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 June 30, 1997 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to COMMISSION FILE 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 CREEK 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 JUNE 30, 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 June 30, 1997 and December 31, 1996 5 Consolidated Statements of Operations for the Three and Six months Ended June 30, 1997 and 1996 6 Consolidated Statements of Cash Flows for the Six months Ended June 30, 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 15-23 PART II OTHER INFORMATION Item 1: Legal Proceedings 24 Item 2: Changes in Securities 24 Item 3: Defaults Upon Senior Securities 24 Item 4: Submission of Matters to a Vote of Security Holders 24 Item 5: Other Information 24 Item 6: Exhibits and Reports on Form 8-K 24 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 Harron Harron Communications, Corp. and certain of its subsidiaries Harron Systems Certain cable television systems purchased from Harron 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 MCA, MCALP, MCDM and MCP Sammons Sammons Communications, Inc. and certain of its subsidiaries 3 Sammons Systems Certain cable television systems purchased from Sammons 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 Time Warner Time Warner Entertainment Company, L.P. and certain of its subsidiaries Time Warner Systems Certain cable television systems received in trade with Time Warner 4 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands) June 30, December 31, Assets 1997 1996 (unaudited) Current assets: Cash and cash equivalents $ 5,045 $ 6,034 Accounts receivable, net of allowance of $1,935 and $1,900, respectively 19,599 17,043 Prepaid expenses and other 3,741 2,432 ----------- ----------- Total current assets 28,385 25,509 Property and equipment, net (note 2) 623,398 578,507 Other assets, net (note 3) 1,037,113 1,083,534 ----------- ----------- $ 1,688,896 $ 1,687,550 =========== =========== Liabilities and Partners' Capital Current liabilities: Current maturities of long-term debt (note 4) $ 74,388 $ 41,819 Accrued liabilities 53,562 49,405 Accrued interest 10,589 10,664 ----------- ----------- Total current liabilities 138,539 101,888 Long-term debt (note 4) 1,412,695 1,396,652 Subsidiary limited partner interests (246) (246) Partners' capital 137,908 189,256 Commitments and contingencies --- --- ----------- ----------- $ 1,688,896 $ 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 Six months ended June 30, June 30, 1997 1996 1997 1996 Revenues: Cable services $115,283 $106,424 $225,352 $208,573 Management fees (note 5) 1,086 579 5,464 1,146 -------- -------- -------- -------- Total revenues 116,369 107,003 230,816 209,719 -------- -------- -------- -------- Operating expenses: Selling, service and system management 43,413 39,285 84,845 78,350 General and administrative 17,300 17,963 34,798 35,754 Depreciation and amortization 45,028 39,806 89,174 78,899 -------- -------- -------- -------- 105,741 97,054 208,817 193,003 -------- -------- -------- -------- Operating income 10,628 9,949 21,999 16,716 -------- -------- -------- -------- Other expenses: Interest expense, net 36,799 35,680 73,347 71,466 -------- -------- -------- -------- Net loss $(26,171) $(25,731) $(51,348) $(54,750) ======== ======== ======== ======== See accompanying notes to the consolidated financial statements. 6 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) (in thousands) Six months ended June 30, 1997 1996 Cash flows from operating activities: Net loss $ (51,348) $ (54,750) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 89,174 78,899 Amortization of debt issuance costs 1,942 1,608 Accretion of discount on notes 33,241 29,023 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (2,556) 4,443 Prepaid expenses (1,309) (1,213) Other assets (47) (79) Accrued interest (75) (1,563) Accrued liabilities 4,157 (5,327) ---------- ---------- Net cash provided by operating activities 73,179 51,041 ---------- ---------- Cash flows from investing activities: Acquisitions of cable systems and franchises, net of cash acquired --- (876) Additions to property and equipment (87,463) (43,346) ---------- ---------- Net cash used in investing activities (87,463) (44,222) ---------- ---------- Cash flows from financing activities: Proceeds from note payable --- 10,000 Proceeds from borrowings 105,000 --- Repayment of long-term debt (90,054) (15,000) Payment of debt issuance costs (1,392) --- Payment of capital lease obligations (259) (176) ---------- ---------- Net cash provided by (used in) financing activities 13,295 (5,176) ---------- ---------- Net increase (decrease) in cash and cash equivalents (989) 1,643 Cash and cash equivalents at beginning of period 6,034 17,409 ---------- --------- Cash and cash equivalents at end of period $ 5,045 $ 19,052 ========== ========= Supplemental disclosure of cash flow information: Interest paid $ 38,131 $ 42,577 ========== ======== 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 a general partner and in which MCC owns a greater than 99.00% interest. Operating, in turn, conducts its operations through the Operating Partnerships, in which it, directly or indirectly, serves as the general partner and owns a greater than 99.00% 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. The Company began the process of itemizing such fees on all customers' bills to conform with the collection of, and accounting for, franchise fees in the remaining Systems in November 1996 and completed the process during the first quarter of 1997. 