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FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-29354 eff. 7-1-91)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from _______to________
Commission file number 333-43157
NORTHLAND CABLE TELEVISION, INC.
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(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1311836
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1638891
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER 98101
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1201 THIRD AVENUE, SEATTLE, WASHINGTON (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 621-1351
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Securities registered pursuant to including Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
(NONE) (NONE)
Securities registered pursuant to Section 12(g) of the Act:
10 1/4% Senior Subordinated Notes due 2007
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [x]
DOCUMENTS INCORPORATED BY REFERENCE
(Partially Incorporated into Part IV)
(1) Form S-4 Registration Statement declared effective on February 12,
1998 (No. 333-43157).
This filing contains ____ pages. Exhibits Index appears on page _____. Financial
Statements/Schedules Index appears on page _____.
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Cautionary statement for purposes of the "Safe Harbor" provisions of the Private
Litigation Reform Act of 1995. Statements contained or incorporated by reference
in this document that are not based on historical fact are "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
Forward-looking statements may be identified by use of forward-looking
terminology such as "believe", "intends", "may", "will", "expect", "estimate",
"anticipate", "continue", or similar terms, variations of those terms or the
negative of those terms.
PART I
ITEM 1. BUSINESS
Northland Cable Television, Inc. (the "Company"), a Washington
Corporation, was formed in October 1985 and owns and operates 41 cable
television systems serving small cities, towns, and rural communities in
California, Georgia, Oregon, South Carolina, Texas and Washington (collectively
the "Systems"). The Company is a wholly owned subsidiary of Northland
Telecommunications Corporation ("NTC") which, together with the Company and
its other affiliates, has specialized in providing cable television and
related services in non-urban markets since 1981. Other subsidiaries of
NTC include:
NORTHLAND COMMUNICATIONS CORPORATION ("NCC")- formed in March 1981 and
principally involved in the ownership and management of cable
television systems. NCC is the sole shareholder of Northland Cable
Properties, Inc.
NORTHLAND CABLE PROPERTIES, INC. - formed in February 1995 and
principally involved in the direct ownership of local cable
television systems.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and
principally involved in the development and production of computer
software used in connection with the billing and financial record
keeping for cable systems owned or managed by NCC or The Company, as
well as the holding company for the following entity:
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally
involved in the production and development of video commercial
advertisements.
NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company
for the following entity:
STATESBORO MEDIA, INC. - formed in April 1995 and principally
involved in operating an AM radio station serving the community
of Statesboro, GA and surrounding areas.
Since closing its initial acquisition in 1986, The Company has
continued to target, negotiate and complete acquisitions of cable systems and
integrate the operation of such systems. In many communities, the Company
offers its exclusive local news and information programming, produced by the
Company's wholly owned subsidiary, Northland Cable News, Inc. The Company has
increased its basic and premium subscribers through strategic acquisitions,
selective system upgrades and extensions of its cable systems. Additionally,
the Company believes its subscriber growth and revenue per subscriber have been
enhanced by consistent economic growth and favorable demographics in its
markets. As of December 31, 1997, the total number of basic subscribers served
by the Systems was 93,675, and the Company's penetration rate (basic
subscribers as a percentage of homes passed) was approximately 69% as compared
to an industry average of approximately 66%, as reported by PAUL KAGAN AND
ASSOCIATES, INC.
The Company has 63 non-exclusive franchises to operate the Systems.
These franchises, which will expire at various dates through 2020, have been
granted by local and county authorities in the areas in which the Systems
operate.
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Annual franchise fees are paid to the granting governmental
authorities. These fees vary between 1% and 5% and are generally based on the
respective gross revenues of the Systems in a particular community. The
franchises may be terminated for failure to comply with their respective
conditions.
THE SYSTEMS
The Company's systems are divided into four geographical regions.
Unless otherwise indicated, all operating statistical data set forth in the
following table and the region-by-region description of the Systems which
follows is as of December 31, 1997.
AVERAGE
MONTHLY
PERCENT OF REVENUE
BASIC BASIC PREMIUM PER EBITDA
HOMES SUBSCRIBERS BASIC SUBSCRIBERS SERVICE PREMIUM BASIC MARGIN
REGION PASSED(1) (2) PENETRATION (3) UNITS(4) PENETRATION SUBSCRIBER (5)
------ --------- ----------- ----------- ----------- -------- ----------- ---------- ------
So. Carolina
/Georgia ...... 35,815 24,542 68.5% 26.2% 7,325 29.8% $ 38.63 45.5%
Washington ..... 34,670 25,872 74.6% 27.6% 8,462 32.7% $ 34.60 41.2%
Texas .......... 46,385 30,389 65.5% 32.4% 9,506 31.3% $ 32.99 46.4%
Oregon/Calif ... 18,310 12,872 70.3% 13.8% 4,937 38.4% $ 33.05 39.8%
------- ------ ---- ----- ------ ---- --------- ----
Total Systems(6) 135,180 93,675 69.2% 100.0% 30,230 32.3% $ 35.60 44.0%
- ----------
(1) Homes passed refers to estimates of the number of dwelling units in a
particular community that can be connected to the distribution system
without any further extension of principal transmission lines. Such
estimates are based upon a variety of sources, including billing records,
house counts, city directories and other local sources.
(2) The number of basic subscribers has been computed by adding the actual
number of subscribers for all non-bulk accounts and the equivalent
subscribers for all bulk accounts. The number of such equivalent
subscribers has been calculated by dividing aggregate basic service revenue
for bulk accounts by the full basic service rate for the community in which
the account is located.
(3) Percentage of all basic subscribers based on an aggregate of all Systems.
(4) Premium service units represents the number of subscriptions to premium
channels.
(5) EBITDA represents income (loss) before interest expenses, income taxes,
depreciation and amortization and other non-cash income (expenses). EBITDA
is not intended to represent cash flow from operations or net income as
defined by generally accepted accounting principles and should not be
considered as a measure of liquidity or an alternative to, or more
meaningful than, operating income or operating cash flow as an indication
of the Company's operating performance. EBITDA is included herein because
management believes that certain investors find it a useful tool for
measuring the Company's ability to service its indebtedness. EBITDA margin
represents EBITDA as a percentage of revenue.
(6) EBITDA Margin for "Total Systems" includes Northland Cable News, Inc.'s net
operating results.
The South Carolina/Georgia Region. The South Carolina/Georgia Region
consists of four headends serving 24,542 subscribers. Two headends, located in
Clemson, South Carolina and Statesboro, Georgia, serve 21,707 subscribers or
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88.4% of the total subscribers in the region. The region is currently operated
from two local offices located in Clemson and Statesboro. Two of the headends
are expected to be interconnected by year-end 1999.
Clemson, South Carolina. The Clemson area systems serve 15,443 subscribers
from three headends, one of which is expected to be eliminated through
interconnection. The Clemson system, which is home to Clemson University,
is the largest system, serving 12,608 subscribers, and is in the final
stages of a 400 MHz rebuild project, in which approximately 90% of the
subscribers are expected to benefit from expanded channel capacity by
spring 1998. The Company is culminating an intensive five-year capital plan
for the Clemson area systems which includes the installation of a fiber
optic backbone designed to support a 750 MHz trunk and feeder architecture.
Additionally, the Clemson area systems offer Northland Cable News, have a
strong advertising sales effort and their principal office and headend
sites are owned by the Company.
Statesboro, Georgia. The Statesboro system serves 9,099 subscribers from a
single headend and is in the final phase of a 400 MHz upgrade scheduled for
completion by early 1998. The Statesboro system offers Northland Cable
News, has a strong advertising sales effort and its office and headend
site is owned by the Company. Statesboro, which is home to Georgia
Southern University, has experienced steady population growth, with a
compound annual growth rate for the period 1990 through 1995 of 2.4%,
more than double the national average of 1.1%, in each case according to
the U.S. Bureau of the Census.
