UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1997 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to COMMISSION FILE NUMBERS 33-67390; 33-67390-01; 33-81088; 33-81088-01; 33-81088-02; 33-93808; 33-93808-01 MARCUS CABLE COMPANY, L.P. MARCUS CABLE OPERATING COMPANY, L.P. MARCUS CABLE CAPITAL CORPORATION MARCUS CABLE CAPITAL CORPORATION II MARCUS CABLE CAPITAL CORPORATION III (Exact name of registrants as specified in their charters) DELAWARE 75-2337471 DELAWARE 75-2495706 DELAWARE 75-2546077 DELAWARE 75-2546713 DELAWARE 75-2599586 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2911 TURTLE CREED BOULEVARD, SUITE 1300 DALLAS, TEXAS 75219-6257 (Address of principal executive offices) (Zip Code) (214) 521-7898 (Registrants' telephone number, including area code) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No There is no established trading market for any of the registrants' voting securities. As of the date of this report, there were 1,000 shares of common stock of Marcus Cable Capital Corporation and 1,000 shares of common stock of Marcus Cable Capital Corporation III outstanding, all of which are owned by Marcus Cable Company, L.P., and 1,000 shares of common stock of Marcus Cable Capital Corporation II outstanding, all of which are owned by Marcus Cable Operating Company, L.P. MARCUS CABLE COMPANY, L.P. MARCUS CABLE OPERATING COMPANY, L.P. MARCUS CABLE CAPITAL CORPORATION MARCUS CABLE CAPITAL CORPORATION II MARCUS CABLE CAPITAL CORPORATION III INDEX TO QUARTERLY REPORT FORM 10-Q MARCH 31, 1997 Page No. Definitions 3-4 PART I FINANCIAL INFORMATION Item 1: Financial Statements - Marcus Cable Company, L.P. and Subsidiaries Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996 5 Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1996 6 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 7 Notes to the Consolidated Financial Statements 8-12 Consolidating Schedules 13-14 Separate financial statements of Operating as issuer of the 13 1/2% Notes have not been presented, as the aggregate net assets, earnings and partners' capital of Operating are substantially equivalent to the net assets, earnings and partners' capital of the Company on a consolidated basis. Additionally, separate financial statements of Capital, Capital II and Capital III have not been presented because these entities have no operations and substantially no assets or equity. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. Certain information included in this Form 10-Q contains statements that are forward looking, such as statements relating to the effects of future regulation, future capital commitments and future acquisitions. Such forward-looking information involves important risks and uncertainties that could significantly affect expected results in the future from those expressed in any forward-looking statements made by, or on behalf of the Company. These risks and uncertainties include, but are not limited to, uncertainties relating to economic conditions, acquisitions and divestitures, government and regulatory policies, the pricing and availability of equipment, materials, inventories and programming, technological developments and changes in the competitive environment in which the Company operates. Investors are cautioned that all forward-looking statements involve risks and uncertainties. 1 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 15-21 PART II OTHER INFORMATION Item 1: Legal Proceedings 22 Item 2: Changes in Securities 22 Item 3: Defaults Upon Senior Securities 22 Item 4: Submission of Matters to a Vote of Security Holders 22 Item 5: Other Information 22 Item 6: Exhibits and Reports on Form 8-K 22 2 DEFINITIONS When used herein, the following terms will have the meaning indicated. Term Definition 11 7/8% Debentures 11 7/8%Senior Debentures, due October 1, 2005, which are obligations of MCC and Capital 13 1/2% Notes 13 1/2% Senior Subordinated Guaranteed Discount Notes, due August 1, 2004, which are obligations of Operating and Capital II that are guaranteed by MCC 14 1/4% Notes 14 1/4% Senior Discount Notes, due December 15, 2005, which are obligations of MCC and Capital III 1992 Cable Act Cable Television Consumer Protection and Competition Act of 1992 1996 Telecom Act Telecommunications Act of 1996 Capital Marcus Cable Capital Corporation Capital II Marcus Cable Capital Corporation II Capital III Marcus Cable Capital Corporation III Company Marcus Cable Company, L.P. and subsidiaries CPST Cable Programming Service Tier EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization FCC Federal Communications Commission Goldman Sachs Goldman, Sachs & Co. LIBOR London InterBank Offered Rate Maryland Cable Maryland Cable Partners, L.P. Maryland Cable Agreement The management agreement between Operating and Maryland Cable Maryland Cable System Cable system owned by Maryland Cable MCC Marcus Cable Company, L.P. and subsidiaries MCA Marcus Cable Associates, L.P. MCALP Marcus Cable of Alabama, L.P. MCDM Marcus Cable of Delaware and Maryland, L.P. MCP Marcus Cable Partners, L.P. Operating Marcus Cable Operating Company, L.P. Operating Partnerships MCP, MCDM, MCALP and MCA Sammons Sammons Communications, Inc. and certain of its subsidiaries Sammons Systems Certain cable television systems purchased from Sammons 3 Senior Credit Facility $1,150,000,000 Credit Agreement among Operating, MCC, Banque