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 June 30, 1997, (ii) the results of its operations for the three and six months ended June 30, 1997 and 1996 and (iii) its cash flows for the six months 8 ended June 30, 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): June 30, December 31, 1997 1996 Cable and Electronics $ 452,413 $ 440,513 Other 345,827 269,580 ----------- --------- 798,240 710,093 Accumulated Depreciation (174,842) (131,586) ----------- ---------- $ 623,398 $ 578,507 =========== ========== (3) Other Assets Other assets consist of the following (in thousands): June 30, December 31, 1997 1996 Franchise rights $ 1,175,019 $ 1,175,009 Going concern value of acquired cable systems 45,969 45,969 Noncompetition agreements 31,914 31,914 Debt issuance costs 44,892 43,500 Other 1,106 1,069 ----------- ------------ 1,298,900 1,297,461 Accumulated amortization (261,787) (213,927) ----------- ------------ $ 1,037,113 $ 1,083,534 =========== ============ 9 (4) Long-term Debt The Company had outstanding borrowings under long-term debt arrangements as follows (in thousands): June 30, December 31, 1997 1996 Senior Credit Facility $ 870,000 $ 855,000 13 1/2% Senior Subordinated Discount Notes, due August 1, 2004 315,040 295,119 14 1/4% Senior Discount Notes, Due December 15, 2004 199,182 185,862 11 7/8% Senior Debentures, due October 1, 2005 100,000 100,000 Note Payable 233 287 Capital leases 2,628 2,203 ------------ ----------- 1,487,083 1,438,471 Less current maturities (74,388) (41,819) ------------ ----------- $ 1,412,695 $ 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 EBITDA. At June 30, 1997, borrowings under the Senior Credit Facility bore interest at rates ranging from 6.82% to 7.82% 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 participating banks under the Senior Credit Facility. At June 30, 1997, an interest rate swap agreement covering a notional balance of $150,000,000 was outstanding which requires the Company to pay a fixed rate of 5.77%, plus the applicable interest rate margin. This agreement matures during 1998, and allows for the optional extension by the counterparty for an additional period. In addition, the Company has entered into interest rate swap agreements covering an aggregate notional principal amount of $250,000,000, with forward start dates in August 1997 and November 1997. These agreements require the Company to pay fixed rates ranging from 5.75% to 5.77%, plus the applicable interest rate margin, and will automatically terminate in the event that one month LIBOR equals or exceeds 6.75% on any monthly reset date. These agreements mature during 1999 and 2000, and certain of the agreements allow for the optional extension by the counterparty for an additional period. 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 10 participating banks under the Company's Senior Credit Facility. During the three months and six months ended June 30, 1997, the Company recognized additional interest expense under its interest rate swap agreements of approximately $66,000 and $587,000, 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. (5) 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 $1,087,000 and $5,464,000, respectively, during the three month and six month periods ended June 30, 1997. Effective January 31, 1997, the Maryland Cable System was sold to Jones Communications of Maryland, Inc. In conjunction with the sale, Operating recognized incentive management fees of $986,000 and $5,069,000, respectively, for the three month and six month periods ended June 30, 1997. Additional incentive management fees may be recognized 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. (6) Pending Acquisitions On June 20, 1997, the Company entered into a definitive agreement with Time Warner to exchange cable television systems in the states of Wisconsin and Indiana serving in aggregate approximately 125,000 customers. According to the terms of the agreement, Time Warner will receive systems serving approximately 55,000 customers, while the Company will receive systems serving approximately 70,000 customers. In addition to the contribution of its systems, the Company will pay $20,000,000 to Time Warner. This exchange is subject to regulatory approval and certain closing conditions and is expected to close by year end. 11 (7) Subsequent Events Effective July 1, 1997, the Company completed the acquisition of certain cable television systems from Harron for a purchase price of $34.5 million, subject to working capital adjustments. The Harron Systems provide service to approximately 22,000 customers in 36 communities located near the Company's existing operations in the Dallas/Fort Worth Metroplex. 