The Washington Region. The Washington Region serves 25,872 subscribers
from five headends and is operated from three offices located in Port Angeles,
Bainbridge Island, and Moses Lake, Washington. The three largest headends serve
21,163 subscribers or 81.7% of the Company's total subscribers in the region.
Port Angeles, Washington. The Port Angeles system serves 8,580 subscribers
from one headend. The system utilizes a fiber optic backbone designed to
support a 750 MHz trunk and feeder architecture with 30.0% of the
subscribers served by 450 MHz capacity plant and the remainder of
subscribers served by 330 MHz capacity plant. A 450 MHz upgrade is in
process. The system provides Northland Cable News, which acts as a major
news source for the area. Port Angeles is located near the Olympic National
Park and is the county seat for Clallam County. The system's office and
headend sites are owned by the Company.
Bainbridge Island, Washington. The Bainbridge Island system serves 5,249
subscribers from one headend. Although physically close to Seattle, hilly
terrain makes for poor off-air reception in many areas of the island.
Current channel capacity is 330 MHz. The construction of a fiber optic
backbone designed to support a 750 MHz trunk and feeder architecture is
50.0% accomplished, with completion expected by early 1998. A 550 MHz
design upgrade is now 25.0% accomplished, with completion expected by
year-end 1999. The system's combination office and headend site is owned.
Northland Cable News is offered to subscribers, which has helped develop a
successful advertising sales business. Bainbridge Island had a compound
annual population growth rate for the period 1990 through 1995 of 3.6%, far
exceeding the national average.
Moses Lake, Washington. The Moses Lake area systems serve 12,043
subscribers from three headends. The Moses Lake headend serves 60.4% of the
subscribers and has 400 MHz channel capacity including a recently
constructed fiber optic backbone designed to support a 750 MHz trunk and
feeder architecture. With the resulting increased channel capacity, the
Company added 14 new channels, including a new product tier that it
believes will enhance the financial performance of that system. The office,
three headend sites and a microwave site are owned by the Company. The
three headends are interconnected via microwave for the delivery of certain
off-air broadcast signals imported from the Seattle and Spokane, Washington
markets. Each system maintains a separate headend facility for reception
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and distribution of satellite signals. The Othello system recently was
upgraded to 400 MHz capacity, and the Ephrata System is intended to be
upgraded to 550 MHz capacity by year-end 1999. The Moses Lake area, located
in central Washington State, has experienced a compound annual growth rate
of its population for the period 1990 through 1995 of 3.3%, well above the
national average.
The Texas Region. The Texas Region is characterized by smaller systems,
with 19 headends serving 30,389 subscribers. Three of the region's headends are
scheduled to be interconnected by year-end 1999. Six headends currently serve
64.5% of the subscribers. Additionally, the Company's management structure
allows it to achieve operating efficiencies, as only five local offices are
required to service the region.
Stephenville, Texas. The Stephenville area systems serve 6,504 subscribers
from a cluster of three headends. Stephenville is home to Tarleton State
College, an affiliate of Texas A&M University. Approximately 79.3% of
subscribers currently are served by plant with 400 MHz capacity. The
systems have experienced steady growth in their tier subscriptions and
advertising sales revenue. The office and headend site are owned by the
Company.
Mexia, Texas. The Mexia area systems serve 7,025 subscribers from a cluster
of five headends, with the two largest headends, Mexia and
Fairfield/Teague, serving 89.8% of the subscribers. The Mexia and
Fairfield/Teague systems currently have channel capacity of 400 MHz, with
Mexia utilizing a fiber optic backbone. The Company recently launched a new
product tier in Fairfield/Teague which the Company believes will enhance
the financial performance of that system. The Mexia area has a diversified
economy with Nucor Steel, Inc. as a major employer.
Marble Falls, Texas. The Marble Falls area systems serve 8,760 subscribers
from a cluster of five headends. The Company recently completed a fiber
optic interconnect of the Horseshoe Bay system to the Marble Falls system,
thereby eliminating the Horseshoe Bay headend. Over the next two years, the
Company plans to continue its strategy to interconnect headends by
completing a fiber optic interconnect of the Kingsland system to the Marble
Falls system, thereby eliminating an additional headend. At the completion
of the Kingsland interconnect, approximately 66.0% of the subscribers in
the area will be served from a single headend. The combination office and
headend site in Marble Falls is owned by the Company. The Burnet system is
currently at 450 MHz capacity and over the next three to five years the
remaining systems in the Marble Falls area are scheduled to be upgraded to
400 MHz or 450 MHz capacity. The Marble Falls region is a popular outdoor
recreation and retirement area for families from nearby Austin and San
Antonio. The population growth rate in the area is 3.7%, in excess of three
times the national average.
The remaining six headends in the Texas region serve 8,100 subscribers,
with 89.0% of subscribers served by plant with 330 MHz capacity or better.
The Oregon/California Region. The Oregon/California Region serves
12,872 subscribers from seven headends, which are operated from three offices
located in Woodburn, Oregon, and Yreka and Oakhurst, California. Three headends
serve 11,101 subscribers or 86.2% of the total subscribers in the region.
Woodburn, Oregon. Located between Portland and Salem, Oregon, the Woodburn
system serves 4,283 subscribers from one headend with a 450 MHz capacity
system. The office and headend site are owned. The system's Northland Cable
News production was a key factor in its recently being named the Business
of the Year by the Woodburn Chamber of Commerce. Woodburn is located in the
Willamette Valley, a major agricultural area, and has historically enjoyed
strong population growth.
Oakhurst, California. The Oakhurst, California area is one of the entrances
to Yosemite National Park. The Oakhurst area systems serve 4,929
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subscribers from a cluster of five headends. The Oakhurst headend serves
64% of the subscribers in the area and is currently 330 MHz capacity. An
upgrade of the Oakhurst system to 450 MHz capacity is in process, and the
Company anticipates that 32.0% of Oakhurst system's subscribers will be
served by 450 MHz capacity plant by mid-1998, and the entire Oakhurst
system upgrade will be completed by 1999. The current upgrade plan includes
the construction of a fiber optic backbone, with the interconnect and
subsequent elimination of one headend.
Yreka, California. The Yreka, California system, located near Mt. Shasta
National Park, serves 3,660 subscribers from a single headend. Yreka is the
county seat of Siskiyou County. The majority of the system currently has
330 MHz capacity. An upgrade of the system to 450 MHz capacity is now
underway. Portions of the system serving 64.2% of the subscribers already
have been designed to 450 MHz capacity, with completion projected by
year-end 1999. The Yreka office and headend sites are owned by the Company.
As of December 31, 1997, the Company had approximately 168 full-time
employees and nine part-time employees. Ten of the Company's employees at its
Moses Lake, Washington system are represented by a labor union. The Company
considers its relations with its employees to be good.
The Company's cable television business is not considered seasonal.
Its business is not dependent upon a single customer or a few customers, the
loss of any one or more of which would have a material adverse effect on its
business. No customer accounts for 10% or more of revenues. No material portion
of the Company's business is subject to re-negotiation of profits or termination
of contracts or subcontracts at the election of any governmental unit, except
that franchise agreements may be terminated or modified by the franchising
authorities as noted above. During the last year, the Company did not engage in
any research and development activities.