Paribas, Chase Manhattan Bank, Citibank, N.A., The First National Bank of Boston, Goldman Sachs, Union Bank and certain other lenders referred to therein, dated as of August 31, 1995, as amended SFAS Statement of Financial Accounting Standard Systems Cable television systems owned by the Company 4 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands) March 31, December 31, Assets 1997 1996 (unaudited) Current assets: Cash and cash equivalents $ 21,905 $ 6,034 Accounts receivable, net of allowance of $1,895 and $1,900, respectively 15,440 17,043 Prepaid expenses and other 3,420 2,432 ----------- --------- Total current assets 40,765 25,509 Property and equipment, net (note 2) 582,225 578,507 Other assets, net (note 3) 1,060,958 1,083,534 ----------- ---------- $ 1,683,948 $1,687,550 =========== ========== Liabilities and Partners' Capital Current liabilities: Current maturities of long-term debt (note 5) $ 58,071 $ 41,819 Accrued liabilities (note 4) 44,784 49,405 Accrued interest 10,521 10,664 ----------- ---------- Total current liabilities 113,376 101,888 Long-term debt (note 5) 140,673 139,665 Subsidiary limited partner interests (246) (246) Partners' capital 164,079 189,256 Commitments and contingencies --- --- ----------- ---------- $ 1,683,948 $1,687,550 =========== ========== See accompanying notes to the consolidated financial statements. 5 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Consolidated Statements of Operations (unaudited) (in thousands) Three months ended March 31, 1997 1996 Revenues: Cable services $ 110,070 $ 102,149 Management fees (note 6) 4,377 567 ---------- ---------- Total revenues 114,447 102,716 ---------- ---------- Operating expenses: Selling, service and system management 41,432 39,065 General and administrative 17,498 17,791 Depreciation and amortization 44,146 39,093 ---------- ---------- 103,076 95,949 ---------- ---------- Operating income 11,371 6,767 Other expense: Interest expense, net 36,548 35,786 ---------- ---------- Net loss $ (25,177) $ (29,019) ========== ========== See accompanying notes to the consolidated financial statements. 6 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) (in thousands) Three months ended March 31, 1997 1996 Cash flows from operating activities: Net loss $ (25,177) $ (29,019) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 44,146 39,093 Amortization of debt issuance costs 1,002 795 Accretion of discount on notes 16,512 14,385 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable 1,603 3,770 Prepaid expenses (988) (1,503) Other assets --- (1,071) Accrued interest (143) 1,847 Accrued liabilities (4,621) (4,668) ---------- ---------- Net cash provided by operating activities 32,334 23,629 ---------- ---------- Cash flows from investing activities: Acquisitions of cable systems and franchises, net of cash acquired --- (877) Additions to property and equipment (24,905) (12,720) ----------- ---------- Net cash used in investing activities (24,905) (13,597) ----------- ---------- Cash flows from financing activities: Proceeds from note payable --- 10,000 Proceeds from borrowings 95,000 --- Repayment of long-term debt (85,027) (15,000) Payment of debt issuance costs (1,385) --- Payment of capital lease obligations (146) (90) ----------- ---------- Net cash provided by (used in) financing activities 8,442 (5,090) ----------- ---------- Net increase in cash and cash equivalents 15,871 4,942 Cash and cash equivalents at beginning of period 6,034 17,409 ----------- ---------- Cash and cash equivalents at end of period $ 21,905 $ 22,351 =========== ========== Supplemental disclosure of cash flow information: Interest paid $ 19,119 $ 18,833 =========== ========== See accompanying notes to consolidated financial statements. 7 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (1) Summary of Significant Accounting Policies (a) General MCC is a Delaware limited partnership formed on January 17, 1990 for the purpose of acquiring, operating and developing cable television systems. MCC derives its primary source of revenues by providing various levels of cable television programming and services to residential and business customers. MCC's operations are conducted through Operating, an operating holding company in which MCC serves as the general partner with a 99.8% ownership interest. Operating, in turn, conducts its operations through the Operating Partnerships, in which it, directly or indirectly, serves as the general partner and owns a greater than 99.0% interest. (b) Basis of Presentation The consolidated financial statements include the accounts of MCC, Capital, Capital II, Capital III, Operating and the Operating Partnerships. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) Franchise Fees Local governmental authorities impose franchise fees on the Systems ranging up to a federally mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are collected from the Systems' customers. Historically, franchise fees in certain of the Systems (i.e. the former Sammons Systems) were not separately itemized on customers' bills. Such fees were considered part of the monthly charge for basic services and equipment, and therefore were reported as revenue and expense in the Company's financial results. Beginning in November 1996, the Company began the process of itemizing such fees on all customers' bills to conform with the collection of, and accounting for, franchise fees in the remaining Systems. During the first quarter of 1997, such itemization was completed and such fees were itemized on customers' bills in all of the Systems. As a result, such fees are no longer included as revenue nor general and administrative expenses. The net accounting effect of this change is a quarterly reduction in revenue of approximately $1,700,000 and a corresponding reduction in general and administrative expenses, versus the comparable period in 1996. (d) Interim Financial Information In the opinion of management, the accompanying unaudited interim consolidated financial information of the Company contains all adjustments, consisting only of those of a recurring nature, necessary to present fairly (i) the Company's financial position as of March 31, 1997, (ii) the results of its operations for the three months 8 ended March 31, 1997 and 1996 and (iii) its cash flows for the three months ended March 31, 1997 and 1996. These financial statements are for interim periods and do not include all of the detail normally provided in annual financial statements and should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 1996, included in the Company's Annual Report on Form 10-K. (2) Property and Equipment Property and equipment consists of the following (in thousands): March 31, December 31, 1997 1996 Cable systems $ 695,388 $ 670,829 Vehicles and other 26,306 26,008 Land and buildings 13,304 13,256 ------- ------- 734,998 710,093 Accumulated depreciation (152,773) (131,586) ------- ------- $ 582,225 $ 578,507 ======= ======= (3) Other Assets Other assets consist of the following (in thousands): March 31, December 31, 1997 1996 Franchise rights $ 1,175,009 $ 1,175,009 Going concern value of acquired cable systems 45,969 45,969 Noncompetition agreements 31,914 31,914 Debt issuance costs 44,885 43,500 Other 1,069 1,069 ------------ ----------- 1,298,846 1,297,461 Accumulated amortization (237,888) (213,927) ------------ ----------- $ 1,060,958 $ 1,083,534 ============ =========== 9 (4) Accrued Liabilities Accrued liabilities consist of the following (in thousands): March 31, December 31, 1997 1996 Accrued property taxes $ 2,544 $ 3,830 Accrued acquisition costs 2,838 2,838 Accrued programming costs 8,973 8,301 Accrued franchise fees 5,022 9,429 Accrued operating liabilities 20,882 20,377 Other accrued liabilities 4,525 4,630 --------- --------- $ 44,784 $ 49,405 ========= ========= (5) Long-term Debt The Company had outstanding borrowings under long-term debt arrangements as follows (in thousands): March 31, December 31, 1997 1996 Senior Credit Facility $ 865,000 $ 855,000 13 1/2% Senior Subordinated Discount Notes, due August 1, 2004 304,973 295,119 14 1/4% Senior Discount Notes, due December 15, 2004 192,520 185,862 11 7/8% Senior Debentures, due October 1, 2005 100,000 100,000 Note Payable 260 287 Capital leases 2,057 2,203 ----------- ---------- 1,464,810 1,438,471 Less current maturities (58,071) (41,819) ----------- ----------- $ 1,406,739 $ 1,396,652 =========== =========== Amounts outstanding under the Senior Credit Facility bear interest at either the (i) Eurodollar rate, (ii) prime rate or (iii) CD base rate, in each case plus a margin of up to 2.25%, subject to certain adjustments based on the ratio of Operating's total debt to annualized operating cash flows, as defined. At March 31, 1997, borrowings under the Senior Credit Facility bore interest at rates ranging from 6.57% to 7.81% under the Eurodollar rate option. The Company pays a commitment fee ranging from .250% to .375% on the unused commitment under the Senior Credit Facility. To reduce the impact of changes in interest rates on its floating rate long-term debt, the Company has entered into certain interest rate swap agreements with certain of the 10 participating banks under the Senior Credit Facility. At March 31, 1997, interest rate swap agreements covering a notional balance of $650,000,000 were outstanding. These outstanding swap agreements mature during 1997 and 1998 and require the Company to pay a fixed rate of 5.77% to 5.81%, plus the applicable interest rate margin. Extensions for additional periods are available within the swap agreement at the option of the other parties thereto. As interest rates change under the interest rate swap agreements, the differential to be paid or received is recognized as an adjustment to interest expense. The Company is not exposed to credit loss as its interest rate swap agreements are with certain of the participating banks under the Company's Senior Credit Facility. During the three months ended March 31, 1997 and 1996, the Company recognized additional expenses under its interest rate swap agreements of approximately $521,000 and $260,000, respectively. On March 14, 1997, Operating entered into an agreement to amend its Senior Credit Facility. The amendment provides for, among other items, a reduction in the interest rate margins under the Senior Credit Facility as well as increased flexibility for the Company as it relates to investments, permitted lines of businesses and the incurrence of unsecured indebtedness. The amendment also resulted in a $50,000,000 increase in the availability under the Revolving Credit Facility. (6) Related Party Transactions Affiliates of Goldman Sachs own limited partnership interests in MCC. Maryland Cable, which is