12 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Consolidating Schedule - Balance Sheet Information As of June 30, 1997 (unaudited) (in thousands) ASSETS Combined Operating Capital Elimin- Operating Capital Elimin- Partnerships II Operating ations Consolidated Capital III Company ations Company Current assets: Cash and cash equivalents 5,425 1 (1,137) 0 4,289 1 1 754 0 5,045 Accounts receivable, net 48,973 0 (3,137) (26,237) 19,599 0 0 0 0 19,599 Prepaid expenses and other 2,577 0 1,164 0 3,741 0 0 0 0 3,741 ----------- ----- --------- ---------- ----------- ------ ------ ------- -------- --------- Total current assets 56,975 1 (3,110) (26,237) 27,629 1 1 754 0 28,385 Property and equipment, net 616,791 0 6,607 0 623,398 0 0 0 0 623,398 Other assets, net 1,037,863 0 1,578,053 (1,562,773) 1,053,143 0 0 8,716 (24,746) 1,037,113 Investment in subsidiaries 0 0 138,778 (138,778) --- 0 0 449,056 (449,056) --- ----------- ----- --------- ---------- ----------- ------ ------ ------- -------- --------- Total assets 1,711,629 1 1,720,328 (1,727,788) 1,704,170 1 1 458,526 (473,802) 1,688,896 =========== ===== ========= ========== =========== ====== ====== ======= ======== ========= LIABILITIES AND PARTNERS' CAPTIAL Current liabilities: Current maturities of long-term debt 190 0 74,198 0 74,388 0 0 0 0 74,388 Accrued liabilities 80,148 0 76,570 (96,877) 59,841 0 0 18,467 (24,746) 53,562 Accrued interest 10,589 0 7,620 (10,589) 7,620 0 0 2,969 0 10,589 ----------- ----- --------- ---------- ----------- ------ ------ ------- -------- --------- Total current liabilities 90,927 0 158,388 (107,466) 141,849 0 0 21,436 (24,746) 138,539 Long-term debt 1,481,925 0 1,113,132 (1,481,544) 1,113,513 0 0 299,182 0 1,412,695 Subsidiary limited partner interest 0 0 (246) 0 (246) 0 0 0 0 (246) Partners' capital 138,777 1 449,054 (138,778) 449,054 1 1 137,908 (449,056) 137,908 ----------- ----- --------- ---------- ----------- ------ ------ ------- -------- --------- Total liabilities and parterns' capital 1,711,629 1 1,720,328 (1,727,788) 1,704,170 1 1 458,526 (473,802) 1,688,896 =========== ===== ========= ========== =========== ====== ====== ======= ======== ========= 13 MARCUS CABLE COMPANY, L.P. AND SUBSIDIARIES Consolidating Schedule - Statement of Operations Information For the six months ended June 30, 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 225,352 --- --- --- 225,352 --- --- --- --- 225,352 Management fees --- --- 5,464 --- 5,464 --- --- --- --- 5,464 --------- ----- ------- ----- ------ ------ ------ ---- ------- ------- Total revenues 225,352 --- 5,464 --- 230,816 --- --- --- --- 230,816 --------- ----- ------- ----- ------ ------ ------ ---- ------- ------- Operating expenses: Selling, service and system management 83,703 --- 1,142 --- 84,845 --- --- --- --- 84,845 General and administrative 27,918 --- 6,880 --- 34,798 --- --- --- --- 34,798 Allocated corporate costs 2,243 --- (2,243) --- --- --- --- --- --- --- Depreciation and amortization 88,565 --- 609 --- 89,174 --- --- --- --- 89,174 ----------- ----- ------ ----- ------ ------ ------ ---- ------- ------- 202,429 --- 6,388 --- 208,817 --- --- --- --- 208,817 ----------- ----- ------ ----- ------ ------ ------ ---- ------- ------- Operating income 22,923 --- (924) --- 21,999 --- --- --- --- 21,999 Other (income) expense: Interest (income) expense, net 73,719 --- (20,023) 0 53,696 --- --- 19,651 --- 73,347 Equity earnings (loss) of subsidiaries --- --- 50,796 (50,796) --- --- --- 31,697 (31,697) --- ----------- ----- ------ ----- ------ ------ ----- ------ ------- ------- 73,719 --- 30,773 (50,796) 53,696 --- --- 51,348 (31,697) 73,347 ----------- ----- ------ ----- ------- ------ ----- ------ -------- ------- Net loss (50,796) --- (31,697) 50,796 (31,697) --- --- (51,348) 31,697 (51,348) ======= ===== ======= ====== ======= ====== ===== ====== ====== ======= 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. GENERAL The Company's business strategy focuses on three principles: (i) forming regional clusters of cable television systems through strategic acquisitions, internal growth and divestitures of non-strategic assets, (ii) promoting internal growth and enhanced operating and financial performance by streamlining operations in newly clustered systems and applying innovative marketing techniques and (iii) upgrading systems and employing state-of-the-art technology to enhance