acquired by TCI from TeleCable Corporation at the close of business on January 26, 1995 and subsequently contributed to TCIC. These combined financial statements include the Systems' results of operations after January 26, 1995, the date of acquisition. On July 30, 1996, TCIC contributed the Systems to a newly formed limited partnership in exchange for an interest in InterMedia Partners IV, L.P., ("IP-IV"). See note 6. (b) PROPERTY AND EQUIPMENT Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. Interest capitalized for the periods from January 1, 1996 to July 30, 1996 and January 27, 1995 to December 30, 1995 was not material. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for cable distribution systems and 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales, or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. In March of 1995, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement No. 121"), effective for fiscal years beginning after December 15, 1995. Statement No. 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long- lived assets that are expected to be disposed of. The Systems adopted Statement No. 121 effective January 1, 1996. Such adoption did not have a significant effect on the financial position or results of operations of the Systems. In accordance with Statement No. 121, the Systems periodically review the carrying amounts of their long-lived assets, franchise costs and certain other assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. The Systems consider historical and expected future net operating losses to be their primary indicators of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets ("Assets"). The Systems deem Assets to be impaired if the Systems are unable to recover the carrying value of their assets over their expected remaining useful life through a forecast of undiscounted future operating cash flows directly related to the Assets. If Assets are deemed to be impaired, the loss is measured as the amount by which the carrying amount of the Assets exceeds their fair values. The Systems generally measure fair value by considering sales prices for similar assets or by discounting estimated future cash flows. 115 116 Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. (c) FRANCHISE COSTS Franchise costs include the difference between the cost of acquiring the Systems and amounts allocated to the tangible assets. Franchise costs are amortized on a straight-line basis over 40 years. (d) INCOME TAXES A tax sharing agreement (the "Tax Sharing Agreement") among TCIC and certain other subsidiaries of TCI was implemented effective July 1, 1995. The Tax Sharing Agreement formalizes certain elements of the pre-existing tax sharing arrangement and contains additional provisions regarding the allocation of certain consolidated income tax attributes and the settlement procedures with respect to the intercompany allocation of current tax attributes. The Tax Sharing Agreement encompasses U.S. Federal, state, local, and foreign tax consequences and relies upon the U.S. Internal Revenue Code of 1986 as amended, and any applicable state, local, and foreign tax law and related regulations. Beginning on the July 1, 1995 effective date, TCIC was responsible to TCI for its share of current consolidated income tax liabilities. TCI was responsible to TCIC to the extent that TCIC's income tax attributes generated after the effective date are utilized by TCI to reduce its consolidated income tax liabilities. Accordingly, all tax attributes generated by TCIC's operations (which include the Systems) after the effective date including, but not limited to, net operating losses, tax credits, deferred intercompany gains, and the tax basis of assets are inventoried and tracked for the entities comprising TCIC. (e) ESTIMATES 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACCRUED LIABILITIES Accrued liabilities consists of the following at December 31, 1995 (amounts in thousands): Franchise fees payable...................................... $ 1,722 Property taxes payable...................................... 745 Salaries and benefits payable............................... 263 Sales taxes payable......................................... 187 Other....................................................... 569 --------- $ 3,486 =========
3. TRANSACTIONS WITH RELATED PARTIES Certain subsidiaries of TCIC provide certain corporate general and administrative services and are responsible for the Systems' operations and construction. Costs related to these services were allocated to TCIC's subsidiaries on a per subscriber and gross revenue basis that is intended to approximate TCI's proportionate cost of providing such services and are presented in the combined statement of operations and accumulated deficit as allocated general and administrative costs. The amounts allocated by TCIC are not necessarily representative of the costs that the Systems would have incurred on a stand-alone basis. The Systems purchased, at TCIC's cost, certain pay television and other programming through another TCIC subsidiary. Charges for such programming were $6,473,000 for the period from January 1, 1996 to July 30, 1996 and $6,766,000 for the period from January 27, 1995 to December 31, 1995 and are included in program fees. The amount due to TCIC includes TCIC's funding of current operations as well as the initial contribution of the Systems. The amount of interest expense allocated by TCIC is based on the actual interest costs incurred by TCIC and therefore, it does not necessarily reflect the interest expense that each subsidiary would have incurred on a stand alone basis. In addition, certain of TCIC's debt is secured by the assets of certain of its subsidiaries, including the Systems. 116 117 4. INCOME TAXES The Systems are included in the consolidated Federal income tax return of TCI. Income tax benefit for the Systems is based on those items in the consolidated calculation applicable to the Systems. The income tax benefit during this period represents an apportionment of tax expense or benefit (other than deferred taxes) among subsidiaries of TCIC in relation to their respective amounts of taxable earnings or losses. The payable (receivable) arising from the allocation of taxes for the period has been recorded as an increase (decrease) to the due to TCIC account. For Federal income tax purposes, the tax basis in the assets of the Systems were carried over at their historical tax basis. The Systems recognize deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income tax benefit (expense) attributable to loss before income taxes consists of:
CURRENT DEFERRED TOTAL ------- ------- -------- (AMOUNTS IN THOUSANDS) Period from January 1, 1996 to July 30, 1996: Intercompany tax allocation..................................... $ 6,304 $ 643 $ 6,947 State and local................................................. -- 97 97 ------- ------- -------- $ 6,304 $ 740 $ 7,044 ======= ======= ======== Period from January 27, 1995 to December 30, 1995: Intercompany tax allocation..................................... $ (87) $ 2,021 $ 1,934 State and local................................................. (12) 304 292 ------- ------- -------- $ (99) $ 2,325 $ 2,226 ======= ======= ========
Income tax benefit attributable to earnings differs from the amount computed by applying the Federal income tax rate of 35% as a result of the following (amounts in thousands):
PERIOD FROM JANUARY 1, 1996 PERIOD FROM JANUARY 27, 1995 TO JULY 30, 1996 TO DECEMBER 31, 1995 ---------------------------- ---------------------------- Computed "expected" tax benefit...................................... $ 7,159 $ 2,291 State and local income taxes, net of Federal income tax benefit...................................... 63 190 Other.......................................... (178) (255) -------- --------- $ 7,044 $ 2,226 ======== =========
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 are presented below (amounts in thousands):
DECEMBER 31, 1995 ----------------- Deferred tax assets, primarily related to accounts receivable.............................. $ 164 Deferred tax liabilities: Franchise costs......................... 109,350 Property and equipment.................. 3,415 Other................................... 638 -------- Gross deferred tax liabilities....... 113,403 -------- Net deferred tax liabilities......... $113,239 ========
117 118 5. COMMITMENTS AND CONTINGENCIES As a result of the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), the Systems' basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. The Systems believe that they have complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However the Systems' rates for Regulated Services are subject to review by the FCC, if a complaint has been filed, or the appropriate franchise authority, if such authority has been certified. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to the later of September 1, 1993 or one year prior to the certification date of the applicable franchise authority. The amount of refunds, if any, which could be payable by the Systems in the event that the Systems' rates are successfully challenged by franchising authorities or the FCC is not considered to be material. The Systems have entered into pole rental agreements and use other equipment under lease arrangements. Rental expense under these arrangements was $354,000 for the period from January 1, 1996 to July 30, 1996 and $510,000 for the period from January 27, 1995 to December 31, 1995. 6. SUBSEQUENT EVENT On July 30, 1996, TCI consummated an agreement with IP-IV to contribute the Systems into a newly-formed limited partnership in exchange for a 49% limited partnership interest in IP-IV. Management of the Systems' operations was assumed by InterMedia Capital Management IV, L.P., the general partner of IP-IV as of that date. 118 119 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company has no directors or officers. GENERAL PARTNER In August 1997, ICM-IV LLC, a Delaware limited liability company, succeeded ICM-IV, a California limited partnership, as the General Partner of ICP-IV. As general partner, ICM-IV LLC has responsibility for the overall management of the business and operations of the Company. Pursuant to certain administrative agreements, IMI receives an annual fee for management services rendered under the supervision of the General Partner pursuant to the terms of ICP-IV's agreement of limited partnership amended and restated as of March 31, 1998 (the "Partnership Agreement"). The principal offices of ICM-IV LLC are located at 235 Montgomery Street, Suite 420, San Francisco, California 94104 and the telephone number is (415) 616-4600. ADVISORY COMMITTEE ICP-IV has an advisory committee ("Advisory Committee") which consults with and advises ICM-IV with respect to the business and affairs of the Company. The Advisory Committee consists of one representative of each of the seven limited partners of ICP-IV with the largest aggregate limited partnership interests in ICP-IV. For this purpose, the partnership interest of a limited partner includes actual capital contributions by a limited partner and any capital contributions by such limited partner's affiliate. EXECUTIVES ICP-IV has no employees. Pursuant to the Partnership Agreement, ICM-IV, through its affiliate InterMedia Capital Management, L.P. ("ICM"), whose managing general partner is IMI, provides day-to-day management of the Company's business and operations. The five most senior non-operating executives of IMI are:
NAME AGE POSITION ---- --- -------- Robert J. Lewis........................ 68 President and Chief Executive Officer Edon V. Smith ......................... 39 Senior Executive Director, Chief Financial Officer Rodney M. Royse........................ 32 Vice President and Senior Executive Director, Business Development Thomas R. Stapleton.................... 45 Vice President and Senior Executive Director, Chief Accounting Officer Donna Dearman.......................... 43 Executive Director of Human Resources
119 120 The five officers of IPCC are:
NAME AGE POSITION ---- --- -------- Robert J. Lewis......................... 68 President and Chief Executive Officer Edon V. Smith .......................... 39 Senior Executive Director, Chief Financial Officer Rodney M. Royse......................... 32 Vice President and Senior Executive Director, Business Development Thomas R. Stapleton..................... 45 Vice President, Assistant Secretary and Senior Executive Director, Chief Accounting Officer Bruce J. Stewart........................ 34 Vice President, Legal Affairs
Robert J. Lewis is a recognized pioneer in the cable television industry having started his career as a system manager. Since that time he has held top level positions in the industry. Among them are President of Cablecom-General, President and Chief Operating Officer of Jones Intercable, Inc., President of Televents Group, Inc. and Senior Vice President of TCI. Mr. Lewis retired from TCI in 1995 and since that time has served as an Executive Director and Advisor for the Related InterMedia Entities. He is also a Director of Online System Services, Inc., a Denver based Internet access and business solutions company. Mr. Lewis acquired Mr. Hindery's interest in the general partner of ICM-IV and other management partnerships of the Related InterMedia Entities upon the departure of Mr. Hindery to TCI. See Item 13 "Certain Relationships and Related Transactions." Edon V. Smith is Chief Financial Officer of ICM, IMI and IPCC. Ms. Smith joined ICM in 1996. From 1993 to 1995, Ms. Smith was Finance Director for TCI. From 1990 to 1993, Ms. Smith was Finance Counsel for TCI. Ms. Smith earned a B.S. with honors in accounting from the University of Missouri and a J.D. with honors from the University of Denver. Rodney M. Royse is Vice President and Senior Executive Director, Business Development of ICM, IMI and IPCC. Mr. Royse joined ICM in 1990. From 1988 to 1990, Mr. Royse was a financial analyst at Salomon Brothers Inc in the Corporate Finance Group. Mr. Royse earned a B.A. in Economics from Stanford University. Thomas R. Stapleton is Vice President and Senior Executive Director, Chief Accounting Officer of ICM, IMI and IPCC, and of IPCC. Prior to joining ICM in 1989, Mr. Stapleton was a Manager with PricewaterhouseCoopers LLP, the Company's independent accountants. Mr. Stapleton was previously employed by Bank of America in asset-based financing. Mr. Stapleton earned a B.S. degree with honors in Business Administration from San Francisco State University. Donna Dearman is the Executive Director of Human Resources of ICM, IMI and IPCC. Ms. Dearman joined IMI in 1989 as a payroll and benefits specialist. She was later promoted to the position payroll manager, then benefits manager and lastly Regional Human Resources Manager before succeeding Ms. de Latour as Executive Director of Human Resources. KEY OPERATING MANAGEMENT The following persons hold key operating management positions with ICM or IMI:
NAME AGE POSITION ---- --- -------- F. Steven Crawford....................... 50 Senior Executive Director, Chief Operating Officer Julaine A. Smith......................... 42 Controller Bruce J. Stewart......................... 34 General Counsel and Executive Director of Communications Kenneth A. Wright........................ 43 Executive Director of Engineering and Telecommunications Donna K. Young........................... 50 Development Executive Director of Marketing and Ad Sales
F. Steven Crawford is the Chief Operating Officer and Senior Executive Director for ICM. Prior to joining ICM on October 1, 1996, Mr. Crawford was Senior Vice President of E. W. Scripps Company from September 1992 to September 1996 and was Chief Operating Officer of Scripps Cable serving approximately 750,000 subscribers. Mr. Crawford was Vice President of Scripps Cable's 120 121 operations in the Southeast from September 1990 to September 1992. Mr. Crawford serves on the Board of Directors of the Cable Advertising Bureau. Mr. Crawford earned a B.S. degree in business management and a M.B.A. degree in finance from Valdosta State University. Julaine A. Smith is Operations Controller of IMI. Ms. Smith joined IMI in 1994. Prior to joining IMI, Ms. Smith was, from 1993 to 1994, the Director of Financial Reporting for Pacific Telesis Group. Ms. Smith also worked, from 1991 to 1992, as the Accounting Manager for the domestic cellular operations of PacTel Corporation (now known as AirTouch Communications). Ms. Smith completed her public accounting training at the San Francisco office of PricewaterhouseCoopers LLP. Ms. Smith is a Certified Public Accountant and earned a B.S. in Business Administration, Accounting from California State University at Hayward. Bruce J. Stewart is General Counsel and Executive Director of Communications of IMI. Mr. Stewart joined IMI as Counsel in January 1993, and served in this position until August 1994, when he was appointed General Counsel. Mr. Stewart is a member of the New York State Bar. Prior to joining IMI, Mr. Stewart served as legal counsel from 1991 to 1993 at Scholastic Productions, Inc., a subsidiary of Scholastic, Inc. located in New York City. From 1990 to 1991, Mr. Stewart worked in New York with the Law Firm of Malcolm A. Hoffman on commercial contract matters. Mr. Stewart earned a B.A from Holy Cross College and a J.D. from Case Western Reserve University Law School. Kenneth A. Wright is the Executive Director of Engineering and Telecommunications Development of IMI. He directs the engineering of the Company's and Related InterMedia Entities' cable systems. Prior to joining IMI in February 1995, Mr. Wright was, from 1991 to 1995, Director of Technology for Jones Intercable which manages cable systems serving approximately 1.5 million subscribers. Before joining Jones Intercable, Mr. Wright was Director of Engineering for the Western Division of United Artists Cable which was comprised of systems in 11 states serving approximately 700,000 subscribers. Prior to that, he was a State Engineering Manager for Centel Cable. Mr. Wright earned a B.S. from Western Michigan University and a Master of Telecommunications and a Master level certificate in Global Business and Culture from the University of Denver. Donna K. Young is the Executive Director of Marketing and Ad Sales of IMI. Ms. Young is responsible for national marketing programs, including customer acquisition, customer retention and new product development. Prior to joining IMI in November 1994, Ms. Young was Vice President for Business Development from 1989 to 1994 for KBLCOM, Inc., then an 800,000- subscriber MSO based in Houston. Ms. Young is on the Board of Directors of the Cable Television Administration and Markets Society. A native of Shelbyville, Tennessee, Ms. Young earned a Ph.D. in educational and organizational psychology from the University of Tennessee in Knoxville. ITEM 11. EXECUTIVE COMPENSATION None of the employees of the Company are deemed to be executives or officers of the Company. Services of the non-operating executives, key operating management and other employees of ICM or IMI are provided to the Company in exchange for fees pursuant to ICP-IV's Partnership Agreement and other agreements for services. The executives, key operating management and other employees of ICM or IMI who provide services to the Company are compensated by ICM or IMI and therefore receive no compensation from the Company. No portion of the fees paid by the Company is allocated to specific employees for the services performed by ICM or IMI for the Company. See Item 13 "Certain Relationships and Related Transactions -- Management by ICM-IV LLC" and "-- Services to be Rendered to the Company by IMI." 121 122 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information concerning the partnership interests in ICP-IV owned by each person known to ICP-IV to own beneficially more than a five percent non-preferred equity interest and by the executives of IMI as a group.
NAMES AND ADDRESSES OF BENEFICIAL OWNERS TYPE OF INTEREST PERCENTAGE ---------------------------------------- ---------------- ---------- Tele-Communications, Inc................ Limited Partner 49.6% 5619 DTC Parkway, 11th Floor Englewood, CO 80111 NationsBanc Investment Corp............. Limited Partner 9.5%(1) NationsBank Corporate Center 100 North Tryon Street Charlotte, NC 28255 IP Holdings L.P......................... Limited Partner 7.9% c/o Centre Partners 30 Rockefeller Plaza, Suite 5050 New York, NY 10020 Mellon Bank, N.A., as Trustee for Third Plaza Trust and Fourth Plaza Trust. Limited Partner 6.7%(2) 1 Mellon Bank Center Pittsburgh, PA 15258-0001 Sumitomo Corp........................... Limited Partner 6.1% Sumitomo Kanda Building 24-4, Kanda Nishikicho 3-chome Chiyoda-ku, Tokyo 101, Japan Executives of IMI as a Group (5 persons). General Partner/ 1.4%(3) Limited Partner
- ---------- (1) Includes investments in ICP-IV by NationsBanc Investment Corp. and affiliates thereof. (2) The Chase Manhattan Bank acts as the trustee (the "Plaza Trustee") for each of Third Plaza Trust and Fourth Plaza Trust (collectively, the "Trusts"), two trusts under and for the benefit of certain employee benefit plans of General Motors Corporation ("GM") and its subsidiaries. The limited partnership interests may be deemed to be owned beneficially by General Motors Investment Management Corporation ("GMIMCo"), a wholly owned subsidiary of GM. GMIMCo's principal business is providing investment advice and investment management services with respect to the assets of certain employee benefit plans of GM and its subsidiaries and with respect to the assets of certain direct and indirect subsidiaries of GM and associated entities. GMIMCo is serving as the Trusts' investment manager with respect to the limited partnership interests and in that capacity, it has the sole power to direct the Plaza Trustee as to the voting and disposition of the limited partnership interests. Because of the Plaza Trustee's limited role, beneficial ownership of the limited partnership interests by the Plaza Trustee is disclaimed. (3) Robert J. Lewis is the majority shareholder of IMI, and IMI is the managing member of ICM-IV LLC. See Item 13 "Certain Relationships and Related Transactions -- Managing General Partner." No executive of IMI or IPCC holds a direct interest in ICP-IV. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGING GENERAL PARTNER Robert J. Lewis together with members of his immediate family own all of the outstanding stock of IMI. IMI has a .002% general partner interest in ICM-IV and is the managing general partner of ICM-IV. IMI also owns 95% of the equity interests in ICM-IV LLC. ICM-IV LLC holds a .001% general partner interest in ICP-IV and is the managing general partner of the Company. ICM-IV LLC is also the .01% managing general partner of certain of ICP-IV's subsidiaries. 122 123 Limited partners have the right to remove the Managing General Partner in certain circumstances. INTERMEDIA PARTNERS IV, CAPITAL CORP. 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. THE RELATED INTERMEDIA ENTITIES The Related InterMedia Entities and the Company are a series of partnerships and corporations founded by Leo J. Hindery, Jr. to own and operate cable television systems in the United States. Mr. Hindery formed the first of the Related InterMedia Entities, IP-I, in early 1988 with the financial backing of TCI. Through ICM-IV, Mr. Hindery had managed ICP-IV and its subsidiaries. Upon completion of his transition to TCI, Mr. Hindery no longer holds a controlling interest in IMI, IPCC, ICM-IV, or any of the Related InterMedia Entities or their respective management partnerships. See Item 10 "Directors and Executive Officers of the Registrant -- General Partner" and "-- Executives." Although each of the Related InterMedia Entities and the Company are distinct legal entities, they are operated as a cohesive group. Accordingly, they enjoy operating efficiencies from centralization of certain common functions. Clustering of the Company's operations by geographic location is also intended to contribute to operating efficiencies and revenue opportunities. In order to achieve certain operating economies of scale and to allocate certain administrative services equitably to all of the Related InterMedia Entities and the Company, Mr. Hindery formed IMI. Mr. Lewis is the majority shareholder of IMI. IMI performs the accounting, marketing, engineering, administrative, operations, legal and rate regulation functions for all of the Related InterMedia Entities and the Company at cost. Generally, IMI's costs are allocated to each of the Related InterMedia Entities and the Company on a per subscriber basis. SERVICES TO BE RENDERED TO THE COMPANY BY IMI Certain of ICP-IV's subsidiaries have entered into agreements with IMI, pursuant to which IMI provides accounting, operational, marketing, engineering, legal, rate regulation and other administrative services to the Company at cost (the "Services Agreements"). IMI provides similar services to all of the Related InterMedia Entities' operating companies. IMI charges certain costs to the Company primarily based on the Company's number of basic subscribers as a percentage of total basic subscribers for all of the Related InterMedia Entities' systems. In addition to changes in IMI's cost of providing such services, changes in the number of the Company's basic subscribers and/or changes in the number of basic subscribers of the Related InterMedia Entities' operating companies will affect the level of IMI costs charged to the Company. The Company believes that the terms of the Services Agreements are more favorable than the terms that could be obtained by unaffiliated third parties in arm's-length negotiations with IMI. The Partnership Agreement requires that to the extent amounts paid to affiliates, including ICM-IV, IMI or partners, exceed the amounts that would be paid under terms afforded by unrelated third parties, such excess will result in corresponding reductions in the Administrative Fee (as defined herein). The payment to such affiliate of any such amount in excess of the Administrative Fee requires the approval of 70.0% in interest of the limited partners. MANAGEMENT BY ICM-IV LLC ICM-IV LLC manages the Company's cable systems and such management is administered by IMI, effective January 1, 1998, under ICM-IV LLC's supervision pursuant to ICP-IV's Partnership Agreement. The Partnership Agreement provides that this management relationship continues in effect with respect to each cable television system owned by the Company. ICM-IV LLC is authorized to provide management services that include (i) entering into contracts and performing the resulting obligations, (ii) managing the assets of the Company and employing such personnel as may be necessary or appropriate, (iii) controlling bank accounts and drawing orders for the payment of money, (iv) collecting income and payments due, (v) keeping the books and records, and hiring independent certified public accountants, (vi) paying payables and other expenses, (vii) handling Company claims, (viii) administering 123 124 the financial affairs, making tax and accounting elections, filing tax returns, paying liabilities and distributing profits to ICP-IV's partners, (ix) borrowing money on behalf of the Company, (x) causing the Company to purchase and maintain liability insurance, (xi) commencing or defending litigation that pertains to the Company or any of its assets and investigating potential claims, (xii) executing and filing fictitious business name statements and similar documents, (xiii) admitting additional limited partners and permitting additional capital contributions as provided in the Partnership Agreement and admitting an assignee of an existing limited partner's interest to be a substituted limited partner and (xiv) terminating ICP-IV pursuant to the terms of the Partnership Agreement. The term of the Partnership Agreement is until December 31, 2007 unless earlier dissolved under certain conditions specified in the Partnership Agreement. For its services under certain administration agreements, IMI receives a fee (the "Administrative Fee") equal to 1.0% of the total initial non-preferred equity contributions that have been made to the Company determined as of the beginning of each calendar quarter in each fiscal year; however, if the acquisition of a cable television system is made with debt financing of more than two-thirds of the purchase price of such cable television system, the Partnership Agreement provides that capital contributions of one-third of such purchase price will be deemed to have been made and the Administrative Fee will be paid on such deemed contributions. When any such debt financing is replaced with actual non-preferred capital contributions of the partners, the Partnership Agreement provides that the Administrative Fee will be based on such actual capital contributions rather than a deemed contribution for such amount. The Company believes that the terms in the Partnership Agreement concerning IMI's management services are more favorable than the terms that could be obtained by unaffiliated third parties in arm's-length negotiations. CERTAIN OTHER RELATED TRANSACTIONS IPWT. On July 30, 1996 pursuant to the IPWT Contribution Agreement, among (i) ICP-IV, (ii) IP-I, formerly the 80.1% general partner and 9.9% limited partner of IPWT and (iii) GECC, formerly the 10.0% limited partner of IPWT and creditor as to a $55.8 million principal amount of debt owed by IPWT, ICP-IV acquired the IPWT partnership interests and debt for total consideration of $72.5 million. GECC transferred to the Company its $55.8 million note and related interest receivables of approximately $3.4 million owed by IPWT to GECC in exchange for (i) approximately $22.5 million in cash, (ii) a $25.0 million Preferred Limited Partner Interest and (iii) a $11.7 million limited partnership interest in ICP-IV. ICP-IV contributed the acquired partnership interests in IPWT to the Operating Partnership, which, in turn, contributed a 1.0% limited partnership interest in IPWT to IP-TN. See Item 1 "The Company -- Acquisitions." RMH. On July 30, 1996 IP-IV acquired RMH and its wholly owned subsidiary, RMG, pursuant to a stock purchase agreement between IP-IV and ICM-V, the general partner of IP-V. Prior to the acquisition, IP-V owned the outstanding equity of RMH. The total transaction is valued at approximately $376.3 million. As part of the acquisition of RMH, TCID-IP V, Inc., which was the limited partner of IP-V and is an affiliate of TCI, converted its outstanding loan to IP-V into a partnership interest and received in dissolution thereof $12.0 million in RMH Preferred Stock and approximately $0.037 million in RMH Class B Common Stock. See Item 1 "The Company -- Acquisitions." TCI Greenville/Spartanburg. The TCI Entities, which are wholly owned subsidiaries of TCI, have contributed the Greenville/Spartanburg System to the Company pursuant to the contribution agreement (the "G/S Contribution Agreement") by and among ICP-IV and TCI of Greenville, Inc., TCI of Piedmont, Inc. and TCI of Spartanburg, Inc., each of which is a wholly owned subsidiary of TCI, for total consideration of $238.9 million. The Company subsequently contributed these assets to IP-TN, a subsidiary of ICP-IV. See Item 1 "The Company -- Acquisitions." IP-I. Pursuant to a letter agreement, ICP-IV has agreed to provide InterMedia Partners, a California limited partnership ("IP-I"), tag along rights if ICP-IV sells (i) substantially all of its assets in a single transaction, or (ii) a portion of its assets constituting an identifiable cable television system which has its primary headend site within fifty miles of the primary headend site of a cable television system owned by IP-I, to an entity not controlled by Leo J. Hindery, Jr. ICM-IV. Pursuant to the Partnership Agreement, ICM-IV funded its capital contributions of $3.8 million to ICP-IV with cash of $2.0 million and notes payable to ICP-IV of $1.8 million. These $1.8 million notes were paid off with proceeds from a loan for a like amount from IP-IV to ICM-IV. The promissory note from IP-IV bears interest at an averaged rate based upon interest rates accruing on all loans pursuant to which IP-IV has borrowed funds and matures at the earlier of July 31, 1998 or the date on which IP-IV demands payment. 