controlled by an affiliate of Goldman Sachs, owned the Maryland Cable System which served customers in and around Prince Georges County, Maryland. Operating managed the Maryland Cable System under the Maryland Cable Agreement, which was entered into in September of 1994. Operating earned a management fee, payable monthly, equal to 4.7% of the revenues of Maryland Cable, and was reimbursed for certain expenses. Pursuant to such agreement, Operating was also entitled to an incentive management fee if the Maryland Cable System sold above certain threshold amounts. Operating earned management fees of $4,377,000 and $567,000 during the three month periods ended March 31, 1997 and 1996, respectively. Effective January 31, 1997, the Maryland Cable System was sold to Jones Communications of Maryland, Inc. In conjunction with the sale, Operating recognized an incentive management fee of $4,083,000. Additional incentive management fees may be recognized upon finalization of the purchase price adjustment, anticipated to occur during the second quarter of 1997, and upon dissolution of Maryland Cable, anticipated to occur during the first quarter of 1998. There is no assurance that any of such fees will be realized. Although Operating is no longer involved in the active management of those cable television systems, Operating has entered into an agreement with Maryland Cable to oversee the activities, if any, of Maryland Cable through the liquidation of the partnership. Pursuant to such agreement, Operating will earn a nominal monthly fee. 11 (7) Acquisitions and Dispositions On March 4, 1997, the Company entered into an acquisition agreement with Harron Cablevision of Texas, Inc. pursuant to which the Company will purchase from Harron substantially all of the assets of cable television systems in Texas. The communities served by this system are located in and around the Company's operations in Texas. The acquisition of the Harron Systems is subject to certain closing conditions and is expected to occur in the third quarter of 1997. On April 4, 1997, the Company entered into an agreement in principle with Time Warner to trade cable television systems in the states of Wisconsin and Indiana representing approximately 125,000 customers. According to the terms of the agreement, Time Warner will receive approximately 55,000 customers, while the Company will receive approximately 70,000 customers. The formal exchange agreement is being finalized and although there can be no assurance, closing is expected on or around year end 1997, pending final legal documentation, regulatory and other third party approvals. 12 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Consolidating Schedule - Balance Sheet Information As of March 31, 1997 (unaudited) (in thousands) ASSETS Combined Operating Capital Elimin- Operating Capital Elimin- Partnership II Operating ations Consolidated Capital III Company ations Company Current assets: Cash and cash equivalents 21,385 1 (237) 0 21,149 1 1 754 0 21,905 Accounts receivable, net 39,950 0 (10,299) (14,211) 15,440 0 0 0 0 15,440 Prepaid expenses and other 2,859 0 561 0 3,420 0 0 0 0 3,420 ------------ ---- -------- ---------- ---------- ------ ------ ------- ------- --------- Total current assets 64,194 1 (9,975) (14,211) 40,009 1 1 754 0 40,765 Property and equipment, net 576,842 0 5,383 0 582,225 0 0 0 0 582,225 Other assets, net 1,061,708 0 1,557,879 (1,548,746) 1,070,841 0 0 9,135 (19,018) 1,060,958 Investment in subsidiaries 0 0 164,242 (164,242) --- 0 0 452,647 (452,647) --- ------------ ---- -------- ---------- ---------- ------ ------ ------- -------- -------- Total assets 1,702,744 1 1,717,529 (1,727,199) 1,693,075 1 1 462,536 (471,665) 1,683,948 ============ ==== ======== ========== ========== ====== ====== ======= ======== ======== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Current maturities of long-term debt 189 0 57,882 0 58,071 0 0 0 0 58,071 Accrued liabilities 67,814 0 76,344 (92,881) 51,277 0 0 (1) (6,492) 44,784 Accrued interest 10,520 0 4,585 (10,522) 4,583 0 0 5,938 0 10,521 ------------ ---- -------- ---------- ---------- ------ ------ ------- -------- -------- Total current liabilities 78,523 0 138,811 (103,403) 113,931 0 0 5,937 (6,492) 113,376 Long-term debt 1,459,980 0 1,113,793 (1,459,554) 1,114,219 0 0 292,520 0 1,406,739 Subsidiary limited partner interest 0 0 (246) 0 (246) 0 0 0 0 (246) Partners' capital 164,241 1 465,171 (164,242) 465,171 1 1 164,079 (465,173) 164,079 ------------ ---- -------- ---------- ---------- ------ ------ ------- -------- -------- Total liabilities and parterns' capital 1,702,744 1 1,717,529 (1,727,199) 1,693,075 1 1 462,536 (471,665) 1,683,948 ============ ==== ======== ========== ========== ====== ====== ======= ======== ======== 13 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Consolidating Schedule - Statement of Operations Information For the three months ended March 31, 1997 (unaudited) (in thousands) Combined Operating Operating Capital Elimin- Consol- Capital Elimin- Partnerships II Operating ations idated Capital III MCC ations Company Revenues: Cable services 110,070 --- --- --- 110,070 --- --- --- --- 110,070 Management fees --- --- 4,377 --- 4,377 --- --- --- --- 4,377 ----------- ----- ------- ------ ------- ----- ---- ------ ------ -------- Total revenues 110,070 --- 4,377 --- 114,447 --- --- --- --- 114,447 ----------- ----- ------- ------ ------- ----- ---- ------ ------ -------- Operating expenses: Selling, service and system manage 40,863 --- 569 --- 41,432 --- --- --- --- 41,432 General and administrative 14,142 --- 3,356 --- 17,498 --- --- --- --- 17,498 Allocated corporate costs (122) --- 122 --- --- --- --- --- --- --- Depreciation and amortization 43,824 --- 322 --- 44,146 --- --- --- --- 44,146 ----------- ----- ------- ------ ------- ----- ---- ------ ------ -------- 98,707 --- 4,369 --- 103,076 --- --- --- --- 103,076 Operating income 11,363 --- 8 --- 11,371 --- --- --- --- 11,371 Other (income) expense: Interest (income) expense, net 36,695 --- (9,948) 0 26,747 --- --- 9,801 --- 36,548 Equity earnings (loss) of subsidia --- --- 25,332 (25,332) --- --- --- 15,376 (15,376) --- ----------- ----- ------ ------ ------- ----- ---- ------ ------ -------- 36,695 --- 15,384 (25,332) 26,747 --- --- 25,177 (15,376) 36,548 ----------- ----- ------ ------ ------- ----- ---- ------ ------ -------- Net loss (25,332) --- (15,376) 25,332 (15,376) --- --- (25,177) 15,376 (25,177) ======= ==== ======= ====== ======= ==== ==== ====== ====== ======= 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the attached consolidated financial statements and notes thereto, and with the Company's audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 1996, included in the Company's Annual Report on Form 10-K. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1996. The Company generates the majority of its revenues from monthly customer fees for basic, premium and other services (such as the rental of home terminal devices) and from installation income. Additional revenues are generated from pay-per-view programming, advertising sales and commissions from home shopping networks. Revenues were also generated from fees earned from the management of Maryland Cable. The comparability of operating results between the three months ended March 31, 1997 and the comparable period for 1996 are affected by several events which occurred during 1996 and 1997. These events include 1) the acquisition of cable systems as follows: a system serving 700 basic customers in Texas on January 11, 1996, a system serving 2,600 basic customers in Mississippi on July 8, 1996, and a system serving 5,400 basic customers in Indiana on July 31, 1996; 2) the sale of the Company's cable system serving 12,600 customers in Washington on October 11, 1996; 3) the sale of the previously managed Maryland Cable system on January 31, 1997; and 4) as described in Note 1 to the quarterly financial statements, the conforming change in the accounting for franchise fees in certain of the Systems. Revenue The Company's revenues increased 11.4% to $114,447,000 for the three months ended March 31, 1997 from $102,716,000 for the three months ended March 31, 1996. Substantially all of this increase was attributable to growth in basic service revenues caused by increases in the number of basic customers served, new product offerings and adjustments to the monthly rates charged customers for services (mainly effective in June of 1996), and the incremental management fees earned upon the sale of the Maryland Cable System. In conjunction with the sale of the Maryland Cable System, Operating recognized an incentive management fee of $4,083,000 in January 1997. The effects of these increases in revenue were offset by a revenue reduction of approximately $1,700,000 as a result of the conforming change regarding franchise fee itemization in the former Sammons Systems. Normalizing the effects of the events noted in the previous paragraph above, pro forma revenue would have increased 10.0% over the comparable periods. In addition to the above noted revenue increases, pro forma advertising revenue would have increased $558,000, or 19.0%, and pro forma revenue from premium units would have increased $110,000, despite the conversion of approximately 12,000 premium units, attributable to The Disney Channel, to a basic satellite service in certain cable systems during the first half of 1996. 15 Operating Expenses Selling, service and system management expenses consist primarily of costs associated with programming, marketing, engineering and advertising. Selling, service and system management expenses increased 6.1% to $41,432,000 for the three months ended March 31, 1997 from $39,065,000 for the three months ended March 31, 1996. Programming costs increased approximately $2,800,000 or 11.1% with substantially all of this increase attributable to increases in the cost of basic satellite programming. Approximately 50.0% of the 16.6% increase in basic satellite programming costs is the result of annual contractual increases in rates charged by programmers. The addition of satellite programming channels and incremental basic customers accounted for the balance of the increase in basic satellite programming costs. Additional expense increases included engineering and marketing staffing costs, marketing expenditures and advertising sales costs. These increases were partially offset by approximately $1,800,000 of new channel marketing launch support reported in the first quarter of 1997. Normalizing the effects of the events noted in the second paragraph of this section, pro forma selling, service and system management expenses would have increased the same 6.1% over the comparable periods. General and