existing service and to develop, on a cost-effective basis, ancillary revenue streams. The Company has followed a systematic approach in acquiring, operating and developing cable television systems based on the principle of increasing operating cash flow while maintaining a high quality standard of service. The Company's acquisition strategy focuses on cable television systems in proximity to its existing systems or of sufficient size to serve as cores for new operating regions. The Company believes that increasing its operating scale through strategic acquisitions, as well as through internal growth, enhances its ability to reduce its programming costs, develop new technologies, offer new services and improve operating margins, and thus improve its long-term competitiveness. In continuing to implement the Company's acquisition strategy, the Company acquired the Harron Systems in July of 1997, which are in proximity to other systems owned by the Company in the Dallas/Ft. Worth Metroplex. The Company's basic customer count increased by over 22,000 as a result of this acquisition. Funding for the $34.5 million purchase was provided by borrowings under the Company's revolving credit facility. In addition to the Harron Acquisition, the Company has entered into a definitive agreement with Time Warner to exchange cable television systems in the states of Wisconsin and Indiana serving in total approximately 125,000 customers. The Company will exchange systems serving approximately 55,000 customers in municipalities surrounding the metropolitan areas of Milwaukee and Green Bay, Wisconsin, for systems serving approximately 70,000 customers in the communities of Eau Claire, Beloit, Marshfield and Merrill, Wisconsin and Warsaw, Indiana. In addition to the contribution of its systems, the Company will pay an additional $20,000,000 to Time Warner. Funding for this purchase is expected to be provided by borrowings under the Company's revolving credit facility. The exchange is subject to regulatory approval and certain closing conditions and is scheduled to close by year end. This acquisition and exchange are described in Note 6 to the unaudited consolidated financial statements. Future expansion efforts are expected to focus on acquiring or exchanging systems in proximity 15 to existing operations, with the strategic goal of forming or expanding clusters of systems to permit operating efficiencies and economies of scale. Opportunistic divestitures, in areas where consolidation opportunities do not exist, are also considered. The Company strives to maintain high technological standards in its cable television systems on a cost-effective basis. Currently, the Company is systematically rebuilding its cable systems so that within the next three years substantially all existing systems will have a bandwidth of between 450 MHz and 860 MHz. This program should enable the Company to deliver technological innovations to its customers as such services become commercially viable. As part of this program, certain systems, such as those serving the areas in and around Ft. Worth/Tarrant County (Texas), Glendale/Burbank (California) and suburban Birmingham (Alabama) together with selected systems in Wisconsin, Indiana, Tennessee and other states in which the Company operates cable systems, are being upgraded to 750 MHz or 860 MHz with two-way communication capabilities. Capital expenditures are expected to approximate $180,000,000 (or $150 per customer) in 1997, of which approximately $116,000,000 is for bandwidth upgrades, rebuilds and other enhancements to the cable systems. The Company purchased property and equipment totaling approximately $87,463,000 during the six months ended June 30, 1997, of which approximately $58,000,000 pertained to upgrades and rebuilds . The Company expects to fund future capital expenditures through cash generated from operations and available borrowings under the revolving credit facility. LIQUIDITY AND CAPITAL RESOURCES Acquiring and upgrading cable television systems is contingent upon the availability of cash provided by operations, borrowings from the Company's existing credit facilities and the Company's ability to obtain additional debt or equity financing. Although in the past the Company has been able to obtain financing through equity investments, debt issuances and bank borrowings, there can be no assurance that the capital resources necessary to accomplish the Company's business strategy will be available, or that the terms will be favorable to the Company. 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 June 30, 1997, unreturned capital contributions from equity investors totaled approximately $493,327,000. The Company has an aggregate of $1,487,083,000 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 $276,059,000 of borrowing capacity under its Revolving Credit Facility. The Company generated cash flows from operating activities of $73,179,000 for the six month period ended June 30, 1997. In addition to cash flows from operating activities, funding from equity contributions and borrowings have been sufficient to meet the Company's debt service, working capital and capital expenditure requirements. 