Company revenues are derived primarily from monthly payments received
from cable television subscribers. Subscribers are divided into three
categories: basic subscribers, tier subscribers and premium subscribers. "Basic
subscribers" are households that subscribe to the basic level of service, which
generally provides access to the three major television networks (ABC, NBC and
CBS), a few independent local stations, PBS (the Public Broadcasting System) and
certain satellite programming services, such as ESPN, CNN or The Discovery
Channel. "Tier subscribers" are households that subscribe to an additional level
of programming service, the content of which varies from system to system.
"Premium subscribers" are households that subscribe to one or more "pay
channels" in addition to the basic service. These pay channels include such
services as Showtime, Home Box Office, Cinemax, Disney or The Movie Channel.
COMPETITION
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
satellite master antenna television services, DBS services, wireless cable
services, newspapers, movie theaters, live sporting events, online computer
services and home video products, including videotape cassette recorders. The
extent to which a cable communications system is competitive depends, in part,
upon the cable system's ability to provide, at a reasonable price to customers,
a greater variety of programming and other communications services than those
which are available off-air or through other alternative delivery sources and
upon superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises
granted on a non-exclusive basis. The 1992 Cable Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to operate cable television systems without a
franchise. It is possible that a franchising authority might grant a second
franchise to another company containing terms and conditions more favorable than
those afforded the Company.
Well-financed businesses from outside the cable industry (such as the
public utilities and other companies that own the poles to which cable is
attached) may become competitors for franchises or providers of competing
services. Congress has repealed the prohibition against national television
networks owning cable systems, and telephone companies may now enter the cable
industry, as described below. Such new entrants may become competitors for
franchises or providers of competitive services. In general, a cable system's
financial performance will be adversely affected when a competing cable service
exists (referred to in the cable industry as an "overbuild").
In 1993, a potential competitor petitioned to obtain a franchise from
the City of Woodburn, Oregon to operate a cable system which would compete with
the Company's Woodburn system. Such franchise has not been granted. The
Company's Woodburn system serves 4,170 subscribers, constituting approximately
3.2% of the Company's total subscribers on a pro forma basis. See "--Legal
Proceedings."
In recent years, the FCC and the Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable television systems. These technologies include, among
others, DBS, whereby signals are transmitted by satellite to small receiving
dishes located on subscribers' homes. Programming is currently available to DBS
subscribers through conventional, medium- and high-powered satellites. Existing
DBS systems offer in excess of seventy-five channels of programming and
pay-per-view services and are expected to increase channel capacity to 100 or
more channels, enabling them to provide program service comparable to and in
some instances, superior to those of cable television systems. At least four
well-financed companies currently offer DBS services and have undertaken
extensive marketing efforts to promote their products. The FCC has implemented
regulations under the 1992 Cable Act to enhance the ability of DBS systems to
make available to home satellite dish owners certain satellite delivered cable
programming at competitive costs. Programming offered by DBS systems has certain
advantages over cable systems with respect to number of channels offered,
programming capacity and digital quality, as well as disadvantages that include
high upfront and monthly costs and a lack of local programming, service and
equipment distribution. DBS systems will provide increasing competition to cable
systems as the cost of DBS reception equipment continues to decline. At least
one DBS provider is undertaking the technical and legislative steps necessary to
enhance its service by adding local broadcast signals which could further
increase competitive pressures from DBS systems.
Cable television systems also compete with wireless program
distribution services such as MMDS which uses low power microwave to transmit
video programming over the air to customers. Additionally, the FCC recently
adopted new regulations allocating frequencies in the 28 GHz band for a new
multichannel wireless video service similar to MMDS, known as Local Multipoint
Distribution Service ("LMDS"). LMDS is also suited for providing wireless data
services, including the possibility of Internet access. Wireless distribution
services generally provide many of the programming services provided by cable
systems, although current technology limits the number of channels which may be
offered. Moreover, because MMDS service generally requires unobstructed "line of
sight" transmission paths, the ability of MMDS systems to compete may be
hampered in some areas by physical terrain and foliage.
The 1996 Telecommunications Act eliminated the previous prohibition
on the provision of video programming by local exchange telephone companies
("LECs") in their telephone service areas. Various LECs currently are providing
and seeking to provide video programming services within their telephone service
areas through a variety of distribution methods, primarily through the
deployment of broadband wire facilities, wireless transmission and installation
of traditional cable systems alongside existing telephone equipment. Cable
television systems could be placed at a competitive disadvantage if the delivery
of video programming services by LECs becomes widespread, since LECs may not be
required, under certain circumstances, to obtain local franchises to deliver
such video services or to comply with the variety of obligations imposed upon
cable television systems under such franchises. Issues of cross subsidization by
LECs of video and telephony services also pose strategic disadvantages for cable
operators seeking to compete with LECs that provide video services. The Company
believes, however, that the small to medium markets in which it provides or
expects to provide cable services are unlikely to support competition in the
provision of video and telecommunications broadband services given the lower
population densities and higher costs per subscriber of installing plant. The
1996 Telecommunications Act's provisions promoting facilities-based broadband
competition are primarily targeted at larger systems and markets. The 1996
Telecommunications Act includes certain limited exceptions to the general
prohibition on buy outs and joint ventures between incumbent cable operators and
LECs for smaller non-urban cable systems and carriers meeting certain criteria.
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information useful
both to consumers and businesses. The FCC also permits commercial and
noncommercial FM stations to use their subcarrier frequencies to provide
nonbroadcast services including data transmissions. The FCC has established an
over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. The expansion of fiber optic systems by LECs and other common
carriers, and electric utilities is providing facilities for the transmission
and distribution to homes and businesses of video services, including
interactive computer-based services like the Internet, data and other nonvideo
services.
The business of delivering and producing televised news, information
and entertainment are characterized by new market entrants, increasingly rapid
technological change and evolving industry standards. There can be no assurance
that the Company will be able to fund the capital expenditures necessary to keep
pace with technological developments or that the Company will successfully
predict the technical demand of its subscribers. The Company's inability to
provide enhanced services in a timely manner or to predict the demands of the
marketplace could have a material adverse effect on the Company, its financial
condition, prospects and debt service ability.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environments are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry or on the operations of the
Company.
REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry. Under that regime, all cable systems are subject to
rate regulation, unless they face "effective competition" in their local
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franchise area. Federal law now defines "effective competition" on a
community-specific basis as requiring either low penetration (less than 30%) by
the incumbent cable operator, appreciable penetration (more than 15%) by
competing multichannel video providers ("MVPs"), or the presence of a competing
MVP affiliated with a local telephone company.
Although the FCC rules control, local government units (commonly
referred to as "local franchising authorities" or "LFAs") are primarily
responsible for administering the regulation of the lowest level of cable, the
basic service tier ("BST"), which typically contains local broadcast stations
and public, educational, and government access channels. Before an LFA begins
BST rate regulation, it must certify to the FCC that it will follow applicable
federal rules, and many LFAs have voluntarily declined to exercise this
authority. LFAs also have primary responsibility for regulating cable equipment
rates. Under federal law, charges for various types of cable equipment must be
unbundled from each other and from monthly charges for programming services. The
1996 Telecommunications Act allows operators to aggregate costs for broad
categories of equipment across geographic and functional lines.
The FCC itself directly administers rate regulation of an operator's
cable programming service tiers ("CPST"), which typically contain
satellite-delivered programming. Under the 1996 Telecommunications Act, the FCC
can regulate CPST rates only if an LFA first receives at least two rate
complaints from local subscribers and then files a formal complaint with the
FCC. When new CPST rate complaints are filed, the FCC now considers only whether
the incremental increase is justified and will not reduce the previously
established CPST rate.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carnage. The FCC has modified its rate
adjustment regulations to allow for annual rate increases and to minimize
previous problems associated with regulatory lag. Operators also have the
opportunity of bypassing this "benchmark" regulatory scheme in favor of
traditional "cost-of-service," regulation in cases where the latter methodology
appears favorable. Premium cable services offered on a per-channel or
per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. Federal law requires that the
BST be offered to all cable subscribers, but limits the ability of operators to
require purchase of any CPST before purchasing premium services offered on a
per-channel or per-program basis.