administrative expenses decreased 1.6% to $17,498,000 for the three months ended March 31, 1997 from $17,791,000 for the three months ended March 31, 1996. The decrease in franchise fee expense, as a result of the conforming itemization of such costs on customers' bills in the former Sammons Systems, was mainly offset by rising employee costs, associated with increased staffing of customer service operations and employee wage adjustments, and increases in customer receivable reserves as a result of tightening disconnect procedures in the later half of 1996. Normalizing the effects of the events noted in the second paragraph of this section, pro forma general and administrative expenses would have increased 9.7% over the comparable periods. Approximately 95.0% of the pro forma increase in general and administrative expenses is a result of the previously mentioned rising employee costs and customer receivable reserves. Depreciation and amortization expenses increased 12.9% to $44,146,000 for the three months ended March 31, 1997 from $39,093,000 for the three months ended March 31, 1996. The increase is a result of the additional capital expenditures incurred to rebuild and upgrade the physical plant and equipment of certain of the Systems. Operating Income Operating income rose $4,604,000 to $11,371,000 for the three months ended March 31, 1997 from $6,767,000 in 1996. This increase was due to the previously discussed rise in revenues which was partially offset by increases in selling, service and system management expenses and depreciation and amortization. The cable television industry generally measures the performance of a cable system in terms of system cash flow before corporate expenses and depreciation and amortization. Furthermore, the cable television industry generally measures the performance of a cable television company in terms of operating income before depreciation and amortization (often referred to as "EBITDA"). These measures are not intended to be a substitute or improvement on the terms disclosed on the 16 financial statements, rather these measures are included as industry standards. System cash flow, which represents revenues from cable services less operating expenses before corporate expenses and depreciation and amortization, increased 13.3% to $55,065,000 for the three months ended March 31, 1997 from $48,586,000 for the three months ended March 31, 1996. EBITDA increased 21.1% to $55,517,000 for the three months ended March 31, 1997 from $45,860,000 for the three months ended March 31, 1996. Normalizing the effects of the events noted in the second paragraph of this section, pro forma system cash flow before corporate expenses and depreciation and amortization and EBITDA would have increased 13.9% and 13.5%, respectively, over the comparable period in 1996. Other Expenses Net interest expense increased 2.1% to $36,548,000 for the three months ended March 31, 1997 from $35,786,000 for the three months ended March 31, 1996, due primarily to the scheduled increase in accretion of the 13 1/2% Notes and the 14 1/4% Notes of $2,053,000. This accretion increase was offset by a decrease in interest expense from reductions in the average outstanding balances and the average borrowing costs under the Senior Credit Facility. Borrowings increased to $1,464,810,000 at March 31, 1997 from $1,407,195,000 at March 31, 1996. The weighted average interest rate, including commitment fees, for total debt outstanding during the three months ended March 31, 1997 was 9.91%, compared with 10.01% for the three months ended March 31, 1996. The net loss for the three months ended March 31, 1997 was $25,177,000 compared to a net loss of $29,010,000 for the three months ended March 31, 1996. The reduction in the net loss is due to the factors discussed above. Customer Information The Company's number of basic customers and premium units are as follows: Pro Forma March 31, December 31, March 31, 1997 1996 1996(a) Basic Customers 1,189,581 1,181,293 1,162,086 Premium Units 669,977 666,702 653,363 - ----------------------- <FN> (a) Excludes approximately 12,600 basic customers and 4,800 premium units served by the cable systems in Washington which were subsequently sold to a third party on October 11, 1996. Includes approximately 8,000 basic customers and 3,200 premium units served by systems in Mississippi and Indiana purchased in July 1996. </FN> Substantially all of the internal growth in basic customers and premium units is attributable to continued marketing and sales efforts as well as the continued extension of physical cable plant in order to pass additional dwelling units. 