16 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 $496,446,000 over the next five years. The Company expects to cover both interest and principal payments on its long-term obligations through internally generated funds and borrowings under the Senior Credit Facility. RESULTS OF OPERATIONS The Company generates the majority of its revenues from monthly customer fees for basic, premium and other ancillary 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 in conjunction with the sale of and the management of Maryland Cable. The comparability of operating results between the three and six months ended June 30, 1997 and the corresponding 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 unaudited consolidated financial statements, the conforming change in the accounting for franchise fees in certain of the Systems (collectively referred to as the "Pro Forma Adjustments"). Revenues Revenues for the three months ended June 30, 1997 totaled $116,369,000, an increase of $9,366,000, or 8.8%, over the revenues of $107,003,000 for the three months ended June 30, 1996. Revenues for the six months ended June 30, 1997 of $230,816,000, increased $21,097,000, or 10.1%, over the revenues of $209,719,000 for the six months ended June 30, 1996. Substantially all of this increase was attributable to growth in basic, pay-per-view and advertising sales revenue and increases in management fee revenue as a result of the sale of the Maryland Cable Systems. The effects of these increases in revenue were offset by a revenue reduction of approximately $1,700,000 for the three months ended June 30, 1997 and $3,400,000 for the six months ended June 30, 1997, as a result of the conforming change regarding franchise fee itemization in the former Sammons Systems. Normalizing the effects of the Pro Forma Adjustments, pro forma revenue increased $10,999,000, or 10.5%, and $21,024,000, or 10.3%, respectively, for the three and six months ended June 30, 1997. The Company's basic service revenues increased $6,295,000, or 8.2%, to $82,900,000 for the three months ended June 30, 1997 from $76,605,000 for the three months ended June 30, 1996. 17 For the six months ended June 30, 1997, basic service revenues increased $12,550,000, or 8.4%, to $162,782,000 from $150,232,000 for the six months ended June 30, 1996. Pro forma basic service revenues increased $8,179,000, or 10.9%, and $16,297,000, or 11.1%, respectively, for the three and six months ended June 30, 1997. The growth in basic service revenue primarily reflects increases in the number of basic customers, new product offerings and the full effect of the rate adjustments taken in June of 1996. During June 1997, rates for basic services were increased for a majority of the Company's systems throughout the month. Although some of the actual rate adjustments took effect in the month of June, the full impact of the increase will not be reflected until the third quarter of this year. Pay-per-view revenue increased $1,608,000, or 138.7%, to $2,767,000 for the three months ended June 30, 1997 from $1,159,000 for the three months ended June 30, 1996. For the six months ended June 30, 1997, pay-per-view revenue increased $1,843,000, or 69.5%, to $4,495,000 from $2,652,000 for the six months ended June 30, 1996. The majority of this increase is principally due to the success of the Holyfield/Tyson rematch. The effects of the acquisitions and divestitures had minimal effects on pay-per-view revenue. The Company's advertising revenues increased $564,000, or 15.0%, to $4,326,000 for the three months ended June 30, 1997 from $3,762,000 for the three months ended June 30, 1996. Advertising revenues for the six months ended June 30, 1997 increased $1,113,000, or 16.6%, to $7,821,000 from $6,708,000 for the six months ended June 30, 1996. Pro forma advertising revenue increased $577,000, or 15.4%, and $1,135,000, or 17.0%, for the three and six months ended June 30, 1997, respectively. This growth is mainly the result of increases in the number of insertable channels, improved channel utilization and greater market demand. The Company's management fee revenues increased $508,000, or 87.7%, to $1,087,000 for the three months ended June 30, 1997 from $579,000 for the three months ended June 30, 1996. Management fee revenue for the six months ended June 30, 1997 increased $4,318,000, or 376.8%, to $5,464,000 from $1,146,000 for the six months ended June 30, 1996. These increases were due to the recognition of an incentive management fee in conjunction with the sale of the Maryland Cable System. Operating recognized incentive management fees of $986,800 in May 1997 and $4,083,000 in January 1997 in conjunction with the sale. The Company will continue to earn a nominal monthly management fee through the liquidation of the Maryland Cable partnership. Additional incentive management fees may be recognized upon the termination of the Maryland Cable partnership in January of 1998. 