In an effort to ease the regulatory burden on small cable systems, the
FCC has created special rate rules applicable for systems with fewer than 15,000
subscribers owned by an operator with fewer than 400,000 subscribers. The
special rate rules allow for a simplified cost-of-service showing. All of the
Company's Systems are eligible for these simplified cost-of-service rules, and
have calculated rates generally in accordance with those rules simplified rate
regulations afforded to smaller systems.
The 1996 Telecommunications Act provides additional relief for small
cable operators. For franchising units with less than 50,000 subscribers and
owned by an operator with less than one percent of the nation's cable
subscribers (i.e., approximately 600,000 subscribers) that is not affiliated
with any entities with aggregate annual gross revenue exceeding $250 million,
CPST rate regulation is automatically eliminated. The Company and all of its
Existing Systems qualify for this CPST deregulation.
The 1996 Cable Act sunsets FCC regulation of CPST rates for all 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.
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CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Cable Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The extent to which state and local governments may
impose requirements in such situations recently has been, and will continue to
be, the subject of litigation. The outcome of that litigation, and its effect on
the Company, cannot be predicted. The favorable pole attachment rates afforded
cable operators under federal law can be gradually increased by utility
companies owning the poles (beginning on February 8, 2001) if the operator
provides telecommunications service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Cable Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. Certain aspects of the
FCC's initial interconnection order were rejected by the Eighth Circuit Court of
Appeals on July 18, 1997, on the ground that the states, not the FCC, have
statutory authority to set the prices that incumbent local exchange carriers may
charge for interconnection. It is expected that the FCC will seek review by the
United States Supreme Court of the ruling.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Cable Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers ("LECs"), including the Bell
Operating Companies, can now compete with cable operators both inside and
outside their telephone service areas. Because of their resources, LECs could be
formidable competitors to traditional cable operators, and certain LECs have
begun offering cable service.
Under the 1996 Cable Act, a LEC providing video programming to
subscribers generally will be regulated as a traditional cable operator (subject
to local franchising and federal regulatory requirements), unless the LEC elects
to provide its programming via an "open video system" ("OVS"). To qualify for
OVS status, the LEC must reserve two-thirds of the system's activated channels
for unaffiliated entities.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures between
cable operators and LECs in the same market. The 1996 Telecommunications Act
provides a few limited exceptions to this buyout prohibition, including a
carefully circumscribed "rural exemption." The 1996 Telecommunications Act also
provides the FCC with the limited authority to grant waivers of the buyout
prohibition (subject to LFA approval).
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The 1996 Cable Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Because of their resources, electric utilities could be formidable competitors
to traditional cable systems, and a few electric utilities have
9
announced plans to offer video programming. Recent technological advances have
increased the likelihood that electric utilities may become competitive with the
Company.
ADDITIONAL OWNERSHIP RESTRICTIONS
The 1996 Cable Act eliminates statutory restrictions on broadcast/cable
cross-ownership (including broadcast network/cable restrictions), but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Cable Act also
eliminates the three year holding period required under the 1992 Cable Act's
"anti-trafficking" provision. The 1996 Cable Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
("SMATV") and MMDS facilities, but lifts those restrictions where the cable
operator is subject to effective competition. FCC regulations permit cable
operators to own and operate SMATV systems within their franchise area, provided
that such operation is consistent with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a
cable system from devoting more than 40% of its activated channel capacity to
the carriage of affiliated national program services. A companion rule
establishing a nationwide ownership cap on any cable operator equal to 30% of
all domestic cable subscribers has been stayed pending further judicial review.
There are no federal restrictions on non-U.S. entities having an
ownership interest in cable television systems or the FCC licenses commonly
employed by such systems.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act conveyed to a commercial broadcaster the right
generally to elect every three years either to require: (i) that the local cable
operator carry its signals ("must carry"); or (ii) that such operator obtain the
broadcaster's retransmission consent before doing so. The Company has been able
to reach agreements with all of the broadcasters who elected retransmission
consent and has not been required by broadcasters to remove any broadcast
stations from the cable television channel line-ups. To date, compliance with
the "retransmission consent" and "must carry" provisions of the 1992 Cable Act
has not had a material effect on the Company, although this result may change in
the future depending on such factors as market conditions, the introduction of
digital broadcasts, channel capacity and similar matters when such arrangements
are renegotiated.
CHANNEL SET-ASIDES
LFAs can include franchise provisions, requiring cable operators to set
aside certain channels for public, educational and governmental access
programming. Federal law also requires cable systems to designate a portion of
their channel capacity (up to 15% in some cases) for commercial leased access by
unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but use of commercial leased access channels has
been relatively limited. The FCC recently modified its leased access rules,
making leased access somewhat more favorable to potential users. The changes,
however, were not as dramatic as leased access users had hoped, and should not
significantly infringe on the Company's control over its channel line-up. The
revised maximum rate formula has been challenged by one leased access applicant
in an appeal to the D.C. Circuit Court.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and
competition to incumbent cable operators, the 1992 Cable Act imposed
restrictions on dealings between cable operators and cable programmers. The 1992
Cable Act precludes video programmers affiliated with cable companies
10
from favoring cable operators over competitors and requires such programmers to
sell their programming to other multichannel video distributors. This provision
limits the ability of vertically integrated cable programmers to offer exclusive
programming arrangements to cable companies.
OTHER FCC REGULATIONS
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as equal employment opportunity, subscriber
privacy, programming practices (including, among other things, syndicated
program exclusivity, network program non-duplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, and children's programming advertisements), registration of
cable systems and facilities licensing, maintenance of various records and
public inspection files, frequency usage, lockbox availability, antenna
structure notification, tower marking and lighting, consumer protection and
customer service standards, technical standards, and consumer electronics
equipment compatibility. The FCC recently adopted rules relating to the
ownership of cable wiring located inside multiple dwelling unit complexes. The
FCC has concluded that such wiring can, in certain cases, be unilaterally
acquired by the complex owner, making it easier for complex owners to terminate
service from the incumbent cable operator in favor of a new entrant. The FCC
recently imposed new Emergency Alert System requirements on cable operators
which will be phased in over several years. The FCC recently adopted "closed
captioning" rules that the Company does not expect to have an adverse effect on
its operations. The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
PENDING PROCEEDING
The FCC has initiated a rulemaking proceeding involving whether cable
customers must be allowed to purchase cable converters from third party vendors.
If the FCC concludes that such distribution is required, and does not make
appropriate allowances for signal piracy concerns, it may become more difficult
for cable operators to combat theft of service.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenue to a
federal copyright royalty pool (which varies depending on the size of the system
and the number of distant broadcast television signals carried), cable operators
can obtain blanket permission to retransmit copyrighted material on broadcast
signals. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect the Company's ability to obtain desired broadcast programming. In
addition, the cable industry pays music licensing fees to BMI and is negotiating
a similar arrangement with ASCAP. Copyright clearances for non-broadcast
programming services are arranged through private negotiations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to
nonexclusive franchises granted by a municipality or other state or local
government entity in exchange for the use of public rights-of-way. Federal law
now prohibits franchise authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises. Cable franchises generally
are granted for fixed terms and in many cases include monetary penalties for
non-compliance and may be terminable if the franchisee fails to comply with
material provisions.