124 125 CERTAIN OTHER RELATIONSHIPS The Company is a party to an agreement with SSI, an affiliate of TCI, pursuant to which SSI provides certain cable programming to the Company at the rate available to TCI plus an administrative fee. Management believes that these rates are at least as favorable as the rates that could be obtained through arm's-length negotiations with third parties. The Company's programming fees charged by SSI for the years ended December 31, 1996, 1997 and 1998 amounted to $17.5 million, $41.1 million and $46.9 million, respectively. 125 126 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as a part of this report: (1) Financial Statements-- See Index to Financial Statements on page 51 of this Form 10-K. (2) Financial Statement Schedules-- See Index to Financial Statements on page 51 of this Form 10-K. (3) Exhibits-- See Index to Exhibits on page 127 of this Form 10-K. (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 December 31, 1998. 126 127 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: March 30, 1999. 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. Smith, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substation and resubstation, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, and fully to all intents and purposes as he might or could do in person, hereby ratifying and conforming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ROBERT J. LEWIS President, Chief Executive Officer and Sole Director of March 30, 1999 - ---------------------------- InterMedia Management, Inc. (principal executive Robert J. Lewis officer) /s/ EDON V. SMITH Chief Financial Officer of InterMedia Management, Inc. March 30, 1999 - ---------------------------- (principal financial officer) Edon V. Smith /s/ THOMAS R. STAPLETON Vice President of InterMedia Management, Inc. March 30, 1999 - ---------------------------- (principal accounting officer) Thomas R. Stapleton
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual report or proxy material has been sent to holders of the Notes. Subsequent to the filing of this annual report on Form 10-K a copy of the same shall be furnished to the holders of the Notes. 127 128 Schedule I. Condensed Financial Information of Registrant INTERMEDIA CAPITAL PARTNERS IV, L.P. BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------------------------- 1997 1998 ------------ ------------ ASSETS Escrowed investments held to maturity....................................... $ 29,359 $ 30,923 Interest receivable on escrowed investments................................. 1,412 781 ------------ ------------ Total current assets............................................... 30,771 31,704 Escrowed investments held to maturity....................................... 31,148 Intangible assets, net...................................................... 11,101 10,314 Investment in IP-IV......................................................... 234,955 214,798 ------------ ------------ Total assets....................................................... $ 307,975 $ 256,816 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Accrued interest............................................................ $ 13,688 $ 13,688 ------------ ------------ Total current liabilities.......................................... 13,688 13,688 Long-term debt.............................................................. 292,000 292,000 ------------ ------------ Total liabilities.................................................. 305,688 305,688 ------------ ------------ Commitments and contingencies PARTNERS' CAPITAL Preferred limited partnership interest...................................... 24,888 24,888 Junior preferred limited partnership trust.................................. (1,423) General and limited partners' capital....................................... (20,751) (70,487) Note receivable from partner................................................ (1,850) (1,850) ------------ ------------ Total partners' capital............................................ 2,287 (48,872) ------------ ------------- Total liabilities and partners' capital............................ $ 307,975 $ 256,816 ============ ============
See accompanying notes to the condensed financial information 128 129 INTERMEDIA CAPITAL PARTNERS IV, L.P. STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1997 1998 ------------ ---------- ------------ Revenues ................................................................... $ $ $ Loss from operations........................................................ Other income (expense): Interest income ...................................................... 2,189 3,968 2,636 Interest expense ..................................................... (14,138) (33,543) (33,638) Equity in net loss of IP-IV .......................................... (15,780) (42,038) (20,432) ------------ ---------- ----------- Net loss ................................................................... (27,729) (71,613) (51,434) Other Comprehensive income: Equity in other comprehensive income of IP-IV............................... 275 ------------ ---------- ----------- Comprehensive income........................................................ $ (27,729) $ (71,613) $ (51,159) ============ ========== ===========
See accompanying notes to condensed financial information 129 130 INTERMEDIA CAPITAL PARTNERS IV, L.P. 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, 1995 $ (43) $ $ (7) $ (575) $ $ (625) Cash Contributions .......... 1,913 188,637 190,550 Notes receivable from General Partner ........... 1,850 (1,850) In-kind contributions, historical cost basis ...... 237,805 237,805 Conversion of GECC debt to equity ................. 25,000 11,667 36,667 Allocation of RMG's and IPWT's historical equity balances ............ (2,719) (239,368) (242,087) Distribution ................ (119,775) (119,775) Syndication costs ........... (69) (10) (911) (990) Net loss .................... (311) (27,418) (27,729) ------- ------- --------- --------- -------- --------- Balance at December 31, 1996 24,888 716 50,062 (1,850) 73,816 Cash contributions .......... 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 ... (1,423) 1,423 Net loss .................... (51,434) (51,434) Other Comprehensive income .. 275 275 ------- ------- --------- --------- -------- --------- Balance at December 31, 1998 $24,888 $(1,423) $ $ (70,487) $ (1,850) $ (48,872) ======= ======= ========= ========= ======== =========
See accompanying notes to consolidated financial statements 130 131 INTERMEDIA CAPITAL PARTNERS IV, L.P. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1996 1997 1998 --------------- --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................... $ (27,729) $ (71,613) $ (51,434) Equity in net loss of IP-IV........................ 15,780 42,038 20,432 Amortization expense............................... 268 732 787 Changes in assets and liabilities: Interest receivable.............................. (2,189) 777 631 Accounts payable and accrued liabilities......... (3) Payable to affiliate............................. (625) Accrued interest................................. 13,870 (182) -------------- -------------- ------------- Cash flows from operating activities.................. (628) (28,248) (29,584) -------------- -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in IP-IV............................... (260,304) (84) Purchases of escrowed investments.................. (88,755) Proceeds from maturity of escrowed investments .... 28,248 29,584 -------------- -------------- ------------- Cash flows from investing activities.................. (349,059) 28,164 29,584 -------------- -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from long-term debt..................... 292,000 Contributed capital................................ 190,550 84 Partner distribution............................... (119,775) Debt issue costs................................... (12,098) Syndication costs.................................. (990) -------------- -------------- ------------- Cash flows from financing activities.................. 349,687 84 -------------- -------------- ------------- Net change in cash.................................... Cash and cash equivalents, beginning of period........ -------------- -------------- ------------- Cash and cash equivalents, end of period.............. $ $ $ ============== ============== =============
See accompanying notes to condensed financial information. 131 132 INTERMEDIA CAPITAL PARTNERS IV, L.P. NOTES TO CONDENSED FINANCIAL INFORMATION 1. BASIS OF PRESENTATION The condensed financial information presents the unconsolidated financial statements of InterMedia Capital Partners IV, L.P. ("ICP-IV"). ICP-IV's majority-owned subsidiaries are recorded using the equity basis of accounting. Refer to the Notes to the consolidated financial statements for descriptions of material contingencies, escrowed investments held to maturity and significant provisions of long-term obligations and guarantees of ICP-IV. 132 133 SCHEDULE II INTERMEDIA CAPITAL PARTNERS IV, L.P. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (DOLLARS IN THOUSANDS)
ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT JANUARY 1, BAD DEBT OTHER DECEMBER 31, DESCRIPTION 1997 EXPENSE ACCOUNTS(1) WRITE-OFFS 1997 ----------- ---------- ----------- ----------- ----------- ------------ Allowance for doubtful accounts...................... $ 2,130 $ 4,260 $ (8) $ (4,697) $ 1,685
ADDITIONS ------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT JANUARY 1, BAD DEBT OTHER DECEMBER 31, DESCRIPTION 1998 EXPENSE ACCOUNTS WRITE-OFFS 1998 ----------- ---------- ----------- ----------- ----------- ------------ Allowance for doubtful accounts...................... $ 1,685 $ 3,389 $ $ (3,079) $ 1,995
- ---------- (1) Represents allowance for doubtful accounts balance sold in connection with the Company's sale of certain of its cable television assets in December 1997. 133 134 EXHIBIT INDEX
EXHIBIT SEQUENTIALLY NUMBER EXHIBIT NUMBERED PAGES ------ ------- -------------- *2.1 Asset Purchase and Sale Agreement dated as of October 25, 1995 by and between ParCable, Inc. and InterMedia Partners of Tennessee, L.P. and amendment thereto. (Exhibits and schedules omitted. The Company agrees to furnish a copy of any exhibit or schedule to the Commission upon request)................................... *2.2 Asset Purchase Agreement dated October 18, 1995 between Time Warner Entertainment Company, L.P. and InterMedia Partners of Tennessee, L.P. and amendment thereto. (Exhibits and schedules omitted. The Company agrees to furnish a copy of any exhibit or schedule to the Commission upon request)............. *2.3 Stock Purchase Agreement dated as of July 26, 1996 between InterMedia Capital Management V, L.P. and InterMedia Partners IV, L.P. .................................. *2.4 Contribution Agreement dated as of April 30, 1996 by and between InterMedia Capital Partners IV, L.P., InterMedia Partners and General Electric Capital Corporation and amendments thereto. (Schedules omitted. The Company agrees to furnish a copy of any schedule to the Commission upon request)........................ *2.5 Contribution Agreement dated as of March 4, 1996 by and between InterMedia Partners IV, L.P., TCI of Greenville, Inc., TCI of Piedmont, Inc. and TCI of Spartanburg, Inc. and amendments thereto. (Exhibits and schedules omitted. The Company agrees to furnish a copy of any exhibit or schedule to the Commission upon request)......................................................................... *2.6 Exchange Agreement dated as of December 18, 1995 by and between TCI Communications, Inc. and InterMedia Partners Southeast and amendment thereto. (Exhibits and schedules omitted. The Company agrees to furnish a copy of any exhibit or schedule to the Commission upon request)................................... 3.3 Amended and Restated Agreement of Limited Partnership of InterMedia Capital Partners IV, L.P. dated as of March 31, 1998 by and among InterMedia Capital Management, LLC, InterMedia Capital Management IV, L.P. and various other limited partners...................................................................... *4.2 Indenture dated as of July 30, 1996 by and among InterMedia Capital Partners IV, L.P., InterMedia Partners IV, Capital Corp. and The Bank of New York, as trustee............................................................................... *4.3 Pledge and Escrow Agreement dated as of July 30, 1996 by and among InterMedia Capital Partners IV, L.P., InterMedia Partners IV, Capital Corp., NationsBanc Capital Markets, Inc. and The Bank of New York, as trustee and as collateral agent. (Annex I omitted. The Company agrees to furnish a copy of Annex I to the Commission upon request).............................................................. *10.1 Revolving Credit and Term Loan Agreement dated as of July 30, 1996 among InterMedia Partners IV, L.P. and The Bank of New York, as Administrative Agent, and The Bank of New York, NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc., as Arranging Agents, and NationsBank of Texas, N.A. and Toronto Dominion (Texas), Inc., as Syndication Agents, and the Financial Institution Parties thereto........................................................... *10.2 Security and Hypothecation Agreement dated as of July 30, 1996 by InterMedia Partners of West Tennessee, L.P. in favor of The Bank of New York in its capacity as Agent for the benefit of the Lenders. (InterMedia Partners IV, L.P., InterMedia Capital Partners IV, L.P., InterMedia Partners of Tennessee, InterMedia Partners Southeast, Robin Media Holdings, Inc. and Robin Media Group each have entered into agreements which are substantially identical in all material respects to Exhibit 10.2).................................................................................
134 135 *10.3 General Guarantee dated July 30, 1996 by and among InterMedia Partners of West Tennessee, L.P. in favor of The Bank of New York, as agent to the financial institutions. (InterMedia Capital Partners IV, L.P., InterMedia Partners Southeast, InterMedia Partners of Tennessee, Robin Media Holdings, Inc. and Robin Media Group each have entered into agreements which are substantially identical in all material respects to Exhibit 10.3).................................................... **10.4 Satellite Services, Inc. Programming Supply Agreement dated January 28, 1996, by and between Satellite Services, Inc. and InterMedia Partners IV, L.P.................. *** 10.12 Consent and Second Amendment to Revolving Credit and Term Loan Agreement, dated as of July 30, 1996 and amended as of August 6, 1996, dated as of February 28, 1997 among InterMedia Partners IV, L.P. and The Bank of New York, as Administrative Agent, and The Bank of New York, NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc., as Arranging Agents, and NationsBank of Texas, N.A. and Toronto Dominion (Texas), Inc., as Syndication Agents and the Financial Institution Parties thereto.................................. 12.1 Computation of Ratios................................................................. 21.1 List of Subsidiaries of InterMedia Capital Partners IV, L.P........................... 24.1 Power of Attorney (included on page 127).............................................. 27.1 Schedule of Financial Data for InterMedia Capital Partners IV, L.P...................
- ---------- * Incorporated by reference to the same exhibit number to the Company's Form S-4 Registration Statement File No. 333-11893. ** Incorporated by reference to the same exhibit number to the Company's Amendment No. 2 to Form S-4 Registration Statement File No. 333-11893. Confidential treatment has been previously granted for portions which have been omitted pursuant to Rule 406 and filed separately with the Commission. *** Incorporated by reference to the same exhibit number to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, file No. 333-11893. 135 EX-3.3 2 AGREEMENT OF LIMITED PARTNERSHIP DATED 3/31/98 1 EXHIBIT 3.3 Execution Copy INTERMEDIA CAPITAL PARTNERS IV, L.P. AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP Dated as of March 31, 1998 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 General Provisions.........................................................2 1.1 Formation of the Partnership...............................................2 1.2 Name.......................................................................2 1.3 Principal Place of Business................................................2 1.4 Agent for Service of Process...............................................3 1.5 Business of the Partnership................................................3 1.6 Term of the Partnership....................................................4 ARTICLE 2 Capital Contributions, Withdrawals and Capital Accounts....................4 2.1 Contributions of Capital...................................................4 (a) In General..........................................................4 (b) General Partner as Limited Partner..................................4 (c) Additional Limited Partners.........................................4 (d) Additional Contributions by Limited Partners........................5 (e) Additional Contributions by General Partner.........................5 (f) Payment of Capital Contributions....................................5 (g) General Partner Obligations.........................................6 (h) Limited Partner Obligations.........................................6 (i) Return of Certain Distributions.....................................6 2.2 Withdrawals of Capital Accounts............................................7 (a) Withdrawals in General..............................................7 (b) Required Withdrawals................................................8 (c) Effective Date of Withdrawal........................................8 (d) Effect of Withdrawal................................................8 (e) Limitations on Withdrawal of Capital Account........................9 (f) Interest on Capital Accounts........................................9 2.3 Capital Accounts...........................................................9 ARTICLE 3 Profits and Losses; Distributions........................................ 10 3.1 Profits and Losses....................................................... 10 3.2 Partnership Expenses..................................................... 15 3.3 Distributions............................................................ 15 ARTICLE 4 Management of Partnership................................................ 17 4.1 Management Generally..................................................... 17 4.2 Specific Authority of the General Partner................................ 18 4.3 Reports.................................................................. 20 4.4 Valuation of Assets...................................................... 20 4.5 Revaluation of Partnership Assets........................................ 21 4.6 Administration Fee and Expenses.......................................... 21 (a) Administration Fee................................................ 21 (b) General Partner Expenses.......................................... 22
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Page ---- 4.7 Rights of the Limited Partners........................................... 22 (a) No Control........................................................ 22 (b) Consents.......................................................... 22 (c) Annual Operating Plan............................................. 25 (d) Advisory Committee................................................ 25 (e) Dissolution or Bankruptcy of a Limited Partner.................... 27 4.8 Successor General Partner................................................ 27 (a) Removal of the General Partner.................................... 27 (b) Withdrawal of the General Partner................................. 29 (c) Hindery's Return to the Partnership............................... 30 (d) General Provision Regarding Approvals by the Limited Partners..... 30 (e) Right To Recover Damages.......................................... 30 4.9 Sale Initiation Rights................................................... 30 4.10 Nonvoting Interests...................................................... 33 ARTICLE 5 Tax Matters and Reports.................................................. 34 5.1 Filing of Tax Returns.................................................... 34 5.2 Tax Reports to Current and Former Partners............................... 34 5.3 Restriction on General Partner Activity with Respect to Publicly Traded Partnerships...................................................... 34 5.4 Duties and Obligations of the General Partner with Respect to Publicly Traded Partnerships...................................................... 35 5.5 Books and Records........................................................ 35 5.6 Fiscal Year.............................................................. 35 5.7 Method of Accounting..................................................... 35 ARTICLE 6 Conflicts of Interest; Indemnification; Exculpation...................... 35 6.1 Outside Activities....................................................... 35 6.2 Contracts with the General Partner, Affiliates and Limited Partners...... 37 6.3 Indemnification of the Partners.......................................... 37 6.4 Exculpation.............................................................. 38 ARTICLE 7 Termination and Dissolution.............................................. 39 7.1 No Dissolution........................................................... 39 7.2 Events of Dissolution.................................................... 39 7.3 Winding-Up............................................................... 39 7.4 Order of Liquidating Payments and Distributions.......................... 40 7.5 Termination.............................................................. 40 7.6 Government Regulation.................................................... 41 7.7 Orderly Methods of Liquidating Payments.................................. 43
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Page ---- ARTICLE 8 Transfer of Interest, Failure To Pay Capital Contributions, Beneficial Owners................................................................... 43 8.1 Transfer of Partnership Interest......................................... 43 8.2 Transfer of IP Holdings Affiliates' Interests............................ 44 8.3 Indemnification.......................................................... 44 8.4 Failure To Pay Capital Contributions..................................... 45 8.5 Increase in Beneficial Owners............................................ 46 ARTICLE 9 Miscellaneous............................................................ 46 9.1 Notices.................................................................. 46 9.2 Governing Law............................................................ 46 9.3 Amendments............................................................... 46 9.4 Entire Agreement......................................................... 47 9.5 Waiver of Partition...................................................... 47 9.6 Consents................................................................. 47 9.7 Successors............................................................... 47 9.8 Confidentiality of Investors............................................. 47 9.9 Counterparts............................................................. 47 9.10 Severability............................................................. 47 9.11 Affiliate................................................................ 47 9.12 Power of Attorney........................................................ 48 9.13 Nonrecourse.............................................................. 48 9.14 Foreign Person........................................................... 48
-iii- 5 DEFINITIONS
Term Section - ---- ------- 1933 Act............................................................ Legend No. 1 Abandonment Date.................................................... 4.9(d) Act................................................................. 1.1 Adjacent Systems.................................................... 6.1 Administration Fee.................................................. 4.6(a) Adverse Regulatory Development ..................................... 7.6(b) Advisory Committee.................................................. 4.7(d) Affected Partner.................................................... 7.6(b) Agreement........................................................... Preamble AVR................................................................. Exhibit 2 BHC LP ............................................................. 4.10 Capital Account..................................................... 2.3 Capital Contributions............................................... 2.1(a) Code................................................................ 2.3 FRB ................................................................ 4.10 GECC................................................................ Preamble General Partner..................................................... Preamble Greenville/Spartanburg Contribution Agreement....................... Exhibit 1 Note 4 ICM-IV.............................................................. Preamble ICM LLC............................................................. Preamble IMI................................................................. 6.2 Income Tax Regulations.............................................. 2.3 Indemnified Person ................................................. 8.2(a) Indemnifying Person ................................................ 8.2(a) Interests........................................................... Legend No. 1 Investing Partnership............................................... 1.5(a) Investment Company Act.............................................. 2.2(b) IP.................................................................. Exhibit 1 Note 2 IP-I................................................................ 4.9(b) IP-IV............................................................... 1.5(a) IPSE................................................................ Exhibit 2 IPWT................................................................ Exhibit 1 Note 2 IPWT Contribution Agreement......................................... Exhibit 1 Note 2 Junior Preferred Limited Partner ................................... Preamble Junior Preferred Return ............................................ 3.3(d)(2) Limited Partners.................................................... Preamble Net Loss............................................................ 3.1(j)(4) New Partner......................................................... 2.1(f) Nonvoting Interests ................................................ 4.10 Notice Date......................................................... 4.9(d) Override Tax Distributions.......................................... 2.1(i)(B) Partnership......................................................... 1.1