17 LIQUIDITY AND CAPITAL RESOURCES The Company has grown significantly over the past several years through acquisitions as well as through upgrading, extending and rebuilding its existing cable television systems. Since expansion by means of these methods is capital intensive, the Company has relied upon various sources of financing to meet its funding needs. These sources have included contributions from equity investors, borrowings under various debt instruments and positive cash flows from operations. As of March 31, 1997, unreturned capital contributions from equity investors totaled approximately $493,327,000. The Company has an aggregate of $1,464,810,000 of indebtedness outstanding in the form of the 11 7/8% Debentures, 13 1/2% Notes, 14 1/4% Notes, borrowings under the Senior Credit Facility and note payable and capital lease obligations. The Company has an additional $283,000,000 of borrowing capacity under its Revolving Credit Facility. The Company generated cash flows from operating activities of $32,334,000 for the three month period ended March 31, 1997. Funding from equity contributions, borrowings and cash flow from operations have been sufficient to meet the Company's debt service, working capital and capital expenditure requirements. Certain Systems will be upgraded or rebuilt principally to 860 MHz or 750 MHz capability over the next three years to allow for additional programming and service offerings through networks characterized by such bandwidth capacity. Capital expenditures are expected to approximate $167,000,000 (or $139 per customer) in 1997. Such expenditures include certain upgrade and rebuild projects occurring principally in the Systems located in Alabama, California, Wisconsin and Texas. Ongoing capital expenditures in excess of upgrade and rebuild amounts are consistent with current costs to extend and maintain the existing networks. The Company expects to fund these capital expenditures through cash generated from operations and available borrowings under the Revolving Credit Facility. Cash interest is payable monthly, quarterly and semiannually on borrowings outstanding under the Company's Senior Credit Facility and the 11 7/8% Debentures. No cash interest is payable on the 13 1/2% Notes until February 1, 2000 and no cash interest is payable on the 14 1/4% Notes until December 15, 2000. Maturities of long-term debt approximate $414,987,000 over the next five years. The Company expects to cover both interest and principal payments on its long-term obligations through internally generated funds. RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Transfers of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The provisions of SFAS No. 125 are generally effective for transactions occurring after December 31, 1996. There has been no impact on the Company upon adoption. No other recent accounting pronouncements have been issued which the Company has not adopted and which are expected to have a material effect on the Company's consolidated 18 financial statements and related disclosures. INFLATION Based on the FCC's current rate regulation standards, an inflation factor is included in the benchmark formula in establishing the initial permitted rate. Subsequent to establishing the initial rate, an annual rate increase based on the year-end inflation factor is permitted. In addition to annual rate increases, certain costs over the prescribed inflation factors, defined by the FCC as "external costs", may be passed through to customers. Certain of the Company's expenses, such as those for wages and benefits, equipment repair and replacement and billing and marketing generally increase with inflation. However, the Company does not believe that its financial results have been adversely affected by inflation. Periods of high inflation could have an adverse effect to the extent that increased borrowing costs for floating rate debt may not be offset by increases in revenues. As of March 31, 1997, the Company had $215,000,000 of outstanding borrowings under the Senior Credit Facility which are subject to floating interest rates. The rates are based on either the Eurodollar rate, prime rate, CD base rate or Federal Funds rate, plus a margin of up to 2.25% subject to certain adjustments based on the ratio of Operating's total debt to annualized operating cash flow. To reduce the impact of changes in interest rates on its floating rate long-term debt, the Company entered into certain interest rate swap agreements with certain of the participating banks under the Senior Credit Facility. At March 31, 1997, interest rate swap agreements covering a notional balance of $650,000,000 were outstanding. These outstanding swap agreements mature during 1997 and 1998 and require the Company to pay a fixed rate of 5.77% to 5.81% plus the applicable interest rate margin. Extensions for additional periods are available within the swap agreements at the option of the other parties thereto. REGULATION IN THE CABLE TELEVISION INDUSTRY The operation of cable television systems is extensively regulated by the FCC, some state governments and most local governments. On February 8, 1996, the President signed into law the 1996 Telecom Act. This new law alters the regulatory structure governing the nation's telecommunications providers. It removes barriers to competition in both the cable television market and the local telephone market. Among other things, it reduces the scope of cable rate regulation. The 1996 Telecom Act required the FCC to undertake a host of implementing rulemakings, the final outcome of which cannot yet be determined. Moreover, Congress and the FCC have frequently revisited the subject of cable television regulation and may do so again. Future legislative and regulatory changes could adversely affect the Company's operations. The 1996 Telecom Act sunsets FCC regulation of CPST rates for all cable television systems (regardless of size) on March 31, 1999. It also relaxes existing uniform rate requirements by specifying that uniform rate requirements do not apply where the operator faces "effective 19 