The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
11
governing cable operations, service rates, franchise fees, system construction
and maintenance obligations, system channel capacity, design and technical
performance, customer service standards, and indemnification protections.
Although LFAs have considerable discretion in establishing franchise terms,
there are certain federal limitations. For example, LFAs cannot require the
payment of franchise fees exceeding 5% of the system's gross revenue, cannot
dictate the particular technology used by the system, and cannot specify video
programming other than identifying broad categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchise
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for consent. Historically,
franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of their franchises. However, there
can be no assurance that renewal will be granted or that renewals will be made
on similar terms and conditions.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of state governmental agencies.
ITEM 2. PROPERTIES
The Company's cable television systems are located in and around
Stepenville, Marble Falls, Crockett, Mexia and Navasota, Texas; Bainbridge
Island, Moses Lake and Port Angeles, Washington; Clemson, South Carolina;
Statesboro, Georgia; Woodburn, Oregon, and Yreka and Oakhurst, California.
A cable television system consists of three principal operating
components. The first component, known as the headend, receives television,
radio and information signals generally by means of special antennas and
satellite earth stations. The second component, the distribution network, which
originates at the headend and extends throughout the system's service area,
consists of microwave relays, coaxial or fiber optic cables and associated
electronic equipment placed on utility poles or buried underground. The third
component of the system is a "drop cable," which extends from the distribution
network into each customer's home and connects the distribution system to the
customer's television set. An additional component used in certain systems is
the home terminal device, or converter, that expands channel capacity to permit
reception of more than twelve channels of programming on a non-cable ready
television set.
The Company's principal physical assets consist of cable television systems,
including signal-receiving, encoding and decoding apparatus, headends,
distribution systems and subscriber house drop equipment for each of its
systems. The signal receiving apparatus typically includes a tower, antennas,
ancillary electronic equipment and earth stations for reception of satellite
signals. Headends, consisting of associated electronic equipment necessary for
the reception, amplification and modulation of signals, typically are located
near the receiving devices. The Company's distribution systems consist primarily
of coaxial cable and related electronic equipment. As upgrades are completed,
the systems will generally incorporate fiber optic cable. Subscriber equipment
consists of traps, house drops and, in some cases, converters. The Company owns
its distribution systems, various office fixtures, test equipment and certain
service vehicles. The physical components of the systems require maintenance and
periodic upgrading to keep pace with technological advances.
The Company's cables are generally attached to utility poles under pole rental
agreements with local public utilities, although in some areas the distribution
cable is buried in trenches or placed in underground ducts. The
12
FCC regulates most pole attachment rates under the federal Pole Attachment Act
although in certain cases attachment rates are regulated by state law.
The Company owns or leases parcels of real property for signal reception sites
(antenna towers and headends), microwave complexes and business offices. The
Company believes that its properties, both owned and leased, are in good
condition and are suitable and adequate for the Company's business operations a
presently conducted.
ITEM 3. LEGAL PROCEEDINGS
In 1993, North Willamette Telecom, Inc. an affiliate of Canby
Telephone Association, petitioned to obtain a franchise from the City of
Woodburn, Oregon to operate a cable system which would compete with the
Company's Woodburn system. Such franchise has not been granted. On March 20,
1996, the Company was served with a complaint in a suit commenced in the United
States District Court for the District of Oregon by North Willamette Telecom,
Inc. and Canby Telephone Association. The suit alleges the Company violated
federal antitrust laws, intentionally interfered with plaintiffs' prospective
business relationships with potential cable customers, and intentionally
interfered with plaintiffs' business relationships with the Canby Telephone
Association's members. The complaint seeks actual damages ranging from $1.2
million to $10.2 million, punitive damages of $10.0 million and other relief.
The Company denies the allegations of the complaint and is vigorously defending
the case. The Company has filed summary judgement motions and no trial date has
been set. An adverse ruling could have a material effect on the Company, its
financial condition, prospects and debt service ability.
In addition, the Company is a party to ordinary and routine
litigation proceedings that are incidental to the Company's business. Management
believes that the outcome of all pending legal proceedings will not,
individually or in the aggregate, have a material adverse effect on the Company,
its financial condition, prospects and debt service ability.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) There is no established public trading market for the
Company's common equity.
(b) The Company has one common equity holder as of December 31,
1997.
(c) During 1997, the Company did not pay cash dividends and has no
intentions of paying cash dividends in the foreseeable future.
13
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
SUMMARY OF OPERATIONS:
Revenue $ 39,517,808 $ 33,180,477 $ 26,997,661 $ 15,687,304 $ 13,191,257
Operating income (loss) 4,588,563 4,373,211 3,403,048 2,786,706 1,718,314
Net loss (5,550,635) (4,229,028) (3,758,117) (384,515) (760,960)
December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Total assets $ 92,421,978 $ 91,599,263 $ 75,754,590 $ 61,694,734 $ 31,793,425
Notes payable 107,962,513 102,154,732 83,144,911 65,531,020 38,727,916
Total liabilities 114,643,410 117,608,253 97,534,552 79,716,579 49,430,755
Shareholder's deficit (22,221,432) (26,008,990) (21,779,962) (18,021,845) (17,637,330)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 AND 1996
Basic subscribers increased 3,348 or 3.7%, from 90,327 to 93,675 for
the year ended December 31, 1997.
Revenues increased $6.3 million or 19.1%, from $33.2 million to $39.5
million in 1997. Such increase was primarily attributable to a full period
inclusion of the three Moses Lake area systems serving approximately 12,580
subscribers which were acquired in October 1996 (the "Moses Lake Acquisition").
Average monthly revenue per basic subscriber increased $1.72 or 5.2%, from
$33.22 to $34.94 for the year ended December 31, 1997. Such increase was
attributable to: (i) rate increases, which averaged 6.7%, implemented in a
majority of the Company's systems effective August 1, 1996; (ii) rate increases,
which averaged 2.6%, implemented in systems serving an aggregate of 42,642 basic
subscribers effective August 1, 1997; and (iii) revenue from the increase in
penetration of new product tiers. Basic revenue per average basic subscriber
increased $1.22 or 5.4%, from $22.52 to $23.74 for the year ended December 31,
1997. Tier revenue per average basic subscriber increased $0.68 or 28.8%, from
$2.36 to $3.04 for the year ended December 31, 1997. Excluding the impact of the
Moses Lake Acquisition, for the year ended December 31, 1997: (i) revenues would
have increased $2.7 million or 8.4%, from $32.2 million to $34.9 million; and
(ii) revenue per average basic subscriber would have increased $2.21 or 6.3%,
from $33.22 to $35.43.
Operating expenses, which include costs related to programming,
technical personnel, repairs and maintenance and advertising sales, increased
$2.4 million or 23.0%, from $10.5 million to $12.9 million for the year ended
December 31, 1997. Operating expenses as a percentage of revenues increased from
31.6% to 32.7% for the year ended December 31, 1997. A substantial portion of
these increases was due to the Moses Lake Acquisition, which included
approximately 12,580 subscribers. Excluding the impact of the Moses
14
Lake Acquisition, operating expenses would have increased approximately $1.1
million or 10.8%, from $10.2 million to $11.3 million for the year ended
December 31, 1997. Such increase would have been attributable to: (i) annual
wage and benefit increases; and (ii) higher programming costs resulting from
rate increases by certain programming vendors and the launch of new programming
services in various systems.