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Term Section - ---- ------- Partnership Interest................................................ 3.1(a) Preferred Limited Partner .......................................... Preamble Preferred Return ................................................... 3.3(d)(1) Regulatory Change................................................... 7.6(b) Retrievable Tax Benefit............................................. 2.1(i)(B) RMG................................................................. Exhibit 2 Shortfall........................................................... 2.1(i) Systems............................................................. Exhibit 1 Note 4 TCI................................................................. 4.9(a) TCI Entities........................................................ Exhibit 1 Note 4 The Cablevision Company............................................. Exhibit 2
-v- 7 INTERMEDIA CAPITAL PARTNERS IV, L.P. AGREEMENT OF LIMITED PARTNERSHIP THE LIMITED PARTNERSHIP INTERESTS ("INTERESTS") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). SUCH INTERESTS ARE BEING OFFERED AND SOLD UNDER THE EXEMPTION PROVIDED BY SECTION 4(2) OF THE 1933 ACT AND/OR PURSUANT TO RULE 506 OF REGULATION D THEREUNDER. A PURCHASER OF ANY INTEREST MUST BE PREPARED TO BEAR THE ECONOMIC RISK OF THE INVESTMENT FOR AN INDEFINITE PERIOD OF TIME BECAUSE THE INTERESTS HAVE NOT BEEN REGISTERED UNDER THE 1933 ACT AND, THEREFORE, CANNOT BE SOLD UNLESS THEY ARE SUBSEQUENTLY REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THERE IS NO OBLIGATION OF THE PARTNERSHIP TO REGISTER THE INTERESTS UNDER THE 1933 ACT. THE AGREEMENT RESTRICTS TRANSFER OF THE INTERESTS. ACCORDINGLY, PURCHASE OF THE INTERESTS IS ONLY SUITABLE FOR INVESTORS WILLING AND ABLE TO ACCEPT THE ECONOMIC RISK OF THE INVESTMENT AND LACK OF LIQUIDITY. * * * THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP (this "Agreement"), originally entered into and effective as of March 19, 1996 by and among INTERMEDIA CAPITAL MANAGEMENT IV, L.P., a California limited partnership, as general partner ("ICM-IV"), GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GECC"), as the preferred limited partner (the "Preferred Limited Partner") with respect to, and only with respect to, a portion of its interest and as a limited partner with respect to the remainder of its interest, all as set forth on EXHIBIT 1 hereto, and the limited partners listed on the signature pages hereto, who together with such other persons or entities who hereafter shall be admitted as additional or substituted limited partners pursuant to the terms hereof, all of which shall be listed on EXHIBIT 1 hereto, collectively shall be referred to as the "Limited Partners," as amended as of November 27, 1996, and amended and restated in its entirety as of August 5, 1997, by and among INTERMEDIA CAPITAL MANAGEMENT, LLC, a Delaware limited liability company, as general partner ("ICM LLC" or the "General Partner"), ICM-IV, as a Limited Partner, GECC and the other Limited Partners listed on EXHIBIT 1 hereto, as amended August 5, 1997 and December 19, 1997, is hereby amended and restated in its entirety as of March 31, 1998, by and among the General Partner, GECC, TCI OF PIEDMONT, INC., a Delaware corporation, as the junior preferred limited partner (the "Junior Preferred Limited Partner"), and the other -1- 8 Limited Partners listed on EXHIBIT 1 hereto. Unless otherwise specifically set forth herein, the term Limited Partners shall include the Preferred Limited Partner and the Junior Preferred Limited Partner. The General Partner and the Limited Partners are collectively referred to as the Partners and individually as a Partner. W I T N E S S E T H: WHEREAS, the Partners desire to (i) create a junior preferred limited partnership interest subordinate to the preferred limited partnership interest held by the Preferred Limited Partner and (ii) convert the limited partnership interest held by TCI of Piedmont, Inc. to such junior preferred limited partnership interest; and WHEREAS, the Partners desire to admit TCI of Piedmont, Inc. to the Partnership as the Junior Preferred Limited Partner; and WHEREAS, the Partners consented to the preceding actions in that certain Consent of Partners of InterMedia Capital Partners IV, L.P. dated as of February 27, 1998; and WHEREAS, the Partners desire to amend and restate this Agreement to reflect the preceding actions, other related amendments and certain corrections: NOW, THEREFORE, in consideration of the mutual promises and agreements herein made and intending to be legally bound, the Partners hereby agree as follows: ARTICLE 1 General Provisions 1.1 Formation of the Partnership. The Partners hereby admit TCI of Piedmont, Inc. as the Junior Preferred Limited Partner of the Partnership and continue a limited partnership (the "Partnership") pursuant to the California Revised Limited Partnership Act (the "Act"). The Partnership shall continue without interruption as a limited partnership pursuant to the Act. The persons and entities listed as Limited Partners on EXHIBIT 1 to this Agreement shall continue as Limited Partners upon execution of this Agreement. 1.2 Name. The name of the Partnership shall be: InterMedia Capital Partners IV, L.P. The name of the Partnership may be changed by the General Partner upon compliance with applicable laws and after notice by the General Partner to the Limited Partners. 1.3 Principal Place of Business. The principal place of business of the Partnership shall be 235 Montgomery Street, Suite 420, San Francisco, California 94104. The principal place of business of the Partnership may be changed by the General Partner after notice to the Limited Partners. -2- 9 1.4 Agent for Service of Process. The agent for service of process for the Partnership and his address shall be Robert J. Lewis, 235 Montgomery Street, Suite 420, San Francisco, CA 94104. The agent for service of process of the Partnership may be changed by the General Partner upon notice to the Limited Partners. 1.5 Business of the Partnership. (a) The Partnership was organized for and continues to exist for the purpose of directly or indirectly making equity and debt investments in, including acting as a general partner and/or a limited partner of InterMedia Partners IV, L.P., a California limited partnership ("IP-IV") and various partnerships which operate cable television systems (each an "Investing Partnership"), and operating cable television systems and to engage in all necessary and appropriate activities and transactions as the General Partner may deem necessary, appropriate or advisable in connection therewith, provided, however, the Partnership will not make any investments, nor maintain any offices outside of the United States. Prior to January 1, 1996, the Partnership had no material assets or liabilities and had not engaged in any material business activities. (b) Pending the investment of Partnership funds as described in Section 1.5(a), and the distribution of funds as described in Section 3.3, the Partnership may invest in certificates of deposit and overnight time deposits in commercial banks with capital and surplus over five hundred million dollars ($500,000,000), commercial paper, money market funds, repurchase agreements and U.S. Treasury bills and other government obligations and any other short-term, investment grade highly liquid investments. (c) The Partnership may enter into, deliver and perform all contracts, agreements and other undertakings and engage in all activities and transactions that are necessary or appropriate to carry out the foregoing purposes. Without limiting the foregoing, the Partnership may: (i) exercise all rights, powers, privileges, and other incidents of ownership or possession with respect to Partnership property and investments; (ii) borrow or raise money and secure the payment of any obligations of the Partnership, IP-IV or an Investing Partnership by mortgage upon, or pledge or hypothecation of, all or any part of the assets of the Partnership, IP-IV or an Investing Partnership; (iii) engage personnel, whether part-time or full-time and do such other acts as the General Partner may reasonably deem necessary or advisable in connection with the maintenance and administration of the Partnership, IP-IV or an Investing Partnership and their investments; and (iv) engage attorneys, independent accountants, investment bankers, consultants or such other persons for the Partnership, IP-IV or an Investing Partnership as the General Partner may deem necessary or advisable. -3- 10 1.6 Term of the Partnership. The term of the Partnership shall be from the date the Certificate of Limited Partnership was filed with the California Secretary of State until December 31, 2007, unless the Partnership is earlier dissolved pursuant to Article 7. ARTICLE 2 Capital Contributions, Withdrawals and Capital Accounts 2.1 Contributions of Capital. (a) In General. The committed capital contributions ("Capital Contributions") of the Partners shall be contributed in cash, in the respective amounts set forth next to each Partner's name on EXHIBIT 1 attached hereto in the manner provided by Section 2.1(f). Notwithstanding the foregoing, committed Capital Contributions shall be contributed in the form of property pursuant to the Greenville/Spartanburg Contribution Agreement and the IPWT Contribution Agreement (both as defined on EXHIBIT 1 hereto). The General Partner shall contribute an amount of capital to the Partnership such that the General Partner's Capital Contribution will be at least one one-thousandth of one percent (.001%) of the aggregate Capital Contributions of all of the Partners (for the purposes of this calculation the original amount of the Capital Contribution of the Junior Preferred Limited Partner set forth in footnote 6 of EXHIBIT 1 shall be used), a portion of which may be contributed in the form of a note as set forth on EXHIBIT 1 hereto. (b) General Partner as Limited Partner. The General Partner shall also be a Limited Partner to the extent that it purchases an interest as a Limited Partner or it purchases or becomes a transferee of all of or any part of the interest of a Limited Partner, and to such extent shall be treated in all respects as a Limited Partner, and the consent of the Limited Partners to such a purchase or transfer and admission of the General Partner as a Limited Partner need not be obtained; provided, however, the General Partner shall not be entitled to consent as a Limited Partner on those matters set forth in Section 4.7(b)(iv). The General Partner's capital contributions referred to in Sections 2.1(a) and 2.1(e) hereof will be made in its capacity as the General Partner and such capital contribution as the General Partner will not entitle the General Partner to any rights of a Limited Partner. (c) Additional Limited Partners. Until the aggregate committed capital contributions to the Partnership total three hundred thirty-five million dollars ($335,000,000) (not including the preferred limited partner interest of the Preferred Limited Partner), and subject to the condition that each new Limited Partner shall execute a signature page of this Agreement, which execution shall be deemed to represent the execution of a counterpart of this Agreement, and certain other agreements in connection with its subscription, and such Limited Partner meets the suitability requirements imposed on the original Limited Partners pursuant to the subscription agreements, the General Partner may admit one or more additional Limited Partners and may appropriately amend this Agreement to reflect such admissions, only with the consent of seventy percent (70%) in interest of the Limited Partners. Admission of a new Limited Partner shall not be a cause for dissolution of the -4- 11 Partnership. Upon the aggregate committed capital contributions to the Partnership equaling three hundred thirty-five million dollars ($335,000,000) (not including the preferred limited partner interest of the Preferred Limited Partner), the General Partner may admit any additional Limited Partners to increase the aggregate committed capital contributions beyond three hundred thirty-five million dollars ($335,000,000) only with the consent of one hundred percent (100%) in interest of the Limited Partners or accept any additional commitment to make capital contributions from the Limited Partners only with the consent of ninety percent (90%) in interest of the Limited Partners; provided, however, that the General Partner shall offer, on a pro rata basis, preemptive rights in connection with any additional cash capital contributions to the existing Limited Partners and any such additional commitments to make cash capital contributions shall be on terms no more favorable than those offered to the existing Limited Partners. The Limited Partners will have fifteen (15) days from the date of the written notice to exercise such preemptive rights. (d) Additional Contributions by Limited Partners. Until the aggregate committed capital contributions to the Partnership total three hundred thirty-five million dollars ($335,000,000) (not including the preferred limited partner interest of the Preferred Limited Partner), the General Partner shall permit one or more Limited Partners to make additional contributions to the Partnership until July 31, 1997 and may appropriately amend this Agreement to reflect such additional contributions, without the consent of any Limited Partner. A Partner which desires to make such additional contributions during such period shall notify the General Partner of its desire to do so not later than fifteen (15) days before such proposed contribution. (e) Additional Contributions by General Partner. The General Partner shall from time to time make additional capital contributions to the extent required to cause its aggregate capital contributions to equal at least one one-thousandth of one percent (.001%) of the aggregate Capital Contributions of all Partners (for the purposes of this calculation the original amount of the Capital Contribution of the Junior Preferred Limited Partner set forth in footnote 6 of EXHIBIT 1 shall be used). Any such additional capital contribution required of the General Partner shall be made within ten (10) days of the capital contribution of the Limited Partner(s) giving rise to such requirement. (f) Payment of Capital Contributions. The Capital Contributions to be contributed in the form of property pursuant to the Greenville/Spartanburg Contribution Agreement or the IPWT Contribution Agreement shall be made at the time and in the manner set forth in those agreements which in the case of the Partners contributing assets pursuant to those agreements shall represent their entire commitment. In no event shall the TCI Entities be required to contribute more than forty-five percent (45%) of the total Capital Contributions to the Partnership (excluding from both the numerator and the denominator of such calculation the Capital Contributions of the Preferred Limited Partner with respect to the preferred limited partnership interest and the Capital Contributions of the Junior Preferred Limited Partner with respect to the junior preferred limited partnership interest). Except as otherwise agreed to by the Partnership and any Partner, the provisions of this Section 2.1(f) shall apply to all committed Capital Contributions to be made in cash. Included in the first capital call by the Partnership, the Partners will pay the portion of their committed Capital -5- 12 Contributions necessary to pay the organizational expenses of the Partnership up to a maximum of three hundred thousand dollars ($300,000) (in aggregate). The committed Capital Contributions of the Limited Partners shall be paid on fifteen (15) business days written notice in the following manner: (i) as the General Partner determines is necessary or appropriate for meeting the funding requirements of the Partnership or to comply with the Partnership's obligations to make capital contributions to IP-IV or any Investing Partnership, (ii) commencing on January 1, 1996, on the first day of each calendar quarter of each year to the extent determined necessary by the General Partner for the payment of Partnership expenses or the reimbursement of the General Partner for Partnership expenses described in Section 3.2; and (iii) as necessary to pay the Administration Fee as set forth in Section 4.6. The amount to be paid by each Partner in respect of each such capital call shall be determined by first requiring any additional Partner admitted to the Partnership pursuant to Section 2.1(c) (and any other Partner to the extent of any non-pro rata increase in its capital commitment pursuant to Section 2.1(d)) ("New Partner") to pay an amount such that the proportion of capital contributions paid by such New Partner in relation to the committed capital contributions of such New Partner is the same as the proportion of Capital Contributions previously made by the other Partners, other than Partners who contributed property pursuant to the Greenville/Spartanburg Contribution Agreement and the IPWT Contribution Agreement, in relation to the committed Capital Contributions of such other Partners, and then by dividing each Partner's committed Capital Contribution by the aggregate committed Capital Contributions of all the Partners and multiplying such fraction by the total remaining amount of capital to be called. In the event a Partner executes and contributes a promissory note in respect of its capital commitment, any payment of principal pursuant to such note shall constitute a funding of its Capital Contribution. No Capital Contributions for the Partnership or for investments in Investing Partnerships will be called by the General Partner after December 31, 2000. References herein to a Partner's Capital Contribution shall mean the amount of cash or the principal amount of any note contributed by the General Partner or the value of property contributed as set forth in the Greenville/ Spartanburg Contribution Agreement or the IPWT Contribution Agreement. (g) General Partner Obligations. The General Partner shall not be personally obligated to contribute cash or other assets to the Partnership to make up any reduction in the Capital Accounts of the Limited Partners either during the term of the Partnership or upon dissolution, subject to the obligation of the General Partner to return to the Partnership certain distributions as provided in the Act. (h) Limited Partner Obligations. Limited Partners shall not be personally obligated for the debts, liabilities and obligations of the Partnership or of any other Partner, except that, any other provision of this Agreement to the contrary notwithstanding, each Limited Partner shall only be obligated to make its full Capital Contribution to the Partnership in the amount set forth in EXHIBIT 1 hereto to the extent required by this Section 2.1, and each Limited Partner (and any former Limited Partner) shall be obligated to return to the Partnership distributions only to the extent provided in section 15666 of the Act. (i) Return of Certain Distributions. If upon the liquidation of the Partnership pursuant to Section 7.3 hereof, the Partners have not received the full amount described in -6- 13 Sections 3.3(d)(1), 3.3(d)(2), 3.3(d)(3) and 3.3(d)(4) hereof (such deficiency being referred to as the "Shortfall"), then notwithstanding anything in this Agreement to the contrary, including Section 2.1(g), ICM-IV shall be obligated to contribute to the Partnership the lesser of: (A) the amount necessary to provide the Partnership with sufficient funds to allow the Partnership to make distributions in an amount equal to the Shortfall; and (B) an amount equal to the sum of all distributions made to ICM-IV pursuant to Section 3.3(a) which are attributable to allocations of income and gain pursuant to Section 3.1(k)(6)(A) ("Override Tax Distributions"), but not in excess of the Retrievable Tax Benefit. For purposes of this Section 2.1(i), the term "Retrievable Tax Benefit" means an amount equal to the excess, if any, of the Override Tax Distributions over ICM-IV's net aggregate actual tax liability arising out of allocations of income and gain pursuant to Section 3.1(k)(6)(A). Such tax liability shall be computed by taking into account any offsets, allowable for Federal income tax purposes, against such allocations for (y) allocations of loss and deduction to ICM-IV pursuant to Section 3.1(j)(4)(A) and (z) any loss or deduction arising out of any payment to be made under this Section 2.1(i). 2.2 Withdrawals of Capital Accounts. No Partner shall be entitled to withdraw any amount from its Capital Account, other than as provided in this Section 2.2. (a) Withdrawals in General. A Limited Partner may not withdraw from the Partnership in whole or in part prior to dissolution of the Partnership, except (i) as required by Section 2.2(b), or (ii) with the unanimous written consent of all of the Partners. In the event a Limited Partner elects to withdraw with the consent of the Partners, or upon withdrawal of a Limited Partner pursuant to Section 2.2(b), the Partnership Interest of such Limited Partner shall be withdrawn in its entirety and shall be valued pursuant to Section 4.4 as of the date of withdrawal. Notwithstanding the foregoing, (i) the value of the preferred limited partnership interest shall be deemed to be the amount of Preferred Limited Partner's Capital Contribution plus the Preferred Return (as defined in Subsection 3.3(d)(1)), reduced by any distributions received by the Preferred Limited Partner prior to such valuation and (ii) the value of the Junior Preferred Limited Partner's interest shall be deemed to be the amount of such Partner's Capital Contribution plus the Junior Preferred Return (as defined in Subsection 3.3(d)(2)), reduced by any distributions received by the Junior Preferred Limited Partner prior to such valuation. The Capital Account of such withdrawing Limited Partner shall be paid for in the manner provided in this Section 2.2(a) as expeditiously as possible, at a time determined by the General Partner. The General Partner shall not be required to sell, liquidate, pledge or encumber any Partnership asset or security to effect such withdrawal. The General Partner shall have sole discretion to make the payment in respect of the Capital Account of any withdrawing Limited Partner in cash or, at the option of the General Partner, with a promissory note bearing interest at a rate per annum equal to the rate announced from time to time by Bank of America NT&SA as its -7- 14 prime rate. The promissory note will be payable only after the payment of all third party debt and payment of preferred returns to the Preferred Limited Partner and the Junior Preferred Limited Partner and any payments on such promissory notes will be paid pari passu with payments due to the other Partners (excluding the Preferred Limited Partner and the Junior Preferred Limited Partner) with respect to the event giving rise to such payment to the withdrawing Limited Partner upon the earlier of (i) final dissolution of the Partnership, (ii) sale of all or substantially all of the Partnership's assets, or (iii) December 31, 2007. For purposes of the foregoing, the amount to be paid pari passu shall be determined by treating the amount that would have been paid to each Partner if no payment were made to the withdrawing Partner as if it also were represented by a promissory note and pro rating the amount available for distribution to each Partner and withdrawing Partner on that basis. Any portion of any payments made to a withdrawing Limited Partner in kind pursuant to this Section 2.2 shall be made, based upon the balance in a Partner's Capital Account as of the date of withdrawal, ratably in proportion to the value that each security or asset then held by the Partnership, including any interest in an Investing Partnership, determined pursuant to Section 4.4, bears to the value of all assets of the Partnership determined pursuant to Section 4.4. (b) Required Withdrawals. The General Partner may terminate the interest of any Limited Partner in the Partnership, with cause, at the end of any calendar month upon fifteen (15) days prior written notice. For purposes of this Agreement, "cause" shall be determined by the General Partner and shall mean the following: (i) the continued participation of such Limited Partner is likely, in the sole judgment of the General Partner, to cause the Partnership or the General Partner to register as an investment company or elect to be a "business development company" under the Investment Company Act of 1940 (the "Investment Company Act"), the General Partner or any of its partners to register as an investment adviser under the Investment Advisers Act of 1940, or the Partnership or any Partner to violate any law, or (ii) such Limited Partner fails to make a required capital contribution and the General Partner requires withdrawal pursuant to Section 8.4(b). Notwithstanding the foregoing, termination of the Partnership Interest of any Limited Partner as the result of an Adverse Regulatory Development (as defined in Section 7.6(b)) shall be treated as set forth in Section 7.6. (c) Effective Date of Withdrawal. For purposes of this Agreement, the effective date of a Partner's withdrawal shall mean the last day of the calendar month in which the General Partner consents to such withdrawal pursuant to Section 2.2(a) or such Partner's notice period lapses pursuant to Section 2.2(b). (d) Effect of Withdrawal. In the event of the withdrawal of any Limited Partner pursuant to this Section 2.2, the withdrawing Limited Partner shall not otherwise share in the income, gains and losses of the Partnership from the valuation date of its Partnership Interest and shall not have any other rights under this Agreement other than payment to it of its Capital Account as revalued pursuant to Section 4.5. The interest of a Limited Partner who withdraws pursuant to this Section 2.2 shall not thereafter be included in calculating the percentage in interest of the Limited Partners required to take any action under this Agreement. -8- 15 (e) Limitations on Withdrawal of Capital Account. The right of any withdrawn Partner or its legal representatives to have distributed the Capital Account of such Partner pursuant to this Section 2.2 is subject to the provision by the General Partner for all Partnership liabilities in accordance with section 15666 of the Act, and for estimates for contingencies and expenses. The unused portion of any such estimates shall be distributed after the General Partner shall have determined that the need therefor shall have ceased. (f) Interest on Capital Accounts. No interest or compensation shall be paid on or with respect to the Capital Account or capital contributions of any of the Partners, except as otherwise expressly provided herein. 