INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- CONTINUED
compensation for alleged excessive late fee charges for past periods. These
cases are either at the early stages of the litigation process or are subject to
a case management order that sets forth a process leading to mediation. Based
upon the facts available management believes that, although no assurances can be
given as to the outcome of these actions, the ultimate disposition of these
matters should not have a material adverse effect upon the financial condition
of the Systems.
Under existing Tennessee laws and regulations, the Systems paid an
Amusement Tax in the form of a sales tax on programming service revenues
generated in Tennessee in excess of charges for the basic and expanded basic
levels of service. Under the existing statute, only the service charges or fees
in excess of the charges for the "basic cable" television service package were
not exempt from the Amusement Tax. Related regulations clarify the definition of
basic cable to include two tiers of service, which InterMedia's management and
other operators in Tennessee have interpreted to mean both the basic and
expanded basic levels of service.
In the Spring of 1999 Tennessee Department of Revenue ("TDOR") proposed
legislation that was passed by the Tennessee State Legislature which replaced
the current Amusement Tax with a new sales tax on all cable service revenues in
excess of fifteen dollars per month effective September 1, 1999. The new tax
would be computed at a rate approximately equal to the existing effective tax
Prior to the passage of the new sales tax legislation, the TDOR suggested
that unless InterMedia and other cable operators in Tennessee support the
proposed legislation, it would assess additional taxes on prior years' expanded
basic service revenue. The TDOR can issue an assessment for prior periods up to
three years. Management estimates that the amount of such an assessment, if made
for all periods not previously audited, would be approximately $5.4 million.
InterMedia's management believes that it is possible but not likely that the
TDOR can make such an assessment and prevail in defending it. Management also
believes that such an assessment is not likely based on the passage of the new
sales tax legislation.
InterMedia's management believes it has made a valid interpretation of the
current Tennessee statute and regulations and that it has properly determined
and paid all sales tax due. InterMedia further believes that the legislative
history of the current statute and related regulations, as well as the TDOR's
history of not making assessments based on audits of prior periods, support
InterMedia's interpretation. InterMedia and other cable operators in Tennessee
are aggressively defending their past practices on calculation and payment of
the Amusement Tax.
The Systems are subject to other claims and litigation in the ordinary
course of business. In the opinion of management, the ultimate outcome of any
existing litigation or other claims will not have a material adverse effect on
the Systems' financial position or results of operations.