General and administrative expenses, which include on-site office and
customer service personnel costs, customer billing, postage and marketing
expenses and franchise fees increased approximately $1.3 million or 21.7%, from
$6.0 million to $7.3 million for the year ended December 31, 1997. General and
administrative expenses, as a percentage of revenues, increased from 18.1% to
18.5% for the year ended December 31, 1997. These increases were attributable
primarily to the Moses Lake Acquisition. Excluding the impact of the Moses Lake
Acquisition, general and administrative expenses would have increased
approximately $400,000 or 6.9%, from $5.8 million to $6.2 million for the year
ended December 31, 1997. This increase was attributable to: (i) annual wage and
benefit increases; and (ii) increases in revenue-based expenses such as
franchise fees.
Management fees increased $300,000 or 18.7%, from $1.6 million to $1.9
million for the year ended December 31, 1997. Such increase was directly
attributable to the revenue increases discussed above. Management fees are
calculated at 5.0% of gross revenues.
Depreciation and amortization expense increased $2.1 million or 19.6%,
from $10.7 million to $12.8 million for the year ended December 31, 1997. Such
increase was due to the Moses Lake Acquisition and the Company's capital
expenditures.
Interest expense increased by $1.9 million or 22.9%, from $8.3 million
to $10.2 million for the year ended December 31, 1997. Such increase was
primarily attributable to increased borrowings incurred in connection with the
Moses Lake Acquisition which increased average outstanding indebtedness $17.3
million or 19.8%, from $87.3 million to $104.6 million for the year ended
December 31, 1997.
1996 AND 1995
The Company served 90,327 basic subscribers as of December 31, 1996, an
increase of 13.1%. In 1996, the net number of subscribers added through system
acquisitions was approximately 12,582. Excluding such acquired subscribers, the
Company served 77,745 basic subscribers as of December 31, 1996.
Revenues increased $6.2 million or 23.0%, from $27.0 million to $33.2
million in 1996. Such increase was due primarily to: (i) the full period
inclusion of systems acquired in 1995; and (ii) results for the Moses Lake area
systems acquired in October 1996. Average monthly revenue per basic subscriber
increased $2.10 or 6.7%, from $31.12 to $33.22 in 1996. Such increase was
attributable to: (i) increases in rates charged for subscriptions to basic and
tier services; (ii) an increase in the average number of tier subscribers from
21,682 to 28,964 in 1996; and (iii) increases in advertising revenue. Revenues,
from systems owned as of January 1, 1995, increased $2.0 million or 8.1%, from
$24.6 million to $26.6 million in 1996. Average monthly revenue per basic
subscriber, for systems owned as of January 1, 1995, increased $2.50 or 8.0%,
from $31.22 to $33.72 in 1996.
Operating expenses increased $2.0 million or 23.5%, from $8.5 million
to $10.5 million in 1996. Such increase was primarily attributable to the
Company's acquisition activities. Operating expenses as a percentage of revenues
remained the same at 31.6%.
General and administrative expenses increased $1.3 million or 27.7%,
from $4.7 million to $6.0 million in 1996. Such increase was primarily
attributable to the Company's acquisition activities. General and administrative
expenses, as a percentage of revenues, increased from 17.5% to
15
18.0% in 1996. Such increase was primarily attributable to increases in: (i)
property tax expense; and (ii) consulting fees.
Management fees increased approximately $300,000 or 23.1%, from $1.3
million to $1.6 million in 1996. Such increase was attributable to the revenue
increases discussed above. Management fees are calculated at 5.0% of gross
revenues.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business generally requires substantial capital
for the construction, expansion and maintenance of the signal distribution
system. In addition, the Company has pursued, and intends to pursue, a business
strategy which includes selective acquisitions. The Company has financed these
expenditures through a combination of cash flow from operations and borrowings
under the revolving credit and term loan facility provided by a variety of
banks. For the years ended December 31, 1995 and 1996 and 1997, the Company's
net cash provided from operations was $5.6 million, $8.0 million, $9.3 million,
respectively, all of which were sufficient to meet the Company's debt service
obligations, working capital and capital expenditure requirements for the
respective periods, excluding acquisitions. Acquisitions of cable television
systems during these periods primarily were financed through bank borrowings.
The Company's debt service obligations for the year ended December 31, 1998 are
expected to be $19.1 million. The Company anticipates that cash flow from
operations will be sufficient to service its debt and to fund capital
expenditures through December 31, 1998. The Company's debt service obligations
for the year ended December 31, 1999 are anticipated to be $21.9 million. The
Company believes that cash flow from operations will be adequate to meet the
Company's long-term liquidity requirements, excluding acquisitions, prior to the
maturity of its long-term indebtedness, although no assurance can be given in
this regard.
Net cash provided by operating activities was $9.3 million for the year
ended December 31, 1997. Adjustments to the $6.5 million net loss for the period
to reconcile to net cash provided by operating activities consisted primarily of
$12.8 million of depreciation and amortization, off-set by other changes in
operating balance sheet accounts.
Net cash used in investing activities was $11.1 million for the year
ended December 31, 1997, and consist primarily of $6.5 million for the
acquisition of cable television systems in and around the communities of Marlin,
Madisonville and Buffalo, Texas, and capital expenditures of $4.0 million.
Net cash provided by financing activities was approximately $600,000
for the year ended December 31, 1997. The Company had $105 million in additions
to long term debt and made $99.2 million of principal payments on notes payable.
EBITDA increased approximately $2.3 million or 15.2%, from $15.1
million to $17.4 million for the year ended December 31, 1997. EBITDA Margin
decreased from 45.5% to 44.0% for the year ended December 31, 1997. These
changes were attributable primarily to the Moses Lake Acquisition, which
contributed approximately $1.7 million of EBITDA for the year ended December 31,
1997. The EBITDA Margin for the Moses Lake area systems was 37.3% for the year
ended December 31, 1997. Excluding the effects of the Moses Lake Acquisition,
EBITDA would have increased $900,000 or 6.0%, from $15.1 million to $16.0
million for the year ended December 31, 1997.
Net cash provided by operating activities was $8.0 million for the
fiscal year ended December 31, 1996. Adjustments to the $4.2 million net loss
for such period to reconcile to net cash provided by operating activities
consisted primarily of $11.0 million of depreciation and amortization, off-set
by other changes in operating balance sheet accounts.
Net cash used in investing activities was $24.8 million for the fiscal
year ended December 31, 1996. Net cash used in investing activities consisted
16
primarily of the $22.2 million for the acquisition of cable television systems
in and around the communities of Moses Lake, Othello, Ephrata, and certain
unincorporated areas of Grant and Adams counties, all in the state of
Washington, and for the payment of a holdback note related to a 1995
acquisition. Net cash used in investing activities also consisted of $2.8
million of capital expenditures.
Net cash provided by financing activities was $18.3 million for the
fiscal year ended December 31, 1996. Net cash provided by financing activities
consisted primarily of $22.0 million in additions to notes payable, off-set by
$2.6 million of principal payments on notes payable and $1.0 million of loan
fees.
EBITDA increased $2.7 million or 21.8%, from $12.4 million to $15.1
million in 1996. Such increase was primarily attributable to the Company's
acquisition activities. EBITDA Margin declined from 46.0% to 45.5% in 1996. Such
decrease was attributable to: (i) the acquisition of certain systems with lower
EBITDA Margins; and (ii) the resulting increase in operating and general and
administrative expenses as a percentage of revenues.
Net cash provided by operating activities was $5.6 million for the
fiscal year ended December 31, 1995. Adjustments to the $3.8 million net loss
for the period to reconcile to net cash provided by operating activities
consisted primarily of $9.2 million of depreciation and amortization, off-set by
other changes in operating balance sheet accounts.