2.3 Capital Accounts. The Partnership shall maintain for each Partner a separate capital account (a "Capital Account") in accordance with the capital accounting rules of section 704(b) of the Internal Revenue Code of 1986 (the "Code"), and the regulations thereunder (the "Income Tax Regulations") (including particularly section 1.704-1(b)(2)(iv) of the Income Tax Regulations). (a) In general, under such capital accounting rules (but subject to any contrary requirements of the Code and the Income Tax Regulations), a Partner's Capital Account shall be (i) increased by the amount of money and the fair market value (determined in accordance with Section 4.4 or as otherwise provided in the Greenville/Spartanburg Contribution Agreement or the IPWT Contribution Agreement) of other property (net of liabilities secured by such contributed property that the Partnership is considered to take subject to or assume under section 752 of the Code) contributed by the Partner to the Partnership and allocations to the Partner of Partnership income and gain (or items thereof), including income and gains exempt from tax, and (ii) decreased by the amount of money and the fair market value (determined in accordance with Section 4.4) of other property distributed (net of liabilities secured by such distributed property that the Partner is considered to take subject to or assume under section 752 of the Code) to the Partner by the Partnership and allocations to the Partner of Partnership loss and deduction (or items thereof), including Partnership expenditures not deductible in computing its taxable income and not properly chargeable to Capital Account. For purposes of making allocations of all items of income, gain, loss and deduction and for purposes of crediting or charging distributions to Capital Accounts, the Preferred Limited Partner shall be considered to have a Capital Account separate and distinct from its Capital Account attributable to its additional interest as a Limited Partner. (b) When Partnership property is revalued by the General Partner pursuant to Section 4.5 or distributed in kind (whether in connection with dissolution and liquidation of the Partnership or otherwise), the Capital Accounts of the Partners first shall be adjusted to reflect the manner in which the unrealized income, gain, loss or deduction inherent in such property (that has not previously been allocated to Capital Accounts) would be allocated among the Partners if there were a taxable disposition of such property for its fair market value (determined in accordance with Section 4.4 and taking into account section 7701(g) of the Code) and such income, gain, loss or deduction had been recognized for federal income tax purposes immediately upon such distribution or the event requiring such revaluation. -9- 16 (c) Where section 704(c) of the Code applies to Partnership property or when Partnership property is revalued pursuant to section 1.704-1(b)(2)(iv)(f) of the Income Tax Regulations, Capital Accounts of the Partners shall be adjusted in accordance with section 1.704-1(b)(2)(iv)(g) of the Income Tax Regulations as to allocations to the Partners of depreciation, depletion, amortization and gain or loss, as computed for book purposes with respect to such property. (d) The General Partner shall direct the Partnership's accountant to make all necessary adjustments in each Partner's Capital Account as required by the rules of section 704(b) of the Code and the regulations thereunder. ARTICLE 3 Profits and Losses; Distributions 3.1 Profits and Losses. A Partner's distributive share of the Partnership's total income, gain, loss, deduction or credit (or items thereof), which total shall be as shown on the annual federal income tax return prepared by the Partnership's accountants or as finally determined by the Internal Revenue Service or the courts, and as modified by the capital accounting rules of section 704(b) of the Code and the Income Tax Regulations thereunder as implemented by Section 2.3, as applicable, shall be determined as provided in this Section 3.1. (a) Except as otherwise provided in this Section 3.1, items of Partnership income, gain, loss, deduction and credit shall be allocated among the Partners in proportion to their respective actual Capital Contributions (each, a "Partnership Interest"). (b) Solely for tax purposes, in determining each Partner's allocable share of the taxable income or loss of the Partnership, depreciation, depletion, amortization and gain or loss with respect to any contributed property, or with respect to revalued property where Partnership property is revalued pursuant to section 1.704-1(b)(2)(iv)(f) of the Income Tax Regulations, shall be allocated to the Partners under the remedial method as provided in section 1.704-3(d) of the Income Tax Regulations. (c) Notwithstanding anything to the contrary in this Section 3.1, if there is a net decrease in Partnership Minimum Gain or Partner Nonrecourse Debt Minimum Gain (as such terms are defined in sections 1.704-2(b) and 1.704-2(i)(2), respectively, of the Income Tax Regulations) during a Partnership taxable year, then each Partner shall be allocated items of Partnership income and gain for such year (and, if necessary, for subsequent years), to the extent required by, and in the manner provided in, section 1.704-2 of the Income Tax Regulations. This provision is intended to be a "minimum gain chargeback" within the meaning of sections 1.704-2(f) and 1.704-2(i)(4) of the Income Tax Regulations and shall be interpreted and implemented as therein provided. -10- 17 (d) Subject to the provisions of Section 3.1(c), but otherwise notwithstanding anything to the contrary in this Section 3.1, if any Partner's Capital Account has a deficit balance in excess of such Partner's obligation to restore its Capital Account balance, computed in accordance with the rules of section 1.704-1(b)(2)(ii)(d) of the Income Tax Regulations (including such Partner's share of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain as provided in sections 1.704-2(g) and 1.704-2(i)(5) of the Income Tax Regulations), then sufficient amounts of income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income, and gain for such year) shall be allocated to such Partner in an amount and manner sufficient to eliminate such deficit as quickly as possible. This provision is intended to be a "qualified income offset" within the meaning of section 1.704-1(b)(2)(ii)(d) of the Income Tax Regulations and shall be interpreted and implemented as therein provided. (e) Solely for tax purposes, gain recognized (or deemed recognized under the provisions hereof) upon the sale or other disposition of Partnership property, which is subject to depreciation recapture, shall be allocated among the Partners as provided in section 1.1245-1(e) of the Income Tax Regulations. (f) Except as otherwise provided in Section 3.1(j), if and to the extent any Partner is deemed to recognize income as a result of any loans described herein pursuant to the rules of sections 1272, 1273, 1274, 1274A, 7872, 482 or 483 of the Code, or any similar provision now or hereafter in effect, any corresponding resulting deduction of the Partnership shall be allocated to the Partner who is charged with the income. Subject to the provisions of section 704(c) of the Code and Sections 3.1(b) through 3.1(d) hereof, if and to the extent the Partnership is deemed to recognize income as a result of any loans described herein pursuant to the rules of sections 1272, 1273, 1274, 1274A, 7872, 482 or 483 of the Code, or any similar provision now or hereafter in effect, such income shall be allocated to the Partner who is entitled to any corresponding resulting deduction. (g) Except as otherwise required by law, tax credits shall be allocated among the Partners pro rata in accordance with the manner in which Partnership profits are allocated to the Partners under this Section 3.1, as of the time the credit property is placed in service or if no property is involved, as of the time the credit is earned. Recapture of any tax credit required by the Code shall be allocated to the Partners in the same proportion in which such tax credit was allocated. (h) Except as provided in Sections 3.1(f) and 3.1(g) or as otherwise required by law, if the Partnership Interests of the Partners are changed hereunder during any taxable year, all items to be allocated to the Partners for such entire taxable year shall be prorated on the basis of the portion of such taxable year which precedes each such change and the portion of such taxable year on and after each such change according to the number of days in each such portion, and the items so allocated for each such portion shall be allocated to the Partners in the manner in which such items are allocated as provided in this Section 3.1 during each such portion of the taxable year in question. -11- 18 (i) Any special allocation of income or gain pursuant to Section 3.1(d) shall be taken into account in computing subsequent allocations of income and gain pursuant to this Section 3.1 so that the net amount of all such allocations to each Partner shall, to the extent possible, be equal to the net amount that would have been allocated to each such Partner pursuant to the provisions of this Section 3.1 if such special allocations of income or gain under Section 3.1(d) had not occurred. (j) (1) Items of deduction and loss attributable to recourse liabilities of the Partnership (within the meaning of section 1.752-1(a)(1) of the Income Tax Regulations but excluding Partner nonrecourse debt within the meaning of section 1.704-2(b)(4) of the Income Tax Regulations) shall be allocated among the Partners in accordance with the ratio in which the Partners share the economic risk of loss (within the meaning of section 1.752-2 of the Income Tax Regulations) for such liabilities. (2) Items of deduction and loss attributable to Partner nonrecourse debt within the meaning of section 1.704-2(b)(4) of the Income Tax Regulations shall be allocated to the Partners bearing the economic risk of loss with respect to such debt in accordance with section 1.704-2(i) of the Income Tax Regulations. (3) Items of deduction and loss attributable to Partnership nonrecourse liabilities within the meaning of section 1.704-2(b)(1) of the Income Tax Regulations shall be allocated among the Partners proportionately in accordance with their Partnership Interests. (4) All other items of deduction or loss ("Net Loss") shall be allocated (A) First, if allocations of items of income or gain have been made to any Partner under Section 3.1(k)(6)(A), then to such Partner in the amount of, and proportionate to, the amount of such items of income or gain; (B) Second, among any New Partners (as defined in Section 2.1(f)), an amount of Net Loss sufficient to reduce its Capital Account balance to what it would have been had all Partners been admitted to the Partnership as of the date hereof, with losses so allocated to each New Partner in the proportion which such New Partner's capital contribution bears to the capital contributions of all New Partners; and (C) Third, among (i) the Partners (other than the Preferred Limited Partner and the Junior Preferred Limited Partner), proportionately in accordance with their Partnership Interests, except that Net Loss shall not be allocated to any Partner to the extent it would create a deficit balance in excess of such Partner's obligation to restore its capital account balance, computed in accordance with the rules of section 1.704-1(b)(2)(ii)(d) of the Income Tax Regulations and including such Partner's share of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain as provided in sections 1.704-2(g) and 1.704-2(i)(5) of the Income Tax Regulations; (ii) next to the Junior Preferred Limited Partner to -12- 19 the extent of its Capital Account balance until the balance of its Capital Account is equal to zero (but never reduced below zero); and (iii) thereafter to the Preferred Limited Partner to the extent of its Capital Account balance until the balance of its Capital Account is equal to zero (but never reduced below zero). Any Net Loss which cannot be allocated to a Partner because of the limitation set forth in the previous sentence shall be allocated first to the other Partners to the extent such other Partners would not be subject to such limitation and second any remaining amount to the Partners in the manner required by the Code and the Income Tax Regulations. (k) Subject to the provisions of Sections 3.1(c) through 3.1(j), items of income and gain shall be allocated to the Partners in the following priority: (1) First, to the Preferred Limited Partner, (i) first, in an amount equal to the excess of the amount of losses previously allocated to it pursuant to Section 3.1(j)(4) over the amount of income previously allocated to it pursuant to this clause (i) of Section 3.1(k)(1) and (ii) thereafter in the amount of any distributions of the Preferred Return made to it pursuant to Section 3.3(d)(1)(i). (2) Second, to the Junior Preferred Limited Partner, (i) first, in an amount equal to the excess of the amount of losses previously allocated to it pursuant to Section 3.1(j)(4) over the amount of income previously allocated to it pursuant to this clause (i) of Section 3.1(k)(2) and (ii) thereafter in the amount of any distributions of the Junior Preferred Return made to it pursuant to Section 3.3(d)(2)(i). (3) Third, to those Partners who have had items of loss or deductions allocated to them under section 3.1(j)(1), in the amount of, and proportionate to, the amount of such items of loss or deduction (provided, however, that no such allocation shall be made with respect to previously allocated items of loss or deduction to the extent of any income and gains previously deemed recognized under Section 2.3(b)). (4) Fourth, if allocations of Net Loss have been made to the Partners under Section 3.1(j)(4)(C)(i), then in the amount of, and proportionate to, the amount of such Net Loss (provided, however, that no such allocation shall be made with respect to previously allocated Net Loss to the extent of any income and gains previously deemed recognized under Section 2.3(b)). (5) Fifth, to the Partners (other than the Preferred Limited Partner and the Junior Preferred Limited Partner), in amounts sufficient, after taking into account all amounts previously distributed to such Partner and including such Partner's actual Capital Contributions, to yield a pre-tax internal rate of return of fifteen percent (15%), on such Partner's actual Capital Contributions and in proportion to the amount required for each Partner. -13- 20 (6) Sixth, (A) twenty percent (20%) of the balance to ICM-IV; and (B) eighty percent (80%) of the balance among the Partners (other than the Preferred Limited Partner and the Junior Preferred Limited Partner) in proportion to their relative Partnership Interests; (l) Notwithstanding Section 3.1(k), but subject to the provisions of Section 3.1(c) through 3.1(j), gain which is recognized (or deemed to be recognized) upon the sale, exchange or other disposition of all or substantially all of the assets of the Partnership or upon the dissolution of the Partnership shall be allocated in the following order: (1) First, to the Preferred Limited Partner, in an amount sufficient to bring its Capital Account balance (computed in the same manner as provided parenthetically in subparagraph 3 below) to an amount equal to the amount of its accrued and unpaid Preferred Return and its unrepaid Capital Contribution. (2) Second, to the Junior Preferred Limited Partner, in an amount sufficient to bring its Capital Account balance (computed in the same manner as provided parenthetically in subparagraph (3) below) to an amount equal to the amount of its accrued and unpaid Junior Preferred Return and its unrepaid Capital Contribution. (3) Third, to the Partners (other than the Preferred Limited Partner and the Junior Preferred Limited Partner) having deficit balances in their Capital Accounts (computed after giving effect to all contributions, distributions, allocations and other Capital Account adjustments for all taxable years, including the year during which such liquidation or dissolution occurs and including each Partner's share of Partnership Minimum Gain and Partner Nonrecourse Debt Minimum Gain as provided in sections 1.704-2(g) and 1.704- 2(i)(5) of the Income Tax Regulations), to the extent of, and in proportion to, those deficits; and (4) Thereafter, so as to cause the credit balance in each Partner's (other than the Preferred Limited Partner and the Junior Preferred Limited Partner) Capital Account (computed in the same manner as provided parenthetically in the preceding subparagraph (3)), to equal as nearly as possible, the amount such Partner would receive in a distribution, if the distribution were made in accordance with the provisions of Section 3.3(d). (m) Unless otherwise specified by the instruments of transfer, any Partner transferring part of its interest pursuant to this Agreement shall be deemed to be transferring that portion of its share in future allocations of the Partnership attributable to the portion of its total Capital Account transferred by it. (n) All matters not expressly provided for by the terms of this Agreement concerning the valuation of assets of the Partnership, the allocation of profits, gains, deductions, losses and credits among the Partners, including taxes thereon, and accounting -14- 21 procedures shall be reasonably determined by the General Partner, whose determination shall be final and conclusive as to all of the Partners, provided that such action does not materially decrease the amount or postpone the timing of any distributions, including distributions upon liquidation, that any Partner would otherwise be entitled to receive pursuant to this Agreement. (o) Any financing or refinancing of TCI Debt (as defined in section 2.3(b) of the Greenville/Spartanburg Contribution Agreement) shall be a "non-recourse" liability of the Partnership as such term is used in Section 1.752-1(a)(ii) of the Income Tax Regulations. 3.2 Partnership Expenses. To the extent not paid by IP-IV or an Investing Partnership, the Partnership shall pay (or reimburse the General Partner or ICM-IV for) all expenses relating to the Partnership's business, investments or reports not required to be borne by the General Partner or ICM-IV pursuant to Section 4.6(b), including, without limitation, the following expenses: organization and offering expenses, placement fees, interest, legal, accounting, consulting and investment banking fees and expenses of the Partnership in connection with its investments, preparation of federal and state tax returns, cost of Partnership meetings (if any), all costs of acquisition and disposition of assets, securities or investments (including legal, overhead expenses, accounting, banking and advisory fees, expenses and commissions), all costs of research, market and statistical information which are paid to unrelated third parties in connection with a potential transaction, directors and advisers fees paid to unrelated third parties, fees and expenses incurred in connection with investigation, prosecution, or defense of any claims by or against the Partnership, all costs of insurance and any extraordinary or other expenses which the General Partner reasonably determines should properly be considered related to the investment of the Partnership's assets or the operations of the Partnership or its assets or investments. 3.3 Distributions. (a) Subject to Section 3.3(e), prior to dissolution of the Partnership, the General Partner shall, to the extent of available cash, distribute in cash, no later than ninety (90) days after the close of each fiscal year, the excess, if any, of (i) forty percent (40%) of an amount equal to the excess, if any, of the cumulative items of income and gain over the cumulative items of deduction, loss and credit (grossed up to a deduction equivalent at a forty percent (40%) tax rate) of the Partnership as shown on the federal income tax returns of the Partnership for all periods over (ii) the sum of amounts previously distributed pursuant to Section 3.3(a), 3.3(b) or 3.3(c), provided that the General Partner shall make such distributions on a quarterly basis as soon as possible to address any Partner's quarterly payments of estimated tax if such early distribution is feasible in terms of available cash and accurate anticipation of the fiscal year's net tax position. The General Partner, in its reasonable discretion, may adjust the rate of distribution provided in this Section 3.3(a) to reflect any changes made to the ordinary income and capital gains tax rates of the Code which may have the effect of requiring the Partners to pay more or less taxes on ordinary income or capital gains generated by Partnership activities. Distributions pursuant to this Section 3.3(a) shall be made to the Partners ratably in the proportions in which the net recognized income and gains (but not income and gains deemed recognized under Section -15- 22 2.3(b)) for such fiscal periods have been allocated to them for federal income tax purposes pursuant to Section 3.1. For purposes of this Section 3.3(a), in the case of property contributed to the capital of the Partnership, items of income, gain, deduction and loss shall be computed as if the tax basis of such property were equal to its fair market value at the time of such contribution as determined in the Greenville/Spartanburg Contribution Agreement or the IPWT Contribution Agreement, or as otherwise provided herein. (b) Subject to Sections 3.3(a) and 3.3(e), prior to dissolution of the Partnership, the General Partner shall distribute the net proceeds from the sale or other disposition of any investment, after payment of all indebtedness with respect thereto and less reasonable estimates for the Partnership's expenses, liabilities, contingencies and working capital requirements, no later than ninety (90) days after the close of such sale. (c) Subject to the mandatory distribution provisions set forth in Sections 3.3(a) and 3.3(b) and to Section 3.3(e), prior to dissolution of the Partnership, the General Partner shall distribute to the Partners no less frequently than on a quarterly basis cash received by the Partnership from operations, any transaction not described in Section 3.3(b), and any dividends, interest or other cash distributions from any corporation or other entity in which the Partnership has invested and which is not necessary in the reasonable judgment of the General Partner for the payment of Partnership expenses or debt or the maintenance of reasonable reserves for the Partnership's expenses, liabilities, contingencies and working capital requirements. With the consent of seventy percent (70%) in interest of the Limited Partners, and with the consent of the Preferred Limited Partner with respect to distributions to such Partner and the consent of the Junior Preferred Limited Partner with respect to distributions to such Partner, distributions may be made in assets of the Partnership other than those described in the preceding sentence. (d) Distributions pursuant to Sections 3.3(b) and 3.3(c) shall be made as follows: (1) First, to the Preferred Limited Partner (i) in payment of its accrued Preferred Return until it has received the full amount thereof, and (ii) then in payment of its unrepaid Capital Contribution. For purposes of this Agreement, the "Preferred Return" shall be an amount equal to eleven and three quarters percent (11.75%), per annum, compounded semi-annually, multiplied by its unrepaid Capital Contributions; for purposes of calculating Preferred Return for a subsequent period, any accrued and unpaid Preferred Return shall be added to the principal amount of the unrepaid Capital Contribution; and (2) Second, to the Junior Preferred Limited Partner (i) in payment of its accrued Junior Preferred Return until it has received the full amount thereof, and (ii) then in payment of its unrepaid Capital Contribution. For purposes of this Agreement, the "Junior Preferred Return" shall be an amount equal to twelve and three quarters percent (12.75%), per annum, compounded annually, multiplied by the Junior Preferred Limited Partner's unrepaid Capital Contribution; for purposes of calculating Junior Preferred Return for a -16- 23 subsequent period, any accrued and unpaid Junior Preferred Return shall be added to the principal amount of the unrepaid Capital Contribution; and (3) Third, to those Partners (other than the Preferred Limited Partner and the Junior Preferred Limited Partner) that have not received distributions pursuant to this Section 3.3 equal to their actual Capital Contributions, in proportion to their relative actual Capital Contributions until the Partners (other than the Preferred Limited Partner and the Junior Preferred Limited Partner) have received distributions pursuant to this Section 3.3 equal to their actual Capital Contributions; and (4) Fourth, to those Partners (other than the Preferred Limited Partner and the Junior Preferred Limited Partner) that have not received distributions pursuant to this Section 3.3 of amounts sufficient to yield a pre-tax internal rate of return of fifteen percent (15%) on their actual Capital Contributions, until such time that they have each received distributions pursuant to this Section 3.3 of amounts sufficient to yield a pre-tax internal rate of return of fifteen percent (15%) on their actual Capital Contributions and in proportion to the amount required for each such Partner; and (5) Fifth, twenty percent (20%) of the balance to ICM-IV and eighty percent (80%) of the balance to the Partners (other than the Preferred Limited Partner and the Junior Preferred Limited Partner) in proportion to their relative Partnership Interests. All distributions made pursuant to this Section 3.3 (other than pursuant to Subsections 3.3(d)(1) and 3.3(d)(2)) shall be treated as a return of Partners' Capital Contributions until their respective actual Capital Contributions are returned in full. Except as otherwise provided herein, no Partner shall have a priority over any other Partner as to returns of Capital Contributions or as to compensation as a Partner by way of income. (e) Any other provision of this Agreement to the contrary notwithstanding, no distribution shall be made which would render the Partnership insolvent or which is prohibited by the terms of any indebtedness of the Partnership, IP-IV or an Investing Partnership, provided, however, that the General Partner shall use its reasonable best efforts to obtain the right to make tax distributions pursuant to Section 3.3(a) above under the terms of any such indebtedness. ARTICLE 4 Management of Partnership 4.1 Management Generally. Except as otherwise provided herein, the business of the Partnership shall be conducted and managed exclusively by the General Partner and administered by ICM-IV under the supervision of the General Partner. The General Partner -17- 24 will not be obligated to do or perform any act in connection with the business of the Partnership not expressly set forth in this Agreement. The General Partner (including Robert J. Lewis as chief executive officer of the managing member of the General Partner) shall devote such time, effort and skill to the business and affairs of the Partnership, IP-IV and any Investing Partnerships and their management as may be reasonable and necessary or appropriate for the welfare and success of the Partnership, IP-IV and the Investing Partnerships. The General Partner shall have the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners. 4.2 Specific Authority of the General Partner. Except as otherwise provided in this Agreement, the General Partner shall have full power and authority to do all things and to perform all acts that it reasonably deems necessary or advisable to conduct the business affairs of the Partnership, IP-IV and the Investing Partnerships, or incidental thereto, without the consent of any Limited Partner, including, without limitation, full power and authority to take any of the following actions, each of which is hereby expressly authorized by the parties hereto: (a) Enter into contracts and perform the obligations of the Partnership undertaken in such contracts, including, without limitation, any contract entered into with the General Partner or a Limited Partner pursuant to Section 6.2; (b) Make all decisions with respect to the investigation, selection, negotiation, structure, acquisition, operation and disposition of the assets of the Partnership, IP-IV or any Investing Partnership; and employ such agents, consultants, advisers, directors, attorneys, accountants, investment bankers and other personnel as may be necessary or appropriate for the business of the Partnership, IP-IV or the Investing Partnerships on such terms and conditions as the General Partner shall determine are reasonable; provided, however, that concurrent with the formation of a new Investing Partnership or any partnership which provides financing to any Investing Partnership, the General Partner will obtain an opinion of counsel, reasonably satisfactory to the Advisory Committee, that such Investing Partnership is taxable as a partnership. (c) Open, maintain and close bank accounts and draw checks and other orders for the payment of money; (d) Collect accounts receivable, income and other payments due to the Partnership, IP-IV or any Investing Partnership; (e) Keep the books and records of the Partnership and hire independent certified public accountants; (f) Pay accounts payable and other expenses of the Partnership; (g) Transfer, hypothecate, compromise or release any Partnership claim; -18- 25 (h) Administer the financial affairs of the Partnership, IP-IV and any Investing Partnership, make tax and accounting elections, including an election or elections under section 754 of the Code (which election shall be made upon the request of any Limited Partner), file all required tax returns relating to the Partnership, pay the liabilities of the Partnership and distribute the profits of the Partnership to the Partners; (i) Borrow money on behalf of the Partnership, IP-IV or any Investing Partnership and make, issue, accept, endorse and execute promissory notes, drafts, bills of exchange, guarantees, and other instruments and evidences of indebtedness in the name of the Partnership, IP-IV or any Investing Partnership, including, without limitation, in connection with and as part of purchasing assets and securities for the Partnership, IP-IV or any Investing Partnership and mortgage, pledge, assign or grant security interests in all or any part of the assets then owned or thereafter acquired by the Partnership, IP-IV or any Investing Partnership in connection therewith; (j) Cause the Partnership, IP-IV and any Investing Partnership to purchase and maintain any insurance, in amounts and on terms customary in the industry, covering the potential liabilities of the Partnership, the General Partner and its members, partners, employees and agents, and the officers, directors and employees of the members of the General Partner, as well as the potential liabilities of any person serving at the request of the Partnership, IP-IV or any Investing Partnership as a director, officer, employee, agent, partner, consultant or adviser of any corporation or other entity in which the Partnership, IP-IV or any Investing Partnership has an investment; provided, however, the General Partner shall cause the Partnership to purchase insurance for the liabilities of directors and officers to the extent such insurance is available on commercially reasonable terms; (k) Commence or defend litigation that pertains to the Partnership, IP-IV or any Investing Partnership or any assets of the Partnership, IP-IV or any Investing Partnership and investigate potential claims; (l) Execute and file fictitious business name statements and similar documents; (m) Admit additional Limited Partners and permit additional capital contributions as provided in Sections 2.1(c) and 2.1(d) (and appropriately amend this Agreement to reflect such admissions and additional capital contributions) without the consent of any Limited Partner except as provided in Section 2.1(c) and admit an assignee of a Limited Partner's interest to be a substituted Limited Partner in the Partnership (and appropriately amend this Agreement and the Partnership records to reflect such assignment), without the consent of any Limited Partner; (n) Terminate the Partnership pursuant to Section 7.2(vi), (vii) or (viii); and (o) Execute and deliver all documents and instruments necessary or advisable to carry out the foregoing. -19- 26 4.3 Reports. The General Partner will distribute annual audited financial statements of the Partnership, prepared by a "big six" accounting firm, to the Limited Partners within ninety (90) days after the end of each Partnership fiscal year. The General Partner will distribute unaudited quarterly progress reports on the Partnership's investment activities to the Limited Partners within forty-five (45) days of the end of the first three fiscal quarters. The General Partner will distribute monthly income statements of the Partnership to the Limited Partners as soon as practicable after such statements are prepared, but in no event more than twenty-five (25) days after the end of such month. The General Partner will distribute any default notices with respect to the debt of the Partnership, IP-IV or any Investing Partnership to the Limited Partners within five (5) days of the receipt thereof from a lender or the delivery thereof by the Partnership, IP-IV or any Investing Partnership to a lender. 