18 Customer Information The following table illustrates the changes in the Company's basic customers and premium units which have significantly contributed to the increases noted in revenues. The increase in basic customers for the six months ended June 30, 1997 equates to an annualized growth rate of 2.4%. Substantially all of the internal growth in basic customers 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. The decrease in premium units from December 31, 1996 was anticipated as a reaction to the annual rate increase implemented during June of 1997. Pro Forma June 30, December 31, June 30, 1997 1996 1996 (a) Basic Customers 1,195,287 1,181,293 1,172,701 Premium Units 660,357 666,702 648,511 - -------------------- <FN> (a) Excludes approximately 12,600 basic customers and 5,000 premium units served by the cable systems in Washington which were subsequently sold to a third party on October 11, 1996. Includes approximately 9,800 basic customers and 4,200 premium units served by systems in Mississippi and Indiana purchased in July 1996. </FN> Costs and Expenses Selling, service and system management expenses consist primarily of salaries and other costs associated with programming, marketing, engineering and plant maintenance and advertising. General and administrative costs consist primarily of salaries for administrative personnel, customer billing costs, bad debt expense, property taxes and copyright fees. Selling, service and system management expenses increased $4,128,000, or 10.5%, to $43,413,000 for the three months ended June 30, 1997 from $39,285,000 for the three months ended June 30, 1996. For the six months ended June 30, 1997, selling, service and system management expenses increased $6,495,000, or 8.3%, to $84,845,000 from $78,350,000 for the six months ended June 30, 1996. The majority of the increase noted resulted from an increase in programming costs of $3,998,000, or 16.0%, and $6,768,000, or 13.5%, respectively, for the three and six months ended June 30,1997. Substantially all of this programming cost increase is attributable to increases in the cost of basic satellite programming as a result of incremental basic customer growth and the addition of satellite programming channels to certain of the Company's rebuilt markets. Pro forma selling, service and system management expenses increased $4,203,000, or 10.7%, and $6,597,000, or 8.4%, respectively, for the three and six months ended June 30, 1997. 19 General and administrative expenses decreased $663,000, or 3.7%, to $17,300,000 for the three months ended June 30, 1997 from $17,963,000 for the three months ended June 30, 1996. For the six months ended June 30, 1997, general and administrative expenses decreased $956,000, or 2.7%, to $34,798,000 from $35,754,000 for the six months ended June 30, 1996. The decrease was due primarily to the reduction in franchise fee expense, as a result of the conforming itemization of such costs on customers' bills. Pro forma general and administrative expenses increased $1,162,000, or 7.2%, and $2,706,000, or 8.4%, respectively, for the three and six months ended June 30, 1997. The pro forma increase in general and administrative expense mainly represents costs from increased staffing of customers service operations and employee wage adjustments. Depreciation and amortization expenses increased $5,222,000, or 13.1%, for the three months ended June 30, 1997 to $45,028,000 from $39,806,000 for the three months ended June 30, 1996. For the six months ended June 30, 1997, depreciation and amortization increased $10,275,000, or 13.0%, to $89,174,000 from $78,899,000 for the six months ended June 30, 1996. The increase is principally 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 increased $679,000, or 6.8%, to $10,628,000 for the three months ended June 30, 1997 from $9,949,000 for the comparable period in 1996. Operating income increased $5,283,000, or 31.6%, to $21,999,000 for the six months ended June 30, 1997 from $16,716,000 for the same period in 1996. These increases are due primarily to the recognition of the incentive management fee in conjunction with the sale of Maryland cable and the impact of the acquisition and divestiture activity noted above. 