Net cash used in investing activities was $24.5 million for the fiscal
year ended December 31, 1995. Net cash used in investing activities consisted
primarily of the $21.7 million acquisition of cable television systems in and
around the communities of Clemson-Seneca, South Carolina, Oconee County, South
Carolina, and Mexia, Texas, and for the payment of a holdback notes related to
acquisitions occurring in 1994. Net loss was also adjusted for $2.7 million of
capital expenditures.
Net cash provided by financing activities was $17.4 million for the
fiscal year ended December 31, 1995. Net cash provided by financing activities
consisted primarily of $19.7 million in additions to notes payable, off-set by
$2.4 million of principal payments on notes payable.
EBITDA increased $4.3 million or 53.1%, from $8.1 million to $12.4
million in 1995. Such increase was primarily attributable to the system
acquisitions. EBITDA Margin declined from 51.6% to 46.0% in 1995. Such decrease
was attributable to: (i) the initiation of a management fee payable to the
Company's parent in August 1994; and (ii) increases in operating expenses as a
percentage of revenues.
Effective June 30, 1997, the Company received a non-cash capital
contribution of approximately $9.3 million which replaced, in its entirety, the
then outstanding net unsecured advances that had previously been owed to NTC and
other affiliates of the Company other than amounts due for normal operations,
management fees paid to NCC and for services provided by affiliated entities as
discussed above.
In November, 1997 the Company completed the issuance of $100 million of
senior subordinated notes (the "Offering") and amended its revolving credit and
term loan agreement to provide for $100 million of senior secured bank debt (the
"Senior Credit Facility"). The following is a brief summary of each transaction.
The Offering: The Company issued $100 million of 10 -1/4% senior
subordinated notes due November 15, 2007. Proceeds from the offering were
utilized to pay transaction costs and reduce amounts outstanding under the
Company's Senior Credit Facility by $95 million. The indenture pursuant to which
the notes were issued will, among other things, limit the ability of the Company
and its subsidiaries to: (i) incur additional indebtedness or issue preferred
stock; (ii) make certain restricted payments as defined in the indenture; (iii)
grant liens on assets; (iv) merge, consolidate or transfer substantially all of
their assets; (v) enter into transactions with certain
17
related parties; (vi) make certain payments affecting subsidiaries; (vii) sell
assets; and (viii) issue capital stock of subsidiaries.
The Senior Credit Facility: The Company has amended and restated the
Company's Senior Credit Facility with First National Bank of Chicago, as lender
and managing agent. The Senior Credit Facility, as amended, establishes an
eight-year reducing revolving loan facility in the initial aggregate principal
amount of $25.0 million (the "Reducing Revolving Facility") and an eight-year
term loan in the aggregate principal amount of $75.0 million (the "Term Loan").
As of December 31, 1997 proceeds from borrowings under the Senior Credit
Facility were utilized in financing the acquisition of certain cable television
systems as discussed below. Amounts available under the Reducing Revolving
Facility will be for working capital purposes and other permitted uses as
described in the Senior Credit Facility.
At the company's election, the interest rate per annum applicable to the
Senior Credit Facility is a fluctuating rate of interest measured by reference
to either: (i) an adjusted London interbank offered rate ("LIBOR") plus a
borrowing margin; or (ii) the base rate of First Chicago the "Base Rate," which
Base Rate is equal to the greater of the Federal Funds Effective Rate plus 0.50%
or the corporate base rate announced by First Chicago, plus a borrowing margin.
The applicable borrowing margins vary, based upon the Company's leverage ratio,
from 1.00% to 3.00% for LIBOR loans and from 0.00% to 1.75% for Base Rate loans.
The Senior Credit Facility contains a number of covenants
which, among other things, require the Company to comply with specified
financial ratios and tests, including continuing maintenance, as tested on a
quarterly basis, of: (A) an interest coverage ratio (the ratio of Annualized
Operating Cash Flow (as defined) to interest expense) of at least 1.25 to 1.00
initially, increasing over time to 2.25 to 1.00; (B) a fixed charge coverage
ratio (the rate of the Company's Annual Operating Cash Flow (as defined) to
capital expenditures and principal and interest payments) of at least 1.05 to
1.0 commencing December 31, 1997; (C) a pro forma debt service ratio (the ratio
of the Company's current Operating Cash Flow (as defined) to the Company's debt
service obligations for the following twelve months) of 1.15 to 1 through March
31, 1998 and 1.20 to 1 thereafter; and (D) a leverage ratio (the ratio of total
Debt (as defined) to Annualized Operating Cash Flow) of not more than 7.0 to 1.0
initially, decreasing over time to 4.00 to 1.00. The Company expects that cash
provided from operations will be sufficient to cover its future debt service
obligations.
Subsequent to the borrowing related to the acquisitions discussed below
the outstanding balance under the Senior Credit Facility was $75,000,000.
As of the date of this filing, interest rates on the Senior Credit
Facility were as follows: $65,000,000 fixed at 8.78% under the terms of a
self-amortizing interest rate swap agreement with the Company's lender expiring
December 31, 2000; $7,800,000 at a LIBOR based rate of 8.88% expiring March 31,
1998; $2,000,000 at a LIBOR based rate of 8.75% expiring March 31, 1998. The
balance of $200,000 bears interest at the prime rate plus 1.75% (currently
10.25%). The above rates include a margin paid to the lender based on overall
leverage and may increase or decrease as the Company's overall leverage
fluctuates.
ACQUISITION
On January 2, 1998 the Company acquired six cable television
systems serving portions of Aiken, Greenwood, McCormick, Laurens, Abbeville,
Saluda and Edgefeild Counties in western South Carolina from InterMedia
Partners of Carolina, L.P. and Robin Cable Systems, L.P.. The purchase price of
the systems was approximately $70 million and was financed through borrowings
under the Senior Credit Facility. The systems passed approximately 59,260
homes and served approximately 35,705 basic subscribers.
18
CAPITAL EXPENDITURES
For the year ended December 31, 1997, the Company had capital
expenditures of $4.0 million. Capital expenditures included: (i) expansion and
improvements of cable properties; (ii) additions to plant and equipment; (iii)
maintenance of existing equipment; and (iv) cable line drops and extensions and
installations of cable plant facilities.
The Company plans to invest approximately $14.1 million in system
upgrades prior to December 31, 1999. This represents anticipated expenditures
for upgrading and rebuilding certain distribution facilities, new product
launches, extensions of distribution facilities to add new subscribers and
general maintenance. It is expected that cash flow from operations will be
sufficient to fund planned capital expenditures.
YEAR 2000 ISSUES
The efficient operation of the Company's business is dependent in
part on its computer software programs and operating systems (collectively,
Programs and Systems). These Program and Systems are used in several key areas
of the Company's business, including subscriber billing and collections and
financial reporting. Management has evaluated the Programs and Systems utilized
in the conduct of the Company's business for the purpose of identifying year
2000 compliance problems. Failure to remedy these issues could impact the
ability of the Company to timely bill its subscribers for service provided and
properly report its financial condition and results of operations which could
have a material impact on its liquidity and capital resources.
The Programs and Systems utilized in subscriber billing and
collections has been modified to address year 2000 compliance issues. These
modifications are currently in the process of being installed in the Company's
various billing sites. The Company expects this implementation to be completed
by the end of 1998. Management is currently in the process of replacing Programs
and Systems related to financial reporting which will resolve year 2000
compliance issues and is expected to be completed by the end of 1998. The
aggregate cost to the Company to address year 2000 compliance issues is not
expected to be material to its results of operations, liquidity and capital
resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Company for the years ended
December 31, 1997, 1996 and 1995 are included as a part of this filing (see Item
14(a)(1) below).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning directors
and executive officers of the Company, none of whom are compensated by the
Company for their respective services to the Company and each of whom devotes a
substantial amount of his time to the affairs of affiliated entities other than
the Company. Each director holds office until the next annual meeting of
shareholders or until his successor is elected or appointed and qualified.