4.4 Valuation of Assets. (a) The General Partner shall value the assets of the Partnership whenever the General Partner may, in its sole discretion, deem appropriate, and whenever else required by this Agreement or under the Code, and on any date provided for in this Agreement on which valuation is required due to the withdrawal of a Limited Partner pursuant to Section 2.2 or Section 7.6, and shall within ninety (90) days of each such date furnish to each Limited Partner a statement showing the value of each system and the net worth of the Partnership. If the Partnership is dissolved and the assets are not sold, the General Partner shall value the assets of the Partnership as of the date of dissolution and shall as promptly as practicable thereafter furnish the Limited Partners with the statement showing the value of each system and the net worth of the Partnership. The value of any system of the Partnership determined by the General Partner pursuant to this Section 4.4(a) shall be conclusive and binding on all of the Partners and all parties claiming through or under them except as provided in Section 4.4(c). (b) In the event of the withdrawal of a Limited Partner from the Partnership pursuant to Section 2.2 or Section 7.6, the General Partner shall within a reasonable period of time notify the Limited Partners in writing of the valuation of the total amount of the assets of the Partnership attributable to the withdrawing Limited Partner. (c) If (i) any of the Limited Partners object in writing to the valuation of the systems and/or net worth of the Partnership made pursuant to Section 4.4(a) by the General Partner or (ii) the withdrawing Limited Partner objects in writing to the valuation of the systems and/or net worth of the Partnership made pursuant to Section 4.4(b) by the General Partner, in either case, within thirty (30) days after the General Partner has furnished the Limited Partners with the statement provided by Section 4.4(a) or 4.4(b) as of such date, the General Partner shall give notice to all the Limited Partners of such objection and the General Partner shall attempt to determine an alternative value for the systems and net worth of the Partnership (with respect to a valuation pursuant to Section 4.4(a)) or the assets of the Partnership attributable to the withdrawing Partner (with respect to a valuation pursuant to Section 4.4(b)). If the General Partner and (i) seventy percent (70%) in interest of the Limited Partners (with respect to a valuation pursuant to 4.4(a)) or (ii) the withdrawing -20- 27 Limited Partner (with respect to a valuation pursuant to Section 4.4(b)) are unable to determine an alternative value for the systems and/or net worth of the Partnership within sixty (60) days after such objections, the matter in dispute shall be submitted to three appraisers of which one shall be chosen by the General Partner, one by (x) seventy percent (70%) in interest of the Limited Partners (with respect to a valuation pursuant to Section 4.4(a)) or (y) the withdrawing Limited Partner (with respect to a valuation pursuant to Section 4.4(b)) and the third by means of the written agreement of the two appraisers selected by such Partners, provided that such third individual is not associated with any of the Partners. Each appraiser appointed in accordance with this paragraph shall complete its appraisal within sixty (60) days of its appointment. The two appraisals closest to one another shall be averaged and such valuation shall be final and binding on the Partners. If performed in connection with Section 4.4(a), the Partnership shall bear all of the costs and expenses of such appraisal. The Partnership and the withdrawing Limited Partner shall each bear one-half (1/2) of the costs and expenses of such appraisal if performed in connection with Section 4.4(b). 4.5 Revaluation of Partnership Assets. The General Partner shall revalue Partnership property to its fair market value (determined as provided in Section 4.4) as of the date when any additional or existing Partner makes a non-pro rata contribution of money or property to the Partnership in exchange for an interest in the Partnership or when the Partnership distributes money or property to a withdrawing or continuing Partner in exchange for all or part of its interest in the Partnership. 4.6 Administration Fee and Expenses. (a) Administration Fee. The Partnership will pay to ICM-IV in cash during the period the Partnership is in existence, as full payment for administrative services rendered to the Partnership, an annual administration fee (the "Administration Fee") equal to one percent (1%) per annum of the total Capital Contributions that have been funded by Partners to the Partnership (other than with respect to the preferred limited partner interest of the Preferred Limited Partner but including the original amount of the Capital Contribution of the Junior Preferred Limited Partner as set forth in footnote 6 to EXHIBIT 1) determined as of the beginning of each calendar quarter in each fiscal year of the Partnership; provided, however, if the acquisition of a cable system by the Partnership, IP-IV or an Investing Partnership is made with debt financing of more than two-thirds of the purchase price of such cable system, capital contributions of one-third of such purchase price shall be deemed to have been made and the Administration Fee shall be paid on such deemed contributions. At such time as any such debt financing is replaced with actual Capital Contributions of the Partners, the Administration Fee shall be based on such actual Capital Contributions rather than a deemed contribution for such amount. Notwithstanding the foregoing, in no event shall an Administration Fee be payable on any amounts in excess of the total capital commitments to the Partnership. Except with respect to acquisitions of cable systems with debt financing as set forth above, ICM-IV agrees that it will not receive an administration fee from the Investing Partnerships of the Partnership greater than one percent (1%) of the capital contributions to the Investing Partnerships and the Partnership. The Administration Fee for the first year on any capital contribution shall be paid in advance upon payment of such -21- 28 capital contribution and shall begin to accrue from the closing of the first cable television system purchased by the Partnership. The Administration Fee for all subsequent periods shall be paid quarterly, in advance, one-fourth of one percent (.25%) per quarter, on the first business day of each calendar quarter, beginning with the first calendar quarter that begins after the first anniversary of the payment of such capital contribution. Any Administration Fee due for the period from the expiration of such first year and the next scheduled payment of the Administration Fee shall be paid at such next payment date. The Administration Fee shall be offset, on a cumulative basis, by any administration fee received by ICM-IV or any affiliate of ICM-IV from IP-IV or any Investing Partnership. The Administration Fee for the Partnership's last annual fiscal year, if less than a full year, shall be prorated based upon the number of days in such period. (b) General Partner Expenses. The General Partner and ICM-IV will bear and be charged with the following expenses: salaries and other expenses (including bonuses and health, welfare, retirement and other benefits) and overhead expenses (including rents, travel and costs) of the General Partner, ICM-IV, and the chief operating officer and the directors of development, finance and accounting of ICM-IV and their related staffs. 4.7 Rights of the Limited Partners. (a) No Control. The Limited Partners shall not take part in the control, management, direction or operation of the business of the Partnership, nor, except as specified in Section 4.7(b) and Section 4.9, have the right, power or authority to be consulted with respect to investment decisions or the other affairs of the Partnership nor have the power to sign documents for or otherwise bind the Partnership and shall have no right to consent on any matter except those expressly set forth in this Agreement or otherwise specified in Section 4.7(b) and Section 4.9. (b) Consents. The Limited Partners shall have a right to consent only with respect to those matters expressly set forth in this Agreement and the matters listed below, which actions may be taken only with the written consent of the General Partner (except with respect to item (iv) which action may be taken without the consent of the General Partner and except to the extent provided in Section 4.9) and the affirmative consent of the percent in interest of the Limited Partners so indicated. The Preferred Limited Partner and the Junior Preferred Limited Partner shall not be entitled to consent, initiate or cause any sale of the Partnership's cable systems or otherwise vote on or take action with respect to any matters in this Agreement, including without limitation Section 4.9 hereof, unless required by law and the preferred limited partnership interest of the Preferred Limited Partner and the junior preferred limited partnership interest of the Junior Preferred Limited Partner shall not be included in either the numerator or the denominator of any computation of the required percentage in interest of the Limited Partners hereunder for all such purposes (except where the consent of the Preferred Limited Partner or the Junior Preferred Limited Partner is required); provided, that the Preferred Limited Partner and the Junior Preferred Limited Partner shall be entitled to consent on any matter which requires the unanimous consent of the Limited Partners and provided further that the Preferred Limited Partner's and the Junior Preferred Limited Partner's consents shall be required for any settlement with a tax authority -22- 29 which would affect the income, gain, loss, deductions or credits allocated to it. For any matters on which the Preferred Limited Partner and the Junior Preferred Limited Partner are not entitled to consent, the required consent shall be the required percent of interest of the Limited Partners other than the preferred limited partnership interest of the Preferred Limited Partner and junior preferred limited partnership interest of the Junior Preferred Limited Partner. In the event one Limited Partner holds seventy percent (70%) of the interests of the Limited Partners, all references in this Agreement to seventy percent (70%) shall be changed to seventy-five percent (75%). For purposes of this Agreement a Limited Partner's interest in the Partnership shall be determined on the basis of its actual Capital Contributions. The Limited Partners shall be entitled to consent on the following matters: (i) The amendment of this Agreement pursuant to Section 9.3 hereof upon the affirmative consent of seventy percent (70%) in interest of the Limited Partners; provided, however, that this Agreement may not be amended without the approval of the Partner being affected if the amendment would change the allocation to any Partner of any income or loss or distribution of cash or property from that which is provided or contemplated herein (other than as a result of any dilution in their Partnership Interests resulting from the admission of any new Limited Partners as contemplated by Section 2.1(c) or additional contributions by Partners pursuant to Section 2.1(d) or 2.1(e) hereof, as Section 2.1(c), Section 2.1(d) or 2.1(e) may be amended from time to time); (ii) The amendment of the allocations and distributions to the Limited Partners other than as permitted by Section 3.1 upon the affirmative consent of each Partner adversely affected; (iii) The admission of a new general partner where there is an existing General Partner upon the affirmative consent of seventy percent (70%) in interest of the Limited Partners; (iv) The approval of a transaction in which the General Partner or any of its affiliates has an actual or potential conflict of interest with the Limited Partners or the Partnership and which is not permitted by Section 6.1 or 6.2 or otherwise expressly permitted by the terms of this Agreement, upon the affirmative consent of seventy percent (70%) in interest of the disinterested Limited Partners; provided, however, the transactions set forth on EXHIBIT 2 hereto may be consummated by the Partnership, IP-IV or any Investing Partnership without any further consent of the Limited Partners; (v) The continuation of the Partnership to effect an orderly dissolution of the Partnership in accordance with Article 7 upon the affirmative consent of seventy percent (70%) in interest of the Limited Partners; (vi) The agreement to enter into any Investing Partnership or make any investments in excess of fifteen million dollars ($15,000,000) upon the -23- 30 affirmative consent of seventy percent (70%) in interest of the Limited Partners; provided, however, each of the acquisitions set forth on EXHIBIT 2 hereto may be consummated by the Partnership, IP-IV or any Investing Partnership without any further consent of the Limited Partners; (vii) The merger of or consolidation of the Partnership with any other entity upon the affirmative consent of each Partner; (viii) The taking of any act that would make it impossible to carry on the business of the Partnership except upon the dissolution of the Partnership in accordance with this Agreement upon the affirmative consent of each Partner; (ix) Confessing a judgment against the Partnership, IP-IV or any Investing Partnership in excess of one hundred fifty thousand dollars ($150,000) or settling a judgment against the Partnership, IP-IV or any Investing Partnership in excess of three hundred thousand dollars ($300,000) upon the affirmative consent of each Partner; (x) Using any funds or assets of the Partnership other than for the benefit of the Partnership upon the affirmative consent of each Partner; (xi) Taking any action that would subject the Limited Partners to personal liability as a general partner in any jurisdiction upon the affirmative consent of each Partner; (xii) The making of, execution of, or delivery of any general assignment for the benefit of the Partnership's creditors upon the affirmative consent of each Partner; (xiii) Any matter in the partnership agreement of IP-IV or any Investing Partnership that requires the consent of the Limited Partners or of the limited partner or a general partner other than the managing general partner of IP-IV or an Investing Partnership; provided, however, that the consent required under this clause (xiii) shall require the approval of the applicable percentage of Limited Partners that would have been required if such consent were required under this Agreement or if no percentage is specified hereunder, seventy percent (70%); and provided further, that the amount or timing of any distributions to the Partnership from any Investing Partnership or IP-IV may not be changed in a manner inconsistent with the amount or timing of distributions under this Agreement without the unanimous consent of the Limited Partners and the General Partner; (xiv) The approval of a transaction with Tele-Communications, Inc. or any of its affiliates in an amount greater than five hundred thousand dollars ($500,000) or transactions less than five hundred thousand dollars ($500,000), -24- 31 which exceed an aggregate of two million dollars ($2,000,000), in any twelve (12) month period, upon the affirmative consent of a majority in interest of the Limited Partners (other than TCI or any of its affiliates); provided, however, that purchases of programming and equipment on no less favorable to the Partnership than arms'-length terms and in the ordinary course of business shall not require any approval by the Limited Partners; and provided further, that the transactions set forth on EXHIBIT 2 hereto may be consummated by the Partnership, IP-IV or any Investing Partnership without any further consent of the Limited Partners; (xv) The approval of any waiver of rights of the Partnership under the IPWT Contribution Agreement if such waiver would result in the Partnership forgoing rights valued in excess of five percent (5%) of the total consideration paid by the Partnership for the contribution of partnership interests and debt transferred under such agreement; and (xvi) The designation of management personnel by the managing general partner of ICM-IV for allocation of the "IRR Bonus" provided for in the Incentive Bonus Program for management employees of the general partner of ICM-IV upon the affirmative consent of seventy percent (70%) in interest of the Limited Partners, which consent shall not unreasonably be withheld, in the event that the Limited Partners have not received a fifteen percent (15%) cumulative internal rate or return on their investment upon termination of the Partnership (calculated in accordance with Section 3.3(d)(4)); provided, however, that if TCI or an affiliate of TCI votes against such designation and a majority in interest of the Limited Partners (excluding TCI) agree to the designation, then such designation will be deemed approved. (c) Annual Operating Plan. The General Partner shall prepare and submit to the Limited Partner having the largest interest as a Limited Partner in the Partnership for approval (which approval shall not be unreasonably withheld) each year an annual operating plan for the Partnership (including IP-IV and the Investing Partnerships) which shall also set forth the amounts to be expended by the Partnership, IP-IV or any Investing Partnership for capital expenditures in the following categories: system rebuild, plant extensions, converters and related equipment, plant maintenance and miscellaneous expenditures. A copy of the final approved operating plan shall be sent to each Limited Partner. Notwithstanding any provision of this Agreement to the contrary, the General Partner, as general partner of IP-IV and each Investing Partnership shall cause IP-IV and each Investing Partnership not to make any expenditures which would cause expenditures in any enumerated category of the annual operating plan to exceed the approved amount for such category by more than ten percent (10%) without the consent of the largest Limited Partner as set forth above. (d) Advisory Committee. The Partnership will form an Advisory Committee (the "Advisory Committee") consisting of one representative from each of the seven (7) Limited Partners with the largest aggregate interests in the Partnership (for purposes of selection of the Advisory Committee, (i) each of the interests of GECC as a Preferred Limited Partner and a Limited Partner shall be aggregated, (ii) each of the interests of NationsBanc -25- 32 Investment Corp. and Atlantic Equity Corporation as Limited Partners shall be aggregated, (iii) each of the interests of Mellon Bank, N.A., as Trustee for Third Plaza Trust and the interests of Mellon Bank, N.A., as Trustee for Fourth Plaza Trust as Limited Partners shall be aggregated, and (iv) each of the interests of the IP Holdings Affiliates (as that term is defined in EXHIBIT 1 hereto) shall be aggregated). For purposes of this Agreement, the determination of aggregate Limited Partner interests in the Partnership shall be based on the aggregate Limited Partner interests in the Partnership held by a Limited Partner and any affiliates thereof, which aggregate holdings shall entitle such Limited Partner and affiliates, if any, to one representative on the Advisory Committee. The General Partner will be responsible for administration of the Advisory Committee and shall have the right to attend any meeting of the Advisory Committee, but shall be excluded from Advisory Committee membership. The General Partner will distribute to the Advisory Committee monthly profit and loss statements of the Partnership and any other monthly financial statements prepared for management personnel. The General Partner will distribute to the Advisory Committee quarterly profit and loss statements, balance sheets and statements of cash flow of the Partnership. The General Partner will distribute to the Advisory Committee the proposed annual operating plan at the same time that it is submitted pursuant to Section 4.7(c) to the Limited Partner having the largest interest in the Partnership, and each member of the Advisory Committee shall have the right to consult with the General Partner regarding such plan for ten (10) days after receipt. In addition, the General Partner will distribute the foregoing reports to any Limited Partner that would be entitled to be on the Advisory Committee but due to regulatory requirements is precluded from membership on the Advisory Committee. The Advisory Committee (including any Limited Partner that because of regulatory requirements is precluded from membership on the Advisory Committee) will meet quarterly in a location approved by the General Partner and a majority of the members of the Advisory Committee, and will consult with and advise the General Partner with respect to the business of the Partnership and perform such other advisory functions as may be requested by the General Partner from time to time; provided, however, that the Advisory Committee shall not perform any functions or duties, which, if performed by a Limited Partner, would constitute participation in the control of the business of the Partnership under the Act. The doing of any act or the failure to do any act by any member of the Advisory Committee, acting in its capacity as such, the effect of which may cause or result in loss, liability, damage or expense to the Partnership or any Partner, shall not subject such member to any liability to the Partnership or to any Partner, except that such member may be so liable if it acted fraudulently or in bad faith or was guilty of willful misconduct or a breach of this Agreement. The Partnership shall pay all reasonable expenses of each member of the Advisory Committee incurred in connection with attendance at Advisory Committee meetings or otherwise in the performance of his or her duties as a member of the Advisory Committee. In the event that interests in the Partnership are converted into or exchanged for interests in a corporation (other than in connection with a sale of interests in the Partnership), the General Partner will take all actions necessary to cause a director of such corporation at all times to be a person designated by each Limited Partner entitled to a representative on the Advisory Committee, so long as such Limited Partner owns an interest in such corporation. -26- 33 (e) Dissolution or Bankruptcy of a Limited Partner. In the event of the dissolution, liquidation, bankruptcy or insolvency of a Limited Partner, the interest of such Limited Partner will continue at the risk of the Partnership business until the dissolution and winding up of the Partnership. The legal representative of a Limited Partner who has dissolved, liquidated or been declared bankrupt or become insolvent will succeed to such Limited Partner's interest in the Partnership, but will not be a substituted Limited Partner without the prior written consent of the General Partner which consent may be granted or denied in the sole and absolute discretion of the General Partner without the consent of any Limited Partner. 4.8 Successor General Partner. (a) Removal of the General Partner. (i) Seventy percent (70%) in interest of the Limited Partners (or a majority in interest of the non-TCI Limited Partners with respect to Section 4.8(a)(i)(D)) may initiate removal of the General Partner by delivering written notice to the General Partner (x) specifying one or more grounds for removal that the Limited Partners believe exist, and, (y) if the notice specifies grounds for removal described in Section 4.8(a)(i)(A), selecting an individual to arbitrate whether such grounds exist in accordance with Section 4.8(a)(ii). For purposes of this Section 4.8(a), grounds for removal means any of the following: (A) conduct by or on behalf of the General Partner in connection with the Partnership that constitutes willful misconduct, bad faith, gross negligence, reckless disregard of its duties, criminal intent, or a material breach of this Agreement; (B) acceleration of the senior debt of the Partnership, IP-IV, any Investing Partnership or any operating company for any reason; (C) the occurrence of any event of default that permits acceleration of the Partnership's, IP-IV's, any Investing Partnership's or any operating company's senior debt, if such event of default has not been waived or cured within sixty (60) days of the date the General Partner knew or should have known of its occurrence; or (D) the death or permanent disability of Leo J. Hindery, Jr. ("Hindery"), or the refusal by Hindery, in the event that he ceases to be employed by TCI or an affiliate of TCI at any time prior to the sale of all or substantially all of the assets of the Partnership, to return to a position with the Partnership such that his relationship with the Partnership is substantially similar to the relationship he had with the Partnership prior to February 7, 1997. (ii) The existence of grounds for removal with respect to matters described in Section 4.8(a)(i)(A) shall be determined by arbitration. Within ten (10) business days after -27- 34 its receipt of the Limited Partners' notice described in Section 4.8(a)(i), the General Partner shall send a written notice to the Limited Partners selecting a second individual to arbitrate whether grounds for removal exist. If the General Partner fails to select a second arbitrator within the time period specified in the preceding sentence, the existence of grounds for removal shall be determined by the arbitrator selected by the Limited Partners (and such arbitrator shall be deemed to be the "arbitration panel" for purposes of this Section 4.8(a)). If the General Partner selects a second arbitrator within the specified time period, the existence of grounds for removal shall be determined by an arbitration panel consisting of the arbitrator selected by the Limited Partners, the arbitrator selected by the General Partner, and a third arbitrator selected by the two arbitrators previously selected. None of the arbitrators selected pursuant to this Section 4.8(a) shall be associated or affiliated with any of the Partners or with any member of the General Partner. The arbitration panel shall conduct its proceedings in San Francisco in accordance with the commercial rules of the American Arbitration Association then in effect and the determination of such panel shall be final and binding upon and enforceable against all Partners. (iii) If the required percent of the Limited Partners (with respect to matters described in Section 4.8(a)(i)(B), (C) or (D) or the arbitration panel (with respect to matters described in Section 4.8(a)(i)(A)) determines that grounds for removal exist, then: (A) A successor general partner of the Partnership shall be selected by seventy percent (70%) in interest of the Limited Partners. If the Limited Partners are unable to agree on a successor general partner within sixty (60) days after the determination under Section 4.8(a)(i)(B) or (C) that grounds for removal exist, the Partnership shall be dissolved in accordance with Article 7. If the Limited Partners are unable to agree on a successor general partner after the determination under Section 4.8(a)(i)(D) that grounds for removal exist, the General Partner shall continue to serve as general partner of the Partnership until a successor general partner is selected. (B) Promptly following the determination that grounds for removal exist, or upon the designation of a successor general partner in accordance with Section 4.8(c), the Partners and the members of the General Partner shall undertake to obtain any government consents and approvals necessary to permit the actions described in the following paragraphs of this Section 4.8(a)(iii) to be taken. Such actions shall be taken as soon as practicable after all such consents and approvals have been obtained; provided, however, that if all such consents and approvals shall not have been obtained