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 (often referred to as "Cable System Cash Flow") and 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 financial statements, rather these measures are included as industry standards. Cable System Cash Flow increased $6,130,000, or 11.7%, to $58,666,000 for the three months ended June 30, 1997 from $52,536,000 for the three months ended June 30, 1996. For the six months ended June 30, 1997, Cable System Cash Flow increased $12,609,000, or 12.5%, to $113,731,000 from $101,122,000 for the six months ended June 30, 1996. EBITDA increased $5,901,000, or 11.9%, to 55,656,000 for the three months ended June 30, 1997 from $49,755,000 for the three months ended June 30, 1996. For the six months ended June 30, 1997, EBITDA increased $15,558,000, or 16.3%, to $111,173,000 from $95,615,000 for the six months ended June 30, 1996. Pro forma Cable System Cash Flow and EBITDA for the three months and six months ended June 30, 1997 increased 12.2% and 11.5% and 13.0% and 12.5%, respectively, over the comparable periods in 1996. 20 Other Expenses Net interest expense increased $1,119,000, or 3.1%, to $36,799,000 for the three months ended June 30, 1997 from $35,680,000 for the three months ended June 30, 1996. For the six months ended June 30, 1997, net interest expense increased $1,881,000, or 2.6%, to $73,347,000 from $71,466,000 for the six months ended June 30, 1996. These increases are primarily due to the scheduled increase in accretion for the 13 1/2% Notes and the 14 1/4% Notes of $4,143,000 for the six months ended June 30, 1997. This accretion increase was offset by a decrease in the average borrowing costs under the Senior Credit Facility. Total indebtedness, including public indebtedness, increased to $1,487,083,000 at June 30, 1997 from $1,421,748,000 at June 30, 1996. The weighted average interest rate, including commitment fees, for total debt outstanding during the three months and six months ended June 30, 1997 was 9.84% and 9.88%, respectively, compared with 9.94% and 9.98%, respectively, for the three months and six months ended June 30, 1996. 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 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, 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 June 30, 1997, the Company had $720,000,000 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 EBITDA. 21 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 June 30, 1997, an interest rate swap agreement covering a notional balance of $150,000,000 was outstanding which requires the Company to pay a fixed rate of 5.77%, plus the applicable interest rate margin. This agreement matures during 1998, and allows for the optional extension by the counterparty for an additional period. In addition, the Company has entered into interest rate swap agreements covering an aggregate notional principal amount of $250,000,000, with forward start dates in August 1997 and November 1997. These agreements require the Company to pay fixed rates ranging from 5.75% to 5.77%, plus the applicable interest rate margin, and will automatically terminate in the event that one month LIBOR equals or exceeds 6.75% on any monthly reset date. These agreements mature during 1999 and 2000, and certain of the agreements allow for the optional extension by the counterparty for an additional period. REGULATION IN THE CABLE TELEVISION INDUSTRY The operation of cable television systems is extensively regulated by the FCC, certain 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 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 to regulate certain rates, 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 June 30, 1997, there were no rate refunds issued. There are, however, rate 22 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 17 cost-of-service filings and one benchmark filing. Pursuant to the re-regulation covering the time period from May 1994 to the date hereof, there are 40 benchmark filings under review by the FCC. These pending reviews potentially affect 157,600 of the Company's basic customers. During 1996 and 1997, reviews involving certain Systems serving approximately 140,400 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 date such rate complaint was filed 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 to regulate certain rates 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. 23 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS There were no material legal proceedings instituted during the six months ended June 30, 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. 24 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, August 14, 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 Properties, Inc. (Principal 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, August 14, 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 Properties, Inc. (Principal Financial and Accounting Officer) 25 MARCUS CABLE CAPITAL CORPORATION (Registrant) August 14, 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) August 14, 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) 26 MARCUS CABLE CAPITAL CORPORATION III (Registrant) August 14, 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) 27