competition," and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing still may be made to the FCC. It is not possible at this time to predict the outcome of such rulemakings. Until the various required rulemakings are implemented which amend the rules under the previous cable acts, the Company continues to be subject to the provisions of the 1992 Cable Act. The Company believes that it has materially complied with provisions of the 1996 Telecom Act and the 1992 Cable Act, including rate setting provisions promulgated by the FCC on April 1, 1993. However, in jurisdictions which have chosen not to certify, refunds covering a one-year period on basic service may be ordered if the Company is regulated at a later date and is unable to justify its rates through a benchmark or cost-of-service filing. The amount of refunds, if any, which may be payable by the Company in the event that these systems' rates are successfully challenged by franchising authorities is not currently estimable. During the three month period ended March 31, 1997, there were no rate refunds issued. There are, however, rate complaints currently pending at the FCC concerning certain of the Company's CPST rates. Pursuant to the re-regulation covering the time period from September 1, 1993 through May 15, 1994, there are currently under review by the FCC 18 cost-of-service filings and two benchmark filings. Pursuant to the re-regulation covering the time period from May 1994 to the date hereof, there are 48 benchmark filings under review by the FCC. These pending reviews potentially affect 351,000 of the Company's basic customers. During 1996, reviews involving certain Systems serving approximately 75,000 customers were completed in which the FCC found no errors in the Company's rate calculations. As a result, the related complaints were denied. If the FCC determines that the Company's CPST rates are unreasonable, it has the authority to order the Company to reduce such rates and to refund to customers any overcharges with interest occurring from the filing date of the rate complaint at the FCC. The amount of refunds, if any, which may be required by the FCC in the event the Company's CPST rates are found to be unreasonable is not currently estimable. Because the FCC has not yet resolved pending rate complaints involving the Company and because franchise authorities may certify in the future, the overall impact of these regulations and other provisions of the 1996 Telecom Act and the 1992 Cable Act on the Company's business cannot be determined at this time. 20 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There were no material legal proceedings instituted during the three months ended March 31, 1997 to which the Company is a party or of which any of its property is subject. ITEM 2 - CHANGES IN SECURITIES None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 - OTHER INFORMATION None ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Included in this report: Exhibit: 27.1 Financial Data Schedule (supplied for the information of the Commission) (b) Reports on Form 8-K None 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MARCUS CABLE COMPANY, L.P. (Registrant) By: Marcus Cable Properties, L.P., its general partner, By: Marcus Cable Properties, Inc., its general partner, May 15, 1997 By: /s/ Jeffrey A. Marcus Jeffrey A. Marcus Its: President, Chief Executive Officer and Sole Director of Marcus Cable Properties, Inc. (Principal Executive Officer) By: /s/ Thomas P. McMillin Thomas P. McMillin Its: Senior Vice President and Chief Financial Officer of Marcus Cable Financial and Accounting Officer) MARCUS CABLE OPERATING COMPANY, L.P. (Registrant) By: Marcus Cable Company, L.P., its general partner, By: Marcus Cable Properties, L.P., its general partner, By: Marcus Cable Properties, Inc., its general partner, May 15, 1997 By: /s/ Jeffrey A. Marcus Jeffrey A. Marcus Its: President, Chief Executive Officer and Sole Properties, Inc.(Principal Executive Officer) By: /s/ Thomas P. McMillin Thomas P. McMillin Its: Senior Vice President and Chief Financial Officer of Marcus Cable Properties, Inc. (Principal Financial and Accounting Officer) 22 MARCUS CABLE CAPITAL CORPORATION (Registrant) May 15, 1997 By: /s/ Jeffrey A. Marcus Jeffrey A. Marcus Its: President, Chief Executive Officer and Sole Director of Marcus Cable Capital Corporation(Principal Executive Officer) By: /s/ Thomas P. McMillin Thomas P. McMillin Its: Senior Vice President and Chief Financial Officer of Marcus Cable Capital Corporation (Principal Financial and Accounting Officer) MARCUS CABLE CAPITAL CORPORATION II (Registrant) May 15, 1997 By: /s/ Jeffrey A. Marcus Jeffrey A. Marcus Its: President, Chief Executive Officer and Sole Director of Marcus Cable Capital Corporation II (Principal Executive Officer) By: /s/ Thomas P. McMillin Thomas P. McMillin Its: Senior Vice President and Chief Financial Officer of Marcus Cable Capital Corporation II (Principal Financial and Accounting Officer) 23 MARCUS CABLE CAPITAL CORPORATION III (Registrant) May 15, 1997 By: /s/ Jeffrey A. Marcus Jeffrey A. Marcus Its: President, Chief Executive Officer and Sole Director of Marcus Cable Capital Corporation III(Principal Executive Officer) By: /s/ Thomas P. McMillin Thomas P. McMillin Its: Senior Vice President and Chief Financial Officer of Marcus Cable Capital Corporation III (Principal Financial and Accounting Officer) 24