within one (1) year after the determination by the arbitration panel that grounds for removal exist, the Partnership shall be dissolved in accordance with Article 7. (C) The successor general partner designated in accordance with Section 4.8(a)(iii)(A) or Section 4.8(c) shall be admitted as the general partner of the Partnership and the General Partner shall be converted into a limited partner of the Partnership as set forth in Section 4.8(a)(iii)(D). The successor general partner shall, beginning on the date of admission, have the same -28- 35 authority and obligations that the removed general partner had and shall have such rights to distributions and allocations as are determined by the unanimous consent of the Limited Partners and the removed General Partner. Upon the admission of the successor general partner, the rights to distributions and allocations of the Partners shall be modified to the extent required to reflect the rights accorded to the successor general partner. The admission of a successor general partner to the Partnership shall be deemed to have occurred prior to the effective date of the conversion of the General Partner. (D) Upon removal of the General Partner as general partner of the Partnership, its interest in the Partnership shall be converted to a limited partnership interest and the Partnership Agreement shall be amended to reflect the events set forth in this Section 4.8. (E) The removed General Partner shall remain liable for any obligations and liabilities incurred by it as general partner prior to the effective date of its removal but shall be free of any and all obligations or liabilities incurred on account of the activities of the general partner of the Partnership from and after that time. (b) Withdrawal of the General Partner. (i) For purposes of this Section 4.8(b), "withdrawal of the General Partner" shall include the occurrence of any of the following: (A) any event that causes the General Partner to cease to be the General Partner; (B) the bankruptcy, insolvency, or appointment of a trustee to manage the affairs of the General Partner or Robert J. Lewis; (C) the dissolution, whether or not required by operation of law or judicial decree, of the General Partner; (D) the death of Robert J. Lewis; (E) the incapacity of Robert J. Lewis such that he is unable to perform substantially all of his duties as chief executive officer of the managing member of the General Partner for a period of nine (9) months; or (F) any other event that causes the General Partner to cease to be controlled directly or indirectly through one or more intermediaries by Robert J. Lewis -29- 36 (ii) Upon the withdrawal of the General Partner, the provisions of Section 4.8(a)(iii) shall be complied with, however, the time frames set forth in Sections 4.8(a)(iii)(A) and (B) shall run from the date of withdrawal of the General Partner. (c) Hindery's Return to the Partnership. In the event that Hindery ceases to be employed by TCI or an affiliate of TCI at any time prior to the sale of all or substantially all of the assets of the Partnership, Hindery may elect, in his sole discretion, directly or indirectly to return to a position with the Partnership such that his relationship with the Partnership is substantially similar to the relationship he had with the Partnership prior to February 7, 1997. In the event that Hindery elects to return to such a position with the Partnership and his return requires removal of the General Partner, then Hindery shall designate a successor general partner and the Partners shall comply with the provisions contained in Sections 4.8(a)(iii)(B) through 4.8(a)(iii)(E) to replace the General Partner (or any successor general partner then in existence) with the successor general partner designated in accordance with this Section 4.8(c) by Hindery. (d) General Provision Regarding Approvals by the Limited Partners. For purposes of any provision of this Section 4.8 that refers to the approval of a specified interest of the Limited Partners, any Limited Partner that is an affiliate of the General Partner shall not be entitled to consent or approve the matter at issue and such Limited Partner's interest shall not be taken into account in determining whether the matter at issue has been approved by Limited Partners holding the requisite interest. (e) Right To Recover Damages. (i) Removal of the General Partner pursuant to this Section 4.8 shall not limit the right of the Partnership or any Partner to recover any direct compensatory damages suffered by such person as a result of any breach of this Agreement by the General Partner or any other person. (ii) Removal of the General Partner, except pursuant to the terms of this Agreement, shall entitle the General Partner to receive, in cash compensation, damages for all direct and indirect economic consequences of such removal, including, but not limited to, damages for all lost profits. Such removed General Partner's interest in the Partnership shall be converted to a limited partnership interest pursuant to Section 4.8(a)(iii)(D). 4.9 Sale Initiation Rights. (a) Any time after July 31, 1999, Partners (other than Tele-Communications, Inc. or any directly or indirectly controlled affiliate thereof which is a Partner (collectively "TCI")) comprising twenty percent (20%) or more of the Interests in the Partnership may petition the General Partner to review, report on and recommend (or not) a sale of some or all of the Partnership's cable systems. (b) Any time after July 31, 2001, (i) Partners (other than TCI, the General Partner and InterMedia Partners, a California limited partnership ("IP-I")), comprising a majority or more of the Interests in the Partnership (other than Interests in the Partnership held by TCI, the General Partner and IP-I) may force a sale of one (1) or both of the Partnership's two -30- 37 significant cable system clusters (i.e., (a) middle Tennessee and (b) eastern Tennessee, eastern Georgia and western South Carolina), by sending a notice to such effect (the "Sale Notice") to the General Partner; provided that TCI shall have a "right of first offer" related thereto as provided in Section 4.9(d) and the terms of any such sale shall be approved by Partners (other than TCI, the General Partner and IP-I) comprising a majority or more of the Interests in the Partnership (other than Interests in the Partnership held by TCI, the General Partner and IP-I), provided that any Sale Notice must include the sale of all of the systems in each cluster and shall include all significant clusters, or (ii) Partners (including TCI, the General Partner and IP-I) comprising seventy percent (70%) or more of the Interests in the Partnership may force a sale of some or all of the Partnership's cable systems by sending a Sale Notice to the General Partner and the terms of any such sale shall be approved by Partners (including TCI, the General Partner and IP-I) comprising seventy percent (70%) or more of the Interests in the Partnership unless such sale is to TCI in which case the foregoing percentage required to approve the terms of the sale to TCI shall be 75%. The Sale Notice shall indicate which cable television systems are desired to be sold and any desired price. The General Partner shall promptly respond to the Partners that sent the Sale Notice (the "Sale Partners") with a good faith proposal for effectuating the sale of the assets specified in the Sale Notice, such proposal to be approved by the Sale Partners. Immediately upon approval of such proposal, the General Partner shall use its best efforts to effect the sale on such terms as soon as is reasonably practicable and the General Partner will provide the Partners with monthly progress reports on the sale process. (c) In addition to Section 4.9(b), at any time, the General Partner may elect to (i) sell all or substantially all of the Partnership's cable systems subject to obtaining the consent of Partners (other than TCI) comprising a majority or more of the Partnership Interests (other than Partnership Interests held by TCI); provided that, if the General Partner makes an election to sell pursuant to this Section 4.9(c)(i) prior to July 31, 2001, TCI shall have a "right of first refusal" related thereto in accordance with the procedures set forth in Section 4.9(e) or (ii) sell some or all of the Partnership's cable systems subject to obtaining the consent of Partners (including TCI) comprising at least seventy percent (70%) of the Partnership Interests unless the sale is to TCI in which case the foregoing percentage shall be seventy-five percent (75%). (d) Before the Partnership shall offer to sell any of the Partnership's cable television systems pursuant to Section 4.9(b)(i), the General Partner shall (i) first deliver a notice to TCI offering to sell all such assets to TCI and specifying the purchase price and other terms on which the General Partner would propose to sell such assets to any third party (the date of such notice being the "Notice Date") and (ii) deliver to each Limited Partner a copy of an appraisal of any such cable television system conducted by an independent appraisal firm to be selected by the General Partner to the reasonable satisfaction of the Advisory Committee, provided, that such appraisal firm has no current or pre-existing relationship with the General Partner or any of its Affiliates other than transactions in which the appraisal firm (i) represents the General Partner or any of its Affiliates as a buyer or seller, (ii) represents the other party to a transaction with the General Partner or any of its Affiliates as a buyer or seller or (iii) any other transaction in the ordinary course of business with such appraisal firm on arm's-length terms. Within thirty (30) days after the Notice Date, TCI may, by -31- 38 giving notice to the General Partner elect, to purchase all such assets for such purchase price and on such other terms specified in such notice and shall enter into an agreement binding it to such purchase within ninety (90) days after its election to exercise the right under such notice. If TCI fails to notify the General Partner of its agreement to purchase all of such assets as of the end of such thirty (30) day period, fails to enter into a purchase agreement within ninety (90) days of such election date, or fails to purchase the assets within either (i) one hundred fifty (150) days after entering into a purchase agreement or (ii) the earlier of ten (10) days after all regulatory and franchise approvals have been obtained or three hundred sixty (360) days after the Notice Date (each an "Abandonment Date"), TCI will not have the right to purchase any of such assets except as provided in the subsequent provisions of this Section 4.9(d) or if the failure to purchase such assets is due to a breach of such purchase agreement by the Partnership and, in the event of such abandonment, the TCI affiliates who are Limited Partners will be deemed to have approved any subsequent sale by the Partnership pursuant to the terms of this Section 4.9(d); provided, however, that nothing contained herein shall preclude TCI and its affiliates from participating in any auction of such assets by the Partnership. If TCI elects not to or does not purchase such assets offered in accordance with the terms of this Section 4.9(d), the General Partner may thereafter sell such assets to any third party only at a price equal to or greater than the price and on terms and conditions not materially more favorable to the purchaser than those specified in the notice delivered pursuant to this Section 4.9(d), provided that a binding agreement for such sale is executed within two hundred ten (210) days after the Abandonment Date and such sale shall be consummated within four hundred fifty (450) days of the Abandonment Date and, provided, further that in the event TCI enters into a purchase agreement with respect to such assets, but fails to close (other than due to a breach of the agreement by the Partnership), then the Partnership will be free to sell such assets at a price less than the price, and on terms and conditions materially more favorable to the purchaser than those, agreed to with TCI, but TCI will be permitted to participate in any auction by the Partnership for such assets. If a binding agreement is not executed within such two hundred ten (210) day period or such sale is not consummated within such four hundred fifty (450) day period, then the Partnership shall be required to again offer such assets to TCI pursuant to and must otherwise comply with the terms of this Section 4.9(d) unless the Partnership had previously entered into an agreement with respect to such assets and TCI had failed to close such agreement due to failure to obtain regulatory or franchise consents or due to a breach by TCI. The rights of TCI pursuant to this Section shall terminate if TCI enters into a binding agreement with respect to any of the Partnership's cable television systems and fails to close such purchase due to its breach; provided that TCI and its affiliates may participate in any auction by the Partnership of its assets. (e) If the Partnership desires to sell any of its cable systems as provided in Section 4.9(c)(i) to a third party pursuant to a bona fide written offer (which shall set forth all material terms of the proposed sale but may be subject to reasonable and customary conditions in the cable television industry) by such third party to purchase such cable systems for cash, then the Partnership shall first offer to sell such cable systems to TCI at the price and on the other terms stated in such bona fide written offer. The Partnership's offer to TCI shall be in writing and shall be accompanied by a copy of the third party bona fide offer. TCI shall have thirty (30) days from the date of receipt of such offer in which to -32- 39 accept it by giving written notice of such acceptance to the General Partner. If TCI fails to accept the Partnership's offer within such thirty (30) day period, the Partnership will be free to sell such cable systems for a period of three hundred sixty (360) days after the end of the thirty (30) day right of first refusal period, or such longer or shorter period as may be specified in the original bona fide offer, but only at a price and on terms not more favorable to the purchaser than those contained in the bona fide offer. If TCI timely accepts the Partnership's offer, TCI must enter into an agreement binding it to such purchase within ninety (90) days after its acceptance of such offer and must purchase such cable systems within either (i) one hundred fifty (150) days after entering into a purchase agreement or (ii) the earlier of ten (10) days after all regulatory and franchise approvals have been obtained or three hundred sixty (360) days after receipt of the Partnership's offer, or in either case, such longer or shorter period as may have been specified in the original bona fide offer. If TCI accepts the Partnership's offer but fails to enter into a purchase agreement or fails to purchase the cable systems, in either case within the respective periods specified in the preceding sentence, then the Partnership may sell such cable systems at a price and on terms not more favorable to the purchaser than those contained in the bona fide written offer within the time period specified in such offer or, if no time period is specified in the offer, within three hundred sixty (360) days and TCI will not have the right to purchase any of such cable systems within such period. Any sale to any third party pursuant to this Section 4.9(e) shall not be connected in any way with any other transaction (including the sale of any other assets) under which consideration of any kind is transferred to the third party by the Partnership such that the price purported to be paid for the Partnership's cable systems (as specified in the bona fide offer) could overstate the value assigned thereto by the third party. (f) For purposes of this Section 4.9, all references to the Partnership's cable systems shall mean any cable system in which the Partnership has an ownership interest either directly or indirectly through IP-IV or any Investing Partnership. 4.10 Nonvoting Interests. Notwithstanding anything to the contrary in this Agreement, if (i) a Limited Partner or any affiliate of such Limited Partner is subject to the Bank Holding Company Act of 1956, as amended, and Regulation Y of the Board of Governors of the Federal Reserve System (the "FRB") promulgated thereunder (such Limited Partner and any of its affiliates hereinafter collectively referred to as a "BHC LP"), (ii) the limited partnership interests of the Partnership (the "Interests") held by the BHC LP exceed five percent (5.0%) of the then total outstanding Interests (exclusive of the Nonvoting Interests, as defined below); and (iii) the BHC LP has not received the approval of the FRB to hold more than five percent (5.0%) of the Interests, then the overline amount of the Interests in excess of five percent (5.0%) shall constitute a separate class of limited partnership interests hereinafter referred to as "Nonvoting Interests". In addition, the aggregate amount of the Interests and Nonvoting Interests held by a BHC LP, that has not received the approval of the FRB to hold more than five percent (5.0%) of the Interests, shall at no time exceed twenty-four and nine-tenths percent (24.9%) of the aggregate amount of all outstanding Interests and Nonvoting Interests. The rights, privileges, benefits and liabilities appertaining to the Nonvoting Interests shall be identical in all respects to the rights, privileges, benefits and liabilities appertaining to the Interests, except that (i) holders -33- 40 of Nonvoting Interests shall not be entitled to vote upon or give consents in respect of any action by the Partners, except those matters that, in the judgment of the BHC LP, acting upon advice of legal counsel, would significantly and adversely affect the rights or preference of its Interests or Nonvoting Interests, including but not limited to the issuance of additional Interests or Nonvoting Interests; any modification or amendment relating to the terms of its Interests, Nonvoting Interests or this Agreement; or the dissolution of the Partnership and (ii) the Nonvoting Interests (other than such Nonvoting Interests that are subject to the exception set forth in the immediately preceding clause (i)) shall not be included in either the numerator or the denominator of any computation of the required percentage in interest of the Limited Partners hereunder for all such purposes (except where the consent of the holders of the Nonvoting Interests is required). ARTICLE 5 Tax Matters and Reports 5.1 Filing of Tax Returns. The General Partner, at the expense of the Partnership, shall prepare and file, or cause the accountants of the Partnership to prepare and file, all required tax returns, including a federal information tax return in compliance with section 6031 of the Code and any required state and local income tax and information returns for each tax year of the Partnership. The General Partner shall act as the Tax Matters Partner of the Partnership as that term is defined in section 6231(a)(7) of the Code. 5.2 Tax Reports to Current and Former Partners. Within ninety (90) days of the end of each fiscal year, the Partnership shall prepare and mail, or cause its accountants to prepare and mail, to each Partner and, to the extent necessary, to each former Partner (or its legal representatives), a report setting forth in sufficient detail such information as is required to be furnished to the Partners by law (e.g., section 6031(b) of the Code and regulations thereunder) and as shall enable such Partner or former Partner (or his or its legal representatives) to prepare their respective federal and state income tax or informational returns in accordance with the laws, rules and regulations then prevailing. Partners subject to ERISA will receive information necessary for them to calculate the fair market value of their Partnership Interests (determined in accordance with Section 4.4). 5.3 Restriction on General Partner Activity with Respect to Publicly Traded Partnerships. Without the consent of all of the Limited Partners, the General Partner shall not have the authority on behalf of the Partnership to: (a) list, recognize, or facilitate the trading of partnership interests (or any interest therein) on any "established securities market" within the meaning of section 7704 of the Code, or permit any of its affiliates to take such actions, if as a result thereof the Partnership might be taxed for federal income tax purposes as an association taxable as a corporation; or (b) create for the partnership interests (or any interest therein) a "secondary market (or the substantial equivalent thereof)" within the meaning of section 7704 of the Code or -34- 41 otherwise permit, recognize or facilitate the trading of such interests (or any interest therein) on any such market, or permit any of its affiliates (or to the extent the General Partner has rights with respect thereto, the selling agents or any of their affiliates) to take such actions, if as a result thereof the Partnership might be taxed for federal income tax purposes as an association taxable as a corporation. 5.4 Duties and Obligations of the General Partner with Respect to Publicly Traded Partnerships. The General Partner shall monitor the transfers of partnership interests to determine if such interests are being traded on an "established securities market" or a "secondary market (or the substantial equivalent thereof)" within the meaning of section 7704 of the Code, and shall take (and cause its affiliates to take) all steps within its power and authority as are reasonably necessary or appropriate to prevent any such trading of interests. 5.5 Books and Records. Complete books and records accurately reflecting the accounts, business, transactions and Partners of the Partnership shall be maintained and kept by the General Partner at the Partnership's principal place of business. The books and records of the Partnership required to be maintained by section 15615 of the Act shall be open at reasonable business hours on prior appointment for inspection and copying by the Partners. Notwithstanding anything to the contrary in this Agreement, the General Partner shall have the right to keep confidential from the Limited Partners for such period of time as the General Partner deems reasonable, any information which the Partnership is required by law or by agreement with a third party to keep confidential and any information which relates to its purchasing of individual items of programming, plant or equipment which it reasonably deems confidential. 5.6 Fiscal Year. Except as may otherwise be required by the federal tax laws, the fiscal year of the Partnership for both financial and tax reporting purposes shall end on December 31. 5.7 Method of Accounting. The books and accounts of the Partnership shall be maintained using the accrual method of accounting for financial reporting purposes and for tax purposes and shall be annually audited by a "Big Six" accounting firm (or a successor thereof). Those documents relating to allocations of items of Partnership income, gain, loss, deduction or credit and Capital Accounts shall be kept under federal income tax accounting principles as provided herein. ARTICLE 6 Conflicts of Interest; Indemnification; Exculpation 6.1 Outside Activities. Without the consent of seventy percent (70%) in interest of the Limited Partners, the General Partner (and its members, partners, employees, agents and affiliates, including, but not limited to, Robert J. Lewis) may not begin the offer and sale of interests in other enterprises with the purpose of investing in cable television systems until -35- 42 the earlier of July 31, 1997 or such time as sixty-six and two-thirds percent (66-2/3%) of the committed capital contributions to the Partnership shall be invested or committed for investment. Without the consent of a majority in interest of the Limited Partners, the General Partner (and its members, partners, employees, agents and affiliates, including, but not limited to, Robert J. Lewis) may not begin to actively supervise the investment of capital of such other enterprises or partnerships until the earlier of July 31, 1997 or such time as ninety-five percent (95%) of the committed capital contributions to the Partnership shall be invested or committed for investment. The General Partner shall first offer any investment opportunities within the scope of the Partnership, IP-IV's and the Investing Partnerships' business purpose and for which the Partnership, IP-IV or the Investing Partnerships have adequate resources to take advantage of the opportunity to the Partnership, IP-IV and the Investing Partnerships and, to the extent that the Partnership and the Investing Partnerships, after good faith consideration by the General Partner, do not invest in such opportunity or take all of such opportunity, the General Partner may elect to give or share such investment opportunity to or with one or more of the following: any Partner, any officer, director, shareholder, member, partner, employee or affiliate of a Partner, any enterprise or partnership in which the General Partner has an interest, or any nonaffiliated person. Notwithstanding the foregoing, in the event the General Partner is permitted under the provisions of this Section 6.1 to begin the offer and sale of interests in other enterprises with the purpose of investing in cable television systems, and the General Partner believes such enterprises may invest in cable television systems in areas contiguous to those owned by the Partnership, IP-IV or any Investing Partnership, the General Partner will offer the Limited Partners an opportunity to invest in such enterprise. Except as set forth in this Section 6.1, the General Partner or its members, partners, employees, agents or affiliates shall not be prohibited from engaging directly or indirectly in other activities, or from directly or indirectly purchasing, selling and holding securities or assets in cable television systems or corporations for their account or for the accounts of others. Any Limited Partner (and their members, partners, employees, agents and affiliates) may engage in any other enterprises, including enterprises in competition or in conflict with the Partnership. The Partnership shall not have any right to any income or profit derived by any Partner, or its members, partners, officers, directors, employees, agents or affiliates from any enterprise, opportunity or transactions permitted by this paragraph. Each Limited Partner shall have the right to transact business with the Partnership, IP-IV or the Investing Partnerships. Neither the General Partner nor any of its affiliates shall sell securities or assets to or purchase securities or assets from the Partnership without the unanimous consent of the Limited Partners; provided that the transactions set forth in EXHIBIT 2 hereto may be consummated by the Partnership, IP-IV or any Investing Partnership without any further consent of the Limited Partners. The General Partner may, on behalf of the Partnership or cable systems of IP-IV or any Investing Partnership, enter into cost and revenue sharing agreements with cable systems adjacent to those owned by the Partnership, IP-IV or any Investing Partnership including those systems purchased by any enterprise or partnership in which the General Partner, any affiliate of the General Partner or the Partnership or any member of the General Partner has an interest (the "Adjacent Systems"), to operate the Adjacent Systems as a single system with the cable systems of the Partnership, IP-IV or any Investing Partnership with costs equitably allocated between the various systems as the General Partner and the owner or operator of such Adjacent System shall determine based on the relative costs associated -36- 43 with such systems and, if determined by the General Partner and the owner or operator of such Adjacent System to be in the best interests of the Partnership, IP-IV, the Investing Partnerships and the Adjacent Systems, to sell such systems as a single system and allocate the sales revenues in such manner as such parties deem appropriate based on the relative values of such systems; provided, however, the terms of any such arrangement are disclosed to the Limited Partners and are on arm's-length terms and conditions. The parties hereto hereby waive, and covenant not to sue on the basis of, any law (statutory, common law or otherwise) respecting the rights and obligations of the Partners inter se which is or may be inconsistent with this Section 6.1 with respect to the matters covered by this Section 6.1, but in no event shall the foregoing be construed as limiting any rights or remedies with respect to a breach of this Section 6.1. 6.2 Contracts with the General Partner, Affiliates and Limited Partners. The General Partner may, on behalf of the Partnership, IP-IV or portfolio companies of the Investing Partnerships, enter into contracts with itself or any of its members, partners, employees, agents or affiliates, including but not limited to InterMedia Management, Inc. ("IMI"), a corporation wholly owned by Robert J. Lewis; provided, however, that such transactions shall be on terms no less favorable to the Partnership than are generally afforded from unrelated third parties or shall require the approval of seventy percent (70%) in interest of the Limited Partners, excluding any interest as a Limited Partner owned or controlled directly or indirectly by the General Partner, which approval shall not be unreasonably withheld. The validity of any transaction, agreement or payment involving the Partnership, IP-IV or an Investing Partnership and the General Partner or any affiliate of the General Partner or a Limited Partner shall not be affected by reason of (a) the relationship between the Partnership, IP-IV or portfolio companies of an Investing Partnership, and the General Partner or such member, partner, employee, agent or affiliate of the General Partner or a Limited Partner or the relationship between such member, partner, employee, agent or affiliate of the General Partner or a Limited Partner and the General Partner or (b) the absence of approval of said transaction, agreement or payment by the Limited Partners if the proceeds therefrom offset but do not exceed the Administration Fee. 6.3 Indemnification of the Partners. The Partnership shall indemnify and hold harmless the General Partner, any Limited Partner, any Advisory Committee member and any member, partner, employee or agent of the General Partner, any Limited Partner or any Advisory Committee member and any employee or agent of the Partnership and/or the legal representatives of any of them, and each other person who may incur liability as a general partner in connection with the management of the Partnership or any corporation or other entity in which the Partnership has an investment, against all liabilities and expenses (including amounts paid in satisfaction of judgments, in compromise, and as counsel fees) reasonably incurred by him or it in connection with the defense or disposition of any civil action, suit or other proceeding, in which he or it may be involved or with which he or it may be threatened, while a general partner or serving in such other capacity or thereafter, by reason of its being or having been a general partner, or by serving in such other capacity, except with respect to any matter which constitutes willful misconduct, bad faith, gross negligence or reckless disregard of the duties of its office, or material breach of this Agreement. The Partnership shall advance, in the sole discretion of the General Partner, to -37- 44 the General Partner, any Limited Partner, any Advisory Committee member and any member, partner, employee or agent of the General Partner, any Limited Partner, any Advisory Committee member or the Partnership reasonable attorneys' fees and other costs and expenses incurred in connection with the defense of any such action or proceeding. The General Partner hereby agrees, and each member, partner, employee or agent of the General Partner and the Partnership shall agree in writing prior to any such advancement, that in the event he or it receives any such advance, such indemnified party shall reimburse the Partnership for such fees, costs and expenses to the extent that it shall be determined that he or it was not entitled to indemnification under this Section. The rights accruing to a General Partner, any Limited Partner and each member, partner, employee or agent of the General Partner, any Limited Partner or the Partnership under this paragraph shall not exclude any other right to which it or they may be lawfully entitled; provided, that any right of indemnity or reimbursement granted in this paragraph or to which any indemnified party may be otherwise entitled may only be satisfied out of the assets of the Partnership, and no withdrawn General Partner, and no Limited Partner, shall be personally liable with respect to any such claim for indemnity or reimbursement. Notwithstanding any of the foregoing to the contrary, the provisions of this Section 6.3 shall not be construed so as to provide for the indemnification of the General Partner, any Limited Partner, and Advisory Committee member or any member, partner, employee or agent of the General Partner, any Limited Partner or Advisory Committee member for any liability to the extent (but only to the extent) that such indemnification would be in violation of applicable law or such liability may not be waived, modified or limited under applicable law, but shall be construed so as to effectuate the provisions of this Section 6.3 to the fullest extent permitted by law. 6.4 Exculpation. The General Partner and any member, partner, employee or agent of the General Partner or the Partnership shall not be liable to any Limited Partner or the Partnership for mistakes of judgment or for action or inaction which the General Partner or any such member, partner, employee or agent of the General Partner or the Partnership reasonably believed to be in the best interests of the Partnership unless such action or inaction constitutes willful misconduct, bad faith, gross negligence, reckless disregard of its duties or material breach of this Agreement. The General Partner may consult with counsel, accountants and other experts in respect of Partnership affairs and be fully protected and justified in any action or inaction which is taken in accordance with the advice or opinion of such counsel, accountants or other experts, provided that they shall have been selected with reasonable care. Notwithstanding any of the foregoing to the contrary, the provisions of this Section 6.4 shall not be construed so as to relieve (or attempt to relieve) the General Partner and any member, partner, employee or agent of the General Partner or the Partnership of any liability, to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law, but shall be construed so as to effectuate the provisions of this Section 6.4 to the fullest extent permitted by law. -38- 45 ARTICLE 7 Termination and Dissolution 7.1 No Dissolution. The Partnership shall not be dissolved by the admission of substituted Limited Partners or by the admission of a new General Partner in accordance with the terms of this Agreement. The dissolution or bankruptcy of a Limited Partner shall not cause a dissolution of the Partnership. 7.2 Events of Dissolution. The Partnership shall dissolve upon the first to occur of the following: (i) expiration of the term of the Partnership specified in Section 1.6 hereof, (ii) the bankruptcy, insolvency or appointment of a trustee or receiver to manage the affairs of the General Partner, (iii) the voluntary resignation of Robert J. Lewis as chief executive officer of the managing member of the General Partner if a successor general partner has not been appointed in accordance with Section 4.8 hereof, (iv) the removal of the General Partner pursuant to Section 4.8(a) if a successor general partner of the Partnership is not appointed pursuant to Section 4.8 hereof, (v) dissolution being required by operation of law or judicial decree including, without limitation, the withdrawal of the General Partner where there is no remaining or surviving general partner, (vi) the determination by the General Partner with the affirmative consent of seventy percent (70%) in interest of the Limited Partners, (vii) the Partnership becoming taxable as a corporation for federal tax purposes or, (viii) the determination by the General Partner, based upon advice of counsel, that the Partnership would be required to register as an investment company under the Investment Company Act and there is no reasonably practicable means of avoiding such requirement. Notwithstanding anything to the contrary in this Section 7.2, without the unanimous consent of the Limited Partners, the General Partner agrees not to voluntarily withdraw as a general partner of the Partnership, and Robert J. Lewis agrees not to voluntarily resign as chief executive officer of the managing member of the General Partner, and the General Partner and Robert J. Lewis each agrees that it or he will not voluntarily take or permit any action that would cause the Partnership to cease to be controlled directly or indirectly by Robert J. Lewis and if any of such persons effects such withdrawal or cessation of control in violation of this Agreement, the Partnership may recover damages for breach of this Agreement. 7.3 Winding-Up. Upon the occurrence of an event of dissolution, the Partnership shall be wound up and liquidated. The General Partner or, if there is no general partner or if the General Partner or the managing member of the General Partner wrongfully caused the dissolution of the Partnership, a liquidator appointed by a majority in interest of the Limited Partners, shall proceed with the dissolution and the final distribution. In the dissolution, the General Partner or such liquidator shall use its best efforts to reduce to cash and cash equivalent items such assets of the Partnership as the General Partner or such liquidator shall deem it advisable to sell, subject to obtaining fair value for such assets and any tax or other legal considerations. A reasonable time shall be allowed for the orderly winding up of the business and affairs of the Partnership and the liquidation of its assets in order to minimize any losses otherwise attendant upon such a winding up, provided that the liquidation is carried out in conformity with the requirements of Section 7.4 and section 1.704-1(b)(2)(ii)(b)(2) and (3) of the Income Tax Regulations. -39- 46 7.4 Order of Liquidating Payments and Distributions. In settling accounts after dissolution, the assets of the Partnership shall be distributed as expeditiously as possible in the following order not later than the end of the taxable year of the liquidation (i.e., the date upon which the Partnership ceases to be a going concern as provided in section 1.704-1(b)(2)(ii)(g) of the Income Tax Regulations) or if later, within ninety (90) days after the date of such liquidation: (a) To creditors, including the Partners to the extent of any unpaid expenses or any outstanding loan or advance; (b) To the payment of the costs of winding up the affairs of, liquidating and dissolving the Partnership including, without limitation, expenses of selling assets of the Partnership, discharging the liabilities of the Partnership, distributing the assets of the Partnership and terminating the Partnership in accordance with Section 7.3 hereof; (c) To the establishment of reasonable reserves to provide for obligations to creditors; (d) To the Partners with respect to which any other debts of the Partnership are owing, other than debts arising out of the expulsion or withdrawal of a Partner; (e) To the Preferred Limited Partner in an amount equal to the positive balance in its Capital Account as determined after all adjustments to such account for the taxable year of the Partnership during which the liquidation occurs as are required by this Agreement and section 1.704-1(b) of the Income Tax Regulations, such adjustments to be made within the time specified in such Regulations; (f) To the Junior Preferred Limited Partner in an amount equal to the positive balance in its Capital Account as determined after all adjustments to such account for the taxable year of the Partnership during which the liquidation occurs as are required by this Agreement and section 1.704-1(b) of the Income Tax Regulations, such adjustments to be made within the time specified in such Regulations; (g) To the Partners (other than the Preferred Limited Partner and the Junior Preferred Limited Partner) in the proportion of their respective Capital Accounts as those accounts are determined after all adjustments to such accounts for the taxable year of the Partnership during which the liquidation occurs as are required by this Agreement and section 1.704-1(b) of the Income Tax Regulations, such adjustments to be made within the time specified in such Regulations. 7.5 Termination. The Partnership shall terminate following its dissolution and liquidation pursuant to this Article 7 when all of the Partnership assets as to which it is practicable to do so in the sole discretion of the General Partner or the liquidator shall have been converted into cash, the net proceeds therefrom, as well as any other assets of the Partnership, after payment of or due provision for all debts, liabilities and obligations of the -40- 47 Partnership, shall have been distributed to the Partners as provided for herein and the Partnership shall have been terminated in the manner required by the Act. 7.6 Government Regulation. (a) The General Partner shall use its best efforts to insure that it and the Partnership are in substantial compliance with those provisions, if any, of ERISA with which they are obligated by that statute to comply, and to qualify as a venture capital operating company (as defined in the Department of Labor regulations promulgated under ERISA) subject to the following provisions of this Section 7.6. (b) In the event that at any time after its admission to the Partnership, (i) any Limited Partner delivers to the General Partner a written opinion of counsel, reasonably satisfactory to the General Partner, to the effect that, by reason of the adoption of any law, rule or regulation or the issuance of any order or directive by any governmental authority (a "Regulatory Change"), such Limited Partner's continued participation in the Partnership or the making by such Limited Partner of any additional capital contribution to the Partnership would violate any law, rule, regulation, license, permit or other regulatory requirement binding upon or required of such Limited Partner or would subject such Limited Partner to any penalty or tax to which it was not subject at the time of its admission to the Partnership and which is, in the reasonable judgment of such Limited Partner, material in relation to its investment in the Partnership and is not applicable to such Limited Partner's investments generally or (ii) the General Partner delivers to any Limited Partner an opinion of the Partnership's counsel to the same effect or to the effect that, by reason of a Regulatory Change, such Limited Partner's continued participation in the Partnership would materially restrict the continued conduct of the Partnership's business (any such event described in clause (i) or (ii) of this paragraph (b) is referred to as an "Adverse Regulatory Development" and the Limited Partner affected thereby is referred to as the "Affected Partner"), then the General Partner and the Affected Partner shall cooperate with each other in taking or causing to be taken such action as shall eliminate such Adverse Regulatory Development. Any such opinion of counsel shall describe the applicable Regulatory Change and its effect on the Affected Partner and the Partnership and, insofar as practicable, the actions which would eliminate such Adverse Regulatory Development. (c) If an Adverse Regulatory Development cannot otherwise be resolved to the mutual satisfaction of the Affected Partner and the General Partner, the General Partner and the Affected Partner shall each use its best efforts to find a purchaser for all the Affected Partner's interest in the Partnership, or such part thereof as shall be sufficient to eliminate the Adverse Regulatory Development, on terms and conditions reasonably acceptable to the Affected Partner, and if acceptable to the Affected Partner, the General Partner shall consent to the sale of such interest as long as, in the reasonable judgment of the General Partner, the purchaser thereof has sufficient financial resources to satisfy any remaining obligation to contribute capital to the Partnership to be assumed by such purchaser from the Affected Partner with respect to the interest in the Partnership to be purchased by it and meets the requirements for transfer set forth in Section 8.1. -41- 48 (d) If, within thirty (30) business days after the delivery of an opinion referred to in paragraph (b) above or such later time as the General Partner and the Affected Partner shall agree, the General Partner and the Affected Partner have not resolved to their mutual satisfaction the Adverse Regulatory Development, then the Partnership may take any of the following actions with respect to the Affected Partner's interest in the Partnership, but only upon the delivery to the Affected Partner of an opinion of the Partnership's counsel (which opinion shall be reasonably acceptable to the Affected Partner) to the effect that the taking of such action should eliminate the Adverse Regulatory Development: (i) release the Affected Partner from making any capital contribution with respect to any new investment by the Partnership (and appropriate provisions shall be made in this Agreement to preserve such Affected Partner's interest in all existing investments and to eliminate such Affected Partner's participation in future investments); (ii) redeem the Affected Partner's interest in the Partnership in exchange for the assignment to the Affected Partner of the percentage share of the Partnership's cash and short-term investments which the Affected Partner would receive if all such assets were then distributed to the Partners plus the percentage share in each of the Partnership's other investments and any other assets of the Partnership equal to the share of all such assets it would receive if the Partnership were dissolved at such time and all such assets were liquidated for their then value as determined in accordance with Section 4.4(b), or a cash payment in lieu thereof in an amount equal to the fair market value (as determined pursuant to Section 4.4) of their Partnership Interest as of the date of the determination of an Adverse Regulatory Development; or (iii) terminate and dissolve the Partnership and, if in the judgment of the General Partner it is prudent to do so, distribute all or any portion of the Partnership's investments to the Partners in kind so that, as nearly as practicable, each Partner receives an equal portion of its total distribution in each investment distributed in kind, in which event the General Partner shall offer to establish a successor partnership on terms and conditions in all material respects the same as this Partnership by contributing the property distributed to them by this Partnership. The Partnership shall seek to take the foregoing actions in the order stated and shall take an action subsequently stated only if, in accordance with the opinion of counsel referred to above, none of the actions previously stated should eliminate the Adverse Regulatory Development. (e) If, within sixty (60) business days after the delivery of the opinion referred to in paragraph (b) above or such later time as the General Partner and the Affected Partner shall agree upon, the General Partner and the Affected Partner have not resolved to their mutual satisfaction the Adverse Regulatory Development or the Partnership has not taken any of the actions permitted by paragraph (d) above to eliminate the Adverse Regulatory Development, the Affected Partner, by notice to the Partnership, may require the Partnership to take any of such actions but only upon the delivery to the Partnership of an opinion of counsel (which opinion and counsel shall be reasonably acceptable to the General Partner) to the effect that the taking of such action should eliminate the Adverse Regulatory Development; provided that the Affected Partner shall require the Partnership to take any of the actions stated in paragraph (d) only if, in the opinion of counsel delivered pursuant to this paragraph (e), none of the actions stated in paragraph (d) before the action proposed to be taken would likely eliminate the Adverse Regulatory Development; and provided further that the Partnership shall not be required to take the actions referred to in clause (iii) of -42- 49 paragraph (d) if the Regulatory Change is the imposition on the Affected Partner of a penalty or tax of the type referred to in paragraph (b) and the General Partner reasonably determines that such action would have an effect on the other Limited Partners that is material and adverse in relation to their investment in the Partnership. (f) The Partnership and the Affected Partner shall each bear all expenses it may respectively incur in connection with taking any of the actions permitted or required of it by paragraphs (b) through (e) of this Section 7.6, including the costs of providing any opinions of counsel it is required to provide. (g) Whenever the General Partner proposes to make any cash payment to an Affected Partner as permitted by paragraph (d) or as may otherwise be agreed upon by the Affected Partner and the General Partner or to take any other action pursuant to this Section 7.6 which would adversely and materially affect the interest of the other Limited Partners in relation to their investment in the Partnership, the General Partner shall first obtain the approval of seventy percent (70%) of such Limited Partners for such payment or action. (h) The Partnership or an Affected Partner may take the actions contemplated by this Section 7.6 either (i) in advance of any Regulatory Change coming into effect if all necessary governmental action has occurred to cause such Regulatory Change to come into effect or (ii) prior to expiration of the time periods provided hereunder for the taking of such actions if in the opinion of counsel referred to herein doing so is necessary to avoid an Adverse Regulatory Development coming into effect with respect to an Affected Partner. 7.7 Orderly Methods of Liquidating Payments. Notwithstanding anything to the contrary in this Article 7, if required to maximize the proceeds of liquidation, the General Partner (or the liquidator chosen in accordance with Section 7.3) may, with the consent of seventy percent (70%) in interest of the Limited Partners, implement the distribution provisions of Section 7.4(g) hereof by transfer, on behalf of the Partners, of the assets of the Partnership to a liquidating trustee or trustees. ARTICLE 8 Transfer of Interest, Failure To Pay Capital Contributions, Beneficial Owners 8.1 Transfer of Partnership Interest. No Limited Partner shall sell, assign, mortgage, encumber, hypothecate or otherwise transfer, whether voluntarily or involuntarily, its interest in the Partnership or any part thereof, unless (x) any such transferee entity meets the suitability requirements originally imposed under the subscription agreement on the transferring Limited Partner and (y) such assignment or transfer will not (and, upon request of the General Partner, the transferring Limited Partner provides an opinion of counsel in form and substance satisfactory to the General Partner that such assignment or transfer will not) (A) violate any applicable federal or state securities laws or regulations, subject the -43- 50 Partnership to registration as an investment company or election as a "business development company" under the Investment Company Act; (B) require the General Partner or any of its members to register as an investment adviser under the Investment Advisers Act of 1940; (C) violate any other federal, state or local laws; (D) effect a termination of the Partnership under section 708 of the Code; or (E) cause the Partnership to be treated as an association taxable as a corporation for federal income tax purposes, or violate this Agreement. Notwithstanding the preceding sentence, a Partner may assign or transfer its interest in the Partnership if any such assignment or transfer effects a termination of the Partnership under section 708 of the Code so long as the transferring Partner agrees to indemnify and hold harmless the Partnership and all other Partners against any and all costs and expenses incurred as a direct result of a termination of the Partnership under section 708 of the Code. No transferee or assignee of all or any part of a Limited Partner's interest shall become a Limited Partner without the prior written consent of the General Partner which consent shall not be unreasonably withheld so long as such Partner sells the lesser of all its Partnership Interests or a Partnership Interest representing an initial contribution of at least five million dollars ($5,000,000) and in no event shall the substitution of an assignee or transferee as a Limited Partner require the consent of any Limited Partner. Any purported transfer of any interest of a Limited Partner in the Partnership or any part thereof not in compliance with this Section 8.1 shall be void and of no force or effect and the transferring Partner shall be liable to the other Partners and the Partnership for all liabilities, obligations, damages, losses, costs and expenses (including reasonable attorneys' fees and court costs) arising as a result of such noncomplying transfer. 8.2 Transfer of IP Holdings Affiliates' Interests. Notwithstanding the provisions of Section 8.1, any IP Holdings Affiliate (as that term is defined in EXHIBIT 1 hereto) may transfer any or all of its interest in the Partnership to any other IP Holdings Affiliate at any time, provided that such transfer is made in compliance with clauses (x) and (y) of Section 8.1. 8.3 Indemnification. (a) Each Limited Partner and substituted Limited Partner (each an "Indemnifying Person") shall indemnify and hold harmless the Partnership, the General Partner and every other Limited Partner (each an "Indemnified Person") who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of or arising from (including without limitation from any actual or alleged misrepresentation or misstatement of facts or omission to represent or state facts made by such Limited Partner in connection with) (i) any assignment, transfer, encumbrance or other disposition of all or any part of such Limited Partner's Partnership Interest, or (ii) the admission of such substituted Limited Partner, against losses, liabilities and expenses for which the Partnership or other person has not otherwise been reimbursed (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by it in connection with such action, suit or proceeding. (b) Each Indemnifying Person agrees that no Indemnifying Person will, without the prior written consent of the Indemnified Person, settle, compromise or consent to the entry of any judgment in any pending or threatened action in respect of which indemnification -44- 51 may be sought under this Agreement unless such settlement includes an unconditional release of the Indemnified Person from all liability arising therefrom. Any Indemnifying Person shall have no indemnification obligations with respect to any such claim or demand which has been settled by an Indemnified Person without the prior written consent of such Indemnifying Person, which consent will not be unreasonably withheld or delayed. 8.4 Failure To Pay Capital Contributions. The parties hereto agree that prompt payment of the installments of required capital contributions hereunder is of the essence and that failure of any Partner to make such payments as provided herein will cause substantial injury to the Partnership and the other Partners; further, the amount of damages caused by such injury will be difficult to calculate. Accordingly, the parties hereto agree that in the event that any Limited Partner fails to pay any installment of its required capital contribution to the Partnership promptly when due, the General Partner shall give such defaulting Limited Partner written notice thereof, and if such defaulting Limited Partner shall fail to make such required payment in full within fifteen (15) days following the mailing of such notice or such other longer period as the General Partner may elect, the General Partner may elect, in its sole discretion, either of the following alternatives: (a) to commence legal proceedings against such defaulting Limited Partner to collect the due and unpaid payment, plus interest from the date due at the reference rate as announced from time to time by Bank of America NT&SA, plus two (2) percentage points, plus the expenses of collection, including attorneys' fees; or (b) to rescind and terminate all of the defaulting Limited Partner's interest in the Partnership. In such event, the defaulting Limited Partner will receive, upon termination of the Partnership, the lesser of (1) its paid-in capital or (2) seventy-five percent (75%) of its Capital Account at the time of default (reduced by what its Partnership Interest in subsequent deductions and losses would have been had it remained a Partner in the Partnership) and in such event the remaining amount that would have been distributed to such Limited Partners shall be available for distribution to the remaining Partners in accordance with Article 3. Notwithstanding the foregoing, without the consent of the Limited Partner having the largest interest as a Limited Partner (other than with respect to a default by such Limited Partner) or if the defaulting Limited Partner has not then paid to the Partnership at least one-third of its commitment of equity to the Partnership as in effect on the date hereof, the General Partner shall not have the option to pursue remedies against the defaulting Limited Partner under the terms of clause 8.3(b) above, but instead may only pursue remedies against such Limited Partner pursuant to clause 8.3(a) above or as otherwise provided herein, at law or in equity. The foregoing alternatives, to the extent available as provided above, are in addition to and not in limitation of any other right or remedy of the Partnership under this Agreement, at law or in equity. Losses attributable to a defaulting Limited Partner pursuant to Section 3.1 shall be calculated as if such installment had been paid when due. -45- 52 8.5 Increase in Beneficial Owners. Notwithstanding any other provision of this Agreement, no Limited Partner shall increase the number of its beneficial owners if (a) at such time, such Limited Partner owns more than ten percent (10%) of the Partnership Interests in the Partnership and has more than ten percent (10%) of its assets invested in private investment companies which are not registered under the Investment Company Act of 1940, as amended, because such companies have less than one hundred (100) beneficial owners and do not presently propose to make a public offering of their interests, or (b) such Limited Partner was formed for the purpose of investing in a Partnership Interest. ARTICLE 9 Miscellaneous 9.1 Notices. All notices, approvals, consents and other communications required or permitted to be given under this Agreement shall be in writing and shall be hand delivered (including by messenger or recognized commercial delivery or courier service), sent by facsimile transmission or sent by registered or certified mail, postage prepaid, addressed to the Partner intended at the address set forth below its name on EXHIBIT 1 hereto or at such other address as such Partner may designate by notice given to the other Partners in the manner aforesaid and shall be deemed given and received on the date it is delivered, in the case of delivery by hand or by facsimile (if sent on a business day, or if not sent on a business day, the next business day thereafter) or, in the case of delivery by mail, actual delivery as shown by the addressee's return receipt. Rejection or other refusal to accept or inability to deliver because of a change of address of which no notice was given shall be deemed to be receipt of the notice. 9.2 Governing Law. This Agreement and this limited partnership continued hereby shall be governed by and construed in accordance with the laws of the State of California. 9.3 Amendments. This Agreement may be modified or amended only by an instrument in writing signed by the General Partner and by seventy percent (70%) in interest of the Limited Partners (or such other percentage as required by Section 4.7(b)); provided that, in addition to any amendments otherwise authorized herein, this Agreement may be amended from time to time by the General Partner without the consent of any of the Limited Partners to (i) add to the representations, duties or obligations of the General Partner or surrender any right or power granted to the General Partner herein, (ii) add to the rights or powers granted to the Limited Partners, (iii) clarify any inconsistency between sections hereof and correct any printing, stenographic or clerical errors or omissions; and (iv) to comply with legal or tax requirements provided such compliance does not materially decrease the amount or timing of any distributions, including distributions upon liquidation, or materially change allocations of income or losses, that the Limited Partners would otherwise be entitled to receive pursuant to this Agreement, provided however, that nothing herein shall be construed to permit the General Partner to add to the rights or powers of the Limited Partners if such addition could reasonably be expected to cause the Limited Partners to have liability as general partners or to cause any Limited Partner to be required to -46- 53 consolidate the Partnership for financial reporting purposes, and provided that the General Partner shall not relinquish any rights or powers if such relinquishment could reasonably be expected to prevent it from performing its duties and obligations hereunder or to cause any Limited Partner to be required to consolidate the Partnership for financial purposes. 9.4 Entire Agreement. This instrument together with the Subscription Agreements of the Partners constitute the entire agreement between the Partners with respect to the Partnership and supersede all prior agreements, understandings, offers and negotiations, oral or written. 9.5 Waiver of Partition. Each Partner hereby irrevocably waives any and all rights that it may have to maintain an action for partition of the Partnership or any of the Partnership's property. 9.6 Consents. All consents, agreements and approvals required or permitted by this Agreement shall be in writing and a signed copy thereof shall be filed and kept with the books of the Partnership. 9.7 Successors. Subject to Article 8, all rights and duties of the Partners hereunder shall inure to the benefit of and be binding upon their respective successors and assigns. 9.8 Confidentiality of Investors. Neither the General Partner nor the Partnership shall disclose to any person or entity (other than to another Partner or potential partner or to lenders or potential lenders to the Partnership) the fact that a Limited Partner is an investor in the Partnership except to the extent (a) required by law or legal process upon prior written notice to such Limited Partner or (b) authorized by any such Limited Partner in writing. 9.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. 9.10 Severability. Each provision of this Agreement shall be considered severable and if for any reason any provision which is not essential to the effectuation of the basic purposes of the Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable and contrary to the Act or existing or future applicable law, such invalidity shall not impair the operation of or affect those provisions of this Agreement which are valid. In that case, this Agreement shall be construed so as to limit any term or provision so as to make it enforceable or valid within the requirements of any applicable law, and in the event such term or provision cannot be so limited, this Agreement shall be construed to omit such invalid or unenforceable provisions. 9.11 Affiliate. For purposes of this Agreement, an affiliate of any person shall mean any other person that (i) directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, the specified person; (ii) is a director or officer of, partner in, member of, or trustee of, or serves in a similar capacity -47- 54 with respect to, the specified person or of which the specified person is a director, officer, partner, or trustee, or with respect to which the specified person serves in a similar capacity; (iii) directly or indirectly through one or more intermediaries is the beneficial owner of ten percent (10%) or more of any class of equity securities of the specified person or of which the specified person is directly or indirectly through one or more intermediaries the owner of ten percent (10%) or more of any class of equity securities; (iv) directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, a person described in clause (iii), (v) is acting at the direction and primarily in furtherance of the interests of the specified person or (vi) is an immediate family member of the specified person. Notwithstanding the foregoing, for purposes of Sections 4.7(d), 4.8, 4.9, 6.1 and 6.2 of this Agreement in no event shall any person that is under the direct or indirect control of Robert J. Lewis be deemed to be an affiliate of Tele-Communications, Inc. or its related entities and for purposes of Sections 4.7(d), 4.8 and 6.1, IP-I shall not be deemed to be an affiliate of the General Partner, the Partnership, ICM-IV, IP-IV or any Investing Partnership. 9.12 Power of Attorney. Each Limited Partner, including any additional or substituted Limited Partner, hereby irrevocably constitutes and appoints the General Partner, and each member of the General Partner, and each of them acting singly, its true and lawful agent and attorney-in-fact, with full power and authority of substitution, to make, amend, execute, acknowledge, swear to, deliver, file and record for and on behalf of such Limited Partner, such documents and instruments as may be reasonably necessary to carry out the provisions of, and which is permitted by, this Agreement, including a Certificate of Limited Partnership and any amendments thereto required by law, any amendments to this Agreement by reason of admissions, substitutions or withdrawals of Limited Partners or any amendments to give effect to the voting of the Partners and any amendments permitted by Section 9.3 without the consent of the Limited Partners. The foregoing power of attorney, being coupled with an interest, is hereby declared to be irrevocable, and shall survive the death, dissolution or incapacity of any Limited Partner. 9.13 Nonrecourse. Neither the Partnership nor the Partners shall have recourse to any member, partner, officer, director or shareholder of any Partner or to the assets of any member, partner, officer, director or shareholder of any Partner with respect to the obligations and liabilities of such Partner under this Agreement, except that this Section 9.13 shall not limit or impair the exercise or enforcement of rights and remedies in respect of any agreement to which such person is a party in accordance with the terms and provisions of such agreement. -48- 55 9.14 Foreign Person. Should any Partner be subject to withholding pursuant to the Code or any applicable state, local or foreign law, the Partnership may withhold all amounts otherwise distributable to such Partner or otherwise under this Agreement or such other amount as may be required by law and any amounts so withheld shall be deemed to have been distributed to the Partner under this Agreement. If any sums are withheld pursuant to this provision, the Partnership shall remit the sums so withheld to and file the required forms with the Internal Revenue Service or other applicable government agency and, in the event of any claimed over-withholding, the Partner shall be limited to an action against the Internal Revenue Service or other applicable government agency for refund and hereby waives any claim or right of action against the Partnership on account of such withholding. Moreover, if the amounts required to be withheld exceed the amounts which would otherwise have been distributed to such Partner, such Partner shall contribute any deficiency to the Partnership within five (5) days after receipt of notice from the General Partner. -49- 56 IN WITNESS WHEREOF, the General Partner has executed this Amended and Restated Agreement of Limited Partnership on behalf of the Partners as attorney-in-fact as of the date first hereinabove written. GENERAL PARTNER INTERMEDIA CAPITAL MANAGEMENT, LLC By InterMedia Management, Inc., --------------------------------- Its managing member By /s/ ROBERT J. LEWIS --------------------------------- Robert J. Lewis President and Chief Executive Officer PREFERRED LIMITED PARTNER GENERAL ELECTRIC CAPITAL CORPORATION By *** --------------------------------- Name ------------------------------- Title ------------------------------ JUNIOR PREFERRED LIMITED PARTNER TCI OF PIEDMONT, INC. By *** --------------------------------- Name ------------------------------- Title ------------------------------ -50- 57 LIMITED PARTNERS PACIFIC CENTURY FINANCIAL CORPORATION fka Bancorp Hawaii, Inc. By *** --------------------------------- Name ------------------------------- Title ------------------------------ By *** --------------------------------- Name ------------------------------- Title ------------------------------ THE BANK OF NEW YORK COMPANY, INC. By *** --------------------------------- Name ------------------------------- Title ------------------------------ CABLE PARTNERS, an Illinois general partnership By *** --------------------------------- Name ------------------------------- Title ------------------------------ GENERAL ELECTRIC CAPITAL CORPORATION By *** --------------------------------- Name ------------------------------- Title ------------------------------ -51- 58 THE CHASE MANHATTAN BANK, solely in its capacity AS TRUSTEE FOR THIRD PLAZA TRUST (as directed by General Motors Investment Management Corporation), and not in its individual capacity By *** --------------------------------- Name ------------------------------- Title ------------------------------ THE CHASE MANHATTAN BANK, solely in its capacity AS TRUSTEE FOR THIRD PLAZA TRUST (as directed by General Motors Investment Management Corporation), and not in its individual capacity By *** --------------------------------- Name ------------------------------- Title ------------------------------ WILLIAM D. HORVITZ TRUST U/A DATED 8/29/84, AS AMENDED By /s/ WILLIAM D. HORVITZ --------------------------------- Name William D. Horvitz ------------------------------- Title Trustee ------------------------------ -52- 59 INDOSUEZ IMC PARTNERS By Indosuez CM II, Inc., Its Managing General Partner By *** --------------------------------- Name ------------------------------- Title ------------------------------ By *** --------------------------------- Name ------------------------------- Title ------------------------------ *** ------------------------------------ THIERRY DEVERGNES INTER CABLE INVESTORS, a California limited partnership By *** --------------------------------- Name ------------------------------- Title ------------------------------ INTERMEDIA CAPITAL MANAGEMENT IV, L.P. By InterMedia Management, Inc., Its General Partner By /s/ ROBERT J. LEWIS --------------------------------- Robert J. Lewis President and Chief Executive Officer -53- 60 ICM-IV CAPITAL PARTNERS, LLC By Intermedia Management, Inc., its managing member By /s/ ROBERT J. LEWIS --------------------------------- Robert J. Lewis President and Chief Executive Officer INTERMEDIA PARTNERS, a California limited partnership By InterMedia Capital Management, LLC, Its General Partner By InterMedia Management, Inc., Its managing member By /s/ ROBERT J. LEWIS --------------------------------- Robert J. Lewis President and Chief Executive Officer IP HOLDINGS L.P., By Centre Partners, L.P., Its General Partner By Park Road Corporation, Its General Partner By *** --------------------------------- Name ------------------------------- Title ------------------------------ -54- 61 CENTRE CAPITAL INVESTORS II, L.P. and CENTRE CAPITAL TAX-EXEMPT INVESTORS II, L.P. By Centre Partners II, L.P., as general partner of such partnerships By Centre Partners Management LLC, attorney-in fact By *** --------------------------------- Bruce G. Pollack Managing Director CENTRE PARTNERS COINVESTMENT, L.P. CENTRE PARALLEL MANAGEMENT PARTNERS, L.P. By Centre Partners II, LLC, a general partner By *** --------------------------------- Bruce G. Pollack Managing Director SBA CABLE CORP. By *** --------------------------------- Bruce G. Pollack Treasurer OVERSEAS CABLE CORP. By *** --------------------------------- Bruce G. Pollack Treasurer -55- 62 LJR LIMITED PARTNERSHIP By *** --------------------------------- Name ------------------------------- Title ------------------------------ NATIONSBANC INVESTMENT CORP. By *** --------------------------------- Name ------------------------------- Title ------------------------------ ROYAL BANK OF CANADA By *** --------------------------------- Name ------------------------------- Title ------------------------------ SUMITOMO CORPORATION By *** --------------------------------- Name ------------------------------- Title ------------------------------ SCOA CAPITAL L.L.C. By Sumitomo Corporation of America By *** --------------------------------- Name ------------------------------- Title ------------------------------ -56- 63 TCI OF GREENVILLE, INC. By *** --------------------------------- Name ------------------------------- Title ------------------------------ TCI OF SPARTANBURG, INC. By *** --------------------------------- Name ------------------------------- Title ------------------------------ TORONTO DOMINION INVESTMENTS, INC. By *** --------------------------------- Name ------------------------------- Title ------------------------------ WLD TRUST By /s/ WILLIAM D. HORVITZ --------------------------------- Name William D. Horvitz ------------------------------- Title Trustee ------------------------------ INTERMEDIA CAPITAL MANAGEMENT, LLC, a Delaware limited liability company, as attorney-in-fact for each Limited Partner marked with *** By InterMedia Management, Inc., Its managing member /s/ ROBERT J. LEWIS - ---------------------------------- Robert J. Lewis President and Chief Executive Officer -57- 64 Exhibit 1
Aggregate Names and Addresses Committed Capital Admission of Partners Contribution Date ----------- ------------ ---- General Partner INTERMEDIA CAPITAL MANAGEMENT, LLC $ 3,600(1) 235 Montgomery Street, Suite 420 San Francisco, CA 94104 Attn: Robert J. Lewis, Member Limited Partners PACIFIC CENTURY FINANCIAL CORPORATION fka 2,124,902(1) Bancorp Hawaii, Inc. 1850 North Central Avenue, Suite 400 Phoenix, AZ 85004 Attn: Beth Maclean THE BANK OF NEW YORK COMPANY, INC. 1,699,921(1) One Wall Street, 18th Floor New York, NY 10286 Attn: Stratton Heath III CABLE PARTNERS 2,124,902(1) c/o JMB Real Estate Investment Group 900 North Michigan Avenue, 18th Floor Chicago, IL 60611-1585 Attn: Andrew G. Bluhm GENERAL ELECTRIC CAPITAL CORPORATION 13,000,000(2) 3379 Peachtree Road, N.E., Suite 600 Atlanta, GA 30326 Attn: Michael J. Cummings THE CHASE MANHATTAN BANK, AS TRUSTEE FOR 10,624,507(1) THIRD PLAZA TRUST THE CHASE MANHATTAN BANK, AS TRUSTEE FOR 10,624,508(1) FOURTH PLAZA TRUST c/o General Motors Investment Management Corporation 767 Fifth Avenue, 16th Floor New York, NY 10153 Attn: S. Lawrence Rusoff
-1- 65
Aggregate Names and Addresses Committed Capital Admission of Partners Contribution Date ----------- ------------ ---- WILLIAM D. HORVITZ TRUST 727,2508,10 u/a Dated 8/29/84, as amended c/o William D. Horvitz 450 East Las Olas Boulevard Suite 900 Fort Lauderdale, FL 33301 INDOSUEZ IMC PARTNERS 4,970,000 THIERRY DEVERGNES 30,000 1211 Avenue of the Americas New York, NY 10036-8701 Attn: Murray T. Kenney INTER CABLE INVESTORS 674,9801 c/o Transcontinental Capital Partners 540 Cowper Street, Suite 200 Palo Alto, CA 94301 Attn: Craig H. Haesemeyer INTERMEDIA CAPITAL MANAGEMENT IV, L.P. 3,760,343 235 Montgomery Street, Suite 420 San Francisco, CA 94104 Attn: Robert J. Lewis ICM-IV CAPITAL PARTNERS, LLC 4,800,000 235 Montgomery Street, Suite 420 San Francisco, CA 94104 Attn: Robert J. Lewis INTERMEDIA PARTNERS, A 12,000,0002 CALIFORNIA LIMITED PARTNERSHIP 235 Montgomery Street, Suite 420 San Francisco, CA 94104 Attn: Robert J. Lewis IP HOLDINGS L.P. 8,500,000(1,3) CENTRE CAPITAL INVESTORS II, L.P. 5,974,320(1,3) CENTRE PARTNERS COINVESTMENT, L.P. CENTRE PARALLEL MANAGEMENT PARTNERS, L.P. 862,503(1,3) OVERSEAS CABLE CORP. CENTRE CAPITAL TAX-EXEMPT INVESTORS II, L.P. 78,115(1,3) SBA CABLE CORP. 1,183,813(1,3) (each of IP Holdings L.P. through SBA Cable Corp., collectively, the "IP Holdings Affiliates") 667,882(1,3) c/o Centre Partners Management L.L.C. 7,733,367(1,3) 30 Rockefeller Plaza, Suite 5050 New York, NY 10020 Attn: Bruce Pollack
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Aggregate Names and Addresses Committed Capital Admission of Partners Contribution Date ----------- ------------ ---- LJR LIMITED PARTNERSHIP 8,549,882(1,8) c/o Moreland Management Company 28601 Chagrin Boulevard Suite 550 Cleveland, OH 44122-4531 Attn: Mark F. Polzin NATIONSBANC INVESTMENT CORP. 30,000,000 NationsBank Corporate Center 7th Floor 100 North Tryon Street NC1-007-07-01 Charlotte, NC 28255 Attn: Robert H. Sheridan III ROYAL BANK OF CANADA 5,000,000 Financial Square 24th Floor New York, NY 10005-3531 Attn: Waldo Abbot SUMITOMO CORPORATION 19,178,747(1) Sumitomo Kanda Building 1-2-2, Hitotsubashi, Chiyoda-ku Tokyo, 100 Japan Attn: Tsuguhito Aoki SCOA CAPITAL L.L.C. 4,358,806(1,7) 345 Park Avenue New York, NY 10154 Attn: Marcia L. Pontius TCI OF GREENVILLE, INC. 101,773,000(1,4,5) c/o Tele-Communications, Inc. 5619 DTC Parkway, 9th Floor Englewood, CO 80111 Attn: William R. Fitzgerald TCI OF SPARTANBURG, INC. 39,520,500(1,4,5) c/o Tele-Communications, Inc. 5619 DTC Parkway, 9th Floor Englewood, CO 80111 Attn: William R. Fitzgerald TORONTO DOMINION INVESTMENTS, INC. 10,000,000 c/o The Toronto-Dominion Bank 31 West 52nd Street New York, NY 10019-6101 Attn: Brian A. Rich
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Aggregate Names and Addresses Committed Capital Admission of Partners Contribution Date ----------- ------------ ---- WLD TRUST 6,397,652(1,8,9) c/o WLD Enterprises, Inc. Barnett Bank Building 450 East Las Olas Boulevard Suite 900 Fort Lauderdale, FL 33301 Attn: Thomas Bauer Subtotal: $316,943,500 ============ Preferred Limited Partner GENERAL ELECTRIC CAPITAL CORPORATION 25,000,000(2) 3379 Peachtree Road, N.E., Suite 600 Atlanta, GA 30326 Attn: Michael J. Cummings Subtotal: $341,943,500 ============ Junior Preferred Limited Partner TCI OF PIEDMONT, INC. 26,457,628(1,4,5,6) c/o Tele-Communications, Inc. 5619 DTC Parkway, 9th Floor Englewood, CO 80111 Attn: William R. Fitzgerald Total Capital Contributions: 368,401,128
1 Includes all of such investors' interest in IP-IV which was contributed; provided, however, that the General Partner retained a .01% interest in IP-IV as the managing general partner thereof. 2 Paid pursuant to the terms of that certain Contribution Agreement dated as of April 30, 1996 (as amended, the "IPWT Contribution Agreement") among the Partnership, InterMedia Partners, a California limited partnership ("IP") and GECC pursuant to which (i) IP and GECC agreed to contribute partnership interests in InterMedia Partners of West Tennessee, L.P., a California limited partnership ("IPWT"), and (ii) GECC agreed to transfer a debt obligation of IPWT to the Partnership. GECC was credited with a $13,000,000 initial contribution as a Limited Partner and a $25,000,000 initial contribution as the Preferred Limited Partner, and IP-I was credited with a $12,000,000 initial contribution as a Limited Partner. The limited partnership interests of IP and GECC were subject to adjustment, up or down, pursuant to the terms of the IPWT Contribution Agreement for working capital adjustments upon closing. The preferred limited partnership interest was subject to reduction to the extent GECC was liable under the indemnification provisions of the IPWT Contribution Agreement. 3 Initial contribution were $8,500,000 by IP Holdings L.P., and the aggregate Capital Contribution by IP Holdings L.P. or one or more affiliates or successor funds of Centre Partners and its affiliates became -4- 68 $25,000,000 upon the acquisition by the Partnership of the assets of Viacom Cable in Nashville, Tennessee. If the increased commitment of sixteen million five hundred thousand dollars ($16,500,000) was contributed more than five (5) business days from the initial capital contribution of eight million five hundred thousand dollars ($8,500,000), then eight million two hundred and fifteen thousand dollars ($8,215,000) of such increased commitment would bear interest payable to the Partnership pro rata by the IP Holdings L.P. affiliates making such contributions at a rate of eight percent (8%) per annum from the date capital was originally contributed to the Partnership until such additional amount was contributed to the Partnership. IP Holdings L.P. agreed that the Partnership may call its existing commitment of eight million five hundred thousand dollars ($8,500,000) in full upon the first capital call made by the Partnership. 4. Paid to the Partnership as assignee pursuant to the terms of that certain Contribution Agreement dated as of March 4, 1996 (as amended, the "Greenville/Spartanburg Contribution Agreement"), among TCI of Greenville, Inc. and TCI of Spartanburg Inc. (together, the "TCI Entities"), IP-IV and TCI of Piedmont, Inc. pursuant to which the TCI Entities and TCI of Piedmont, Inc. agreed to contribute certain cable television systems in and around the areas of Greenville, Piedmont and Spartanburg, South Carolina (the "Systems"), subject to the right to substitute alternate systems with the consent of the General Partner in the event the necessary regulatory approvals for the contribution of the Systems had not been obtained. 5. As set forth in the Greenville/Spartanburg Contribution Agreement, in no event shall the TCI Entities contribute more than forty-five percent (45%) of the total Capital Contributions to the Partnership (excluding the Capital Contributions of the Preferred Limited Partner with respect to the preferred limited partnership interest and the Capital Contributions of the Junior Preferred Limited Partner with respect to the junior preferred limited partnership interest). 6. The Junior Preferred Limited Partner's original capital contribution of eighteen million fifty-six thousand five hundred dollars ($18,056,500) revalued as of March 31, 1998. 7. Interest transferred to SCOA Capital, L.L.C. by Sumitomo Corporation of America pursuant to that certain Assignment, Acceptance and Consent, entered into and made effective as of April 7, 1998. 8. Includes, with respect to (a) the William D. Horvitz Trust u/a Dated 8/29/84, as amended (formerly William D. Horvitz, individually), $227,250; (b) LJR Limited Partnership, $2,500,000; and (c) the WLD Trust (formerly WLD Lamont Partners), $2,272,750, such interests transferred by RMS Limited Partnership pursuant to that certain Assignment, Acceptance and Consent, entered into and made effective as of April 30, 1998. 9. Interest transferred to the WLD Trust by WLD Lamont Partners pursuant to that certain Assignment, Acceptance and Consent, made effective as of July 1, 1998. 10. Interest transferred to the William D. Horvitz Trust u/a dated 8/29/84, as amended, by William D. Horvitz, individually, pursuant to that certain Assignment, Acceptance and Consent, made effective as of September 1, 1998. -5- 69 Exhibit 2 Approved Investments (i) Acquisition of the assets of Viacom Cable in Nashville, TN (ii) Acquisition of the assets of Time Warner Cable in Kingsport, TN (iii) Acquisition of the assets of Par Cable, Inc. in Hendersonville, Waverley and Monterey, TN and Ft. Campbell, KY (iv) Acquisition of the assets of Annox, Inc., in Dickson County et al., TN (v) Acquisition of the assets of Rochford Realty ("The Cablevision Company") in Davidson and Williamson Counties, TN (vi) Acquisition of the assets of Tellico Cable, Inc. in Monroe County, TN (vii) Acquisition of the assets of Mid-South Cable TV, Inc. in Cumberland, Rutherford and Williamson Counties, TN (viii) Acquisition of the assets of Prime Cable Partners, Inc. in Dickson County, TN (ix) Acquisition of the assets of Robin Media Group, Inc. ("RMG") (Nashville, TN; Knoxville, TN; Gainesville, GA). RMG is an affiliate of the General Partner and will be represented by the same counsel as counsel to the Partnership.(1) (x) Acquisition of the assets of InterMedia Partners of West Tennessee, L.P. ("IPWT") Dickson, McKenzie, Union City, Savannah, Louisburg, TN). IPWT is an affiliate of the General Partner and will be represented by the same counsel as counsel to the Partnership.(2) (xi) Contribution of the assets of Greenville, Spartanburg and Piedmont, South Carolina by TCI of Greenville, Inc., TCI of Piedmont, Inc. and TCI of Spartanburg, Inc.(3) Approved Sales (xii) Sale of RMG's 14.99% limited partnership interest in AVR of Tennessee, L.P., a California limited partnership ("AVR"). One one-hundredth of one percent (.01%) of RMG's interest will be retained. (xiii) The sale by InterMedia Partners Southeast ("IPSE") of a 55.01% general partnership interest in AVR upon the acquisition of the Viacom assets. IPSE will retain a 4.99% interest. - -------- 1 Pursuant to the terms of that certain Stock Purchase Agreement between InterMedia Capital Management V, L.P. and IP-IV. 2 Pursuant to the terms of the IPWT Contribution Agreement. 3 Pursuant to the terms of the Greenville/Spartanburg Contribution Agreement. -1- EX-12.1 3 INTERMEDIA RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.1 THE COMPANY RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------------------- 1996 1997 1998 ---------- ---------- ---------- Pre-tax loss from continuing operations..................... $(48,488) $(74,757) $(48,866) -------- -------- -------- Fixed charges: Interest expense and amortization of debt discount and premium on all indebtedness............................ 37,742 78,185 78,107 Rentals: Rent expense(1)........................................... 719 1,521 1,525 Preferred dividend requirement............................ 496 882 945 -------- -------- -------- Total fixed charges............................... 38,957 80,588 80,577 -------- -------- -------- Earnings before income taxes and fixed charges.............. $ (9,531) $ 5,831 $ 31,711 ======== ======== ======== Ratio of earnings to fixed charges(2)....................... -- -- -- ======== ======== ========
- --------------- (1) For leases where the interest factor can be specifically identified, the actual interest factor was used. For all other leases, the interest factor is estimated at one-third of total rent expense for the applicable period which management believes represents a reasonable approximation of the interest factor. (2) The Company's earnings for the years ended December 31, 1996, 1997 and 1998 were inadequate to cover fixed charges by $48,488, $74,757 and $48,866, respectively. EX-21.1 4 INTERMEDIA CAPITAL PARTNERS IV, SUBSIDIARIES 1 EXHIBIT 21.1 INTERMEDIA CAPITAL PARTNERS IV, L.P. SUBSIDIARIES
STATE OF INCORPORATION DBA AND ITS ENTITY OR REGISTRATION STATE OF OPERATION ------ --------------- ------------------ InterMedia Partners IV, Capital Corp.* DE InterMedia Partners IV, L.P. CA InterMedia Partners Southeast N/A because entity is a General Partnership InterMedia Partners of West Tennessee, L.P. CA Volunteer Cable Vision, L.P.: TN Robin Media Group, Inc. NV
- -------- * InterMedia Partners IV, Capital Corp. does not have any subsidiaries. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1020817 INTERMEDIA CAPITAL PARTNER IV, L.P. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 2,236 30,923 22,716 (1,995) 0 64,664 340,028 0 928,657 71,613 0 14,184 0 0 (48,872) 928,657 277,832 277,832 89,396 287,837 6,607 0 78,107 (48,866) 1,623 0 0 0 0 (51,159) 0 0 PP&E IS SHOWN NET OF ACCUMULATED DEPRECIATION. INCLUDES PROGRAM FEES AND OTHER DIRECT EXPENSES.
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