NAME AGE POSITION
---- --- --------
John S. Whetzell.................... 56 Director, Chairman of the Board and President
Richard I. Clark.................... 40 Director, Vice President, Treasurer and Assistant Secretary
James A. Penney..................... 43 Vice President and Secretary
Gary S. Jones....................... 40 Vice President
Richard J. Dyste.................... 52 Vice President, Technical Services
James E. Hanlon..................... 64 Divisional Vice President
H. Lee Johnson...................... 54 Divisional Vice President
John E. Iverson..................... 61 Director and Assistant Secretary
John S. Whetzell. Mr. Whetzell has been President, Chairman of the
Board and a director of the Company since its inception in 1985. He also serves
as President, Chairman of the Board and a director of Northland
Telecommunications Corporation, Northland Communications Corporation (which is
the general partner of each of the Company's five affiliated limited
partnerships), Northland Cable Services Corporation ("NCSC"), Cable Ad-Concepts,
Inc., Northland Cable News, Inc., Northland Cable Properties, Inc., Northland
Media, Inc. ("NMI"), Statesboro Media, Inc., ("SMI") and Corisicana Media, Inc.
("CMI"), (collectively, the "Northland Affiliates"). He has been involved with
the cable television industry for over 21 years and currently serves as a
director on the board of the Cable Telecommunications Association, a national
cable television association. Between 1979 and 1982, he was in charge of the
Ernst & Whinney national cable television consulting services. Mr. Whetzell
first became involved in the cable television industry when he served as the
Chief Economist of the Cable Television Bureau of the FCC from 1974 to 1979. He
provided economic studies which support the deregulation of cable television
both in federal and state arenas. Mr. Whetzell also participated in the
formulation of accounting standards for the industry and assisted the FCC in
negotiating and developing the pole attachment rate formula for cable
television. His undergraduate degree is in economics from George Washington
University, and he has an MBA degree from New York University.
Richard I. Clark. Mr. Clark has served as Vice President and Treasurer
of the Company since 1985, as Assistant Secretary since 1987 and as a director
since 1985. Mr. Clark also serves as Vice President, Treasurer, Assistant
Secretary and a director of each of the Northland Affiliates. Mr. Clark was an
original incorporator of Northland Telecommunications Corporation and is
responsible for the administration and investor relations activities of
Northland Telecommunications Corporation, including financial planning and
corporate development. He has directed cable television feasibility studies and
on-site market surveys. Mr. Clark has assisted in the design and maintenance of
financial and budget computer programs, and has prepared documents for major
cable television companies in franchising and budgeting projects through the
application of these programs. From 1979 to 1982, Mr. Clark was employed by
Ernst & Whinney in the area of providing cable television consultation services
and has been involved with the cable television industry for nearly 17 years. In
1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a
Bachelor of Arts degree in accounting.
James A. Penney. Mr. Penney has served as Vice President and General
Counsel of the Company since 1985, and as Secretary since 1987. Mr. Penney also
serves as Vice President, General Counsel and Secretary of each of the
20
Northland Affiliates. Mr. Penney is responsible for advising all Northland
systems with regard to legal and regulatory matters, and also is involved in the
acquisition and financing of new cable systems. From 1983 until 1985 he was
associated with the law firm of Ryan, Swanson & Cleveland. Mr. Penney holds a
Bachelor of Arts degree from the University of Florida and a Juris Doctor from
The College of William and Mary, where he was a member of The William and Mary
Law Review.
Gary S. Jones. Mr. Jones has been Vice President of the Company since
1986. He also serves as Vice President of each of the Northland Affiliates. Mr.
Jones is responsible for cash management, financial reporting and banking
relations for the Company and each of the Northland Affiliates, and is involved
in the acquisition and financing of new cable systems. Prior to joining the
Company, Mr. Jones was employed as a Certified Public Accountant with Laventhol
& Horwath from 1980 to 1986. Mr. Jones received his Bachelor of Arts degree in
Business Administration with a major in accounting from the University of
Washington in 1979.
Richard J. Dyste. Mr. Dyste has been Vice President -- Technical
Services of the Company since 1988. Mr. Dyste also serves as Vice President --
Technical Services of each of the Northland Affiliates other than NCSC. Mr.
Dyste joined the Company in 1986, originally as an engineer and operations
consultant. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable,
which owned the Bainbridge Island, Washington system now owned by the Company.
Mr. Dyste is a past President and a current member of the Mount Rainier Chapter
of the Society of Cable Television Engineers, Inc. He is a graduate of
Washington Technology Institute.
James E. Hanlon. Mr. Hanlon has served as Divisional Vice President of
the Company since 1985. Mr. Hanlon also serves as Divisional Vice President of
each of the Northland Affiliates other than NCSC, NMI and CMI. Prior to his
association with the Company, he served as Chief Executive of M.C.T.
Communications from 1981 to 1985. His responsibilities included supervision of
the franchise, construction and operation of a cable television system located
near Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of the CATV
Division of Buford Television, Inc., and from 1973 to 1979, he served as
President and General Manager of Suffolk Cablevision in Suffolk County, New
York. Mr. Hanlon has also served as Vice President and Corporate Controller of
Viacom International, Inc. and Division Controller of New York Yankees, Inc. Mr.
Hanlon has a Bachelor of Science degree in Business Administration from St.
Johns University.
H. Lee Johnson. Mr. Johnson has been Divisional Vice President of the
Company since 1994. Mr. Johnson also serves as Divisional Vice President of each
of the Northland Affiliates other than NCPI, NCSC, NMI and CMI. Mr. Johnson
served as Regional Manager for several systems of the Company and its affiliates
from 1986 to 1994 until his promotion to Divisional Vice President. Prior to his
association with the Company, Mr. Johnson served as Regional Manager for Warner
Communications, managing four cable systems in Georgia from 1968 to 1973. Mr.
Johnson has also served as President of Sunbelt Finance Corporation and was
employed as a System Manager for Statesboro CATV, which owned the Statesboro,
Georgia system now owned by the Company. Mr. Johnson has been involved in the
cable television industry for nearly 27 years and is a current member of the
Society of Cable Television Engineers. He is a graduate of Swainsboro Technical
Institute.
John E. Iverson. Mr. Iverson has served as Assistant Secretary and a
director of the Company since 1985. He also serves as Assistant Secretary and a
director of each of the Northland Affiliates. Mr. Iverson is currently a member
of the law firm of Ryan, Swanson & Cleveland. He is a member of the Washington
State Bar Association and American Bar Association and has been practicing law
for more than 33 years. Mr. Iverson is the past President and a trustee of the
Pacific Northwest Ballet Association. Mr. Iverson has a Juris Doctor degree from
the University of Washington.
ITEM 11. EXECUTIVE COMPENSATION
None of the employees of the Company are deemed to be executive
officers of the Company. Services of the executive officers and other employees
of NTC are provided to the Company for which the Company pays NTC a fee
pursuant to the Management Agreement and overhead reimbursements. The executive
officers and other employees of NTC who provide services to the Company are
compensated in their capacity as executive officers and employeess of NTC and
therefore receive no compensation from the Company. No portion of the
management fee paid by the Company is allocated to specific employees for the
services performed by such employees.
DIRECTOR COMPENSATION
The Company does not currently compensate members of its Board of
Directors for their services as directors.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1997 is as follows:
The Company is a wholly owned subsidiary of Northland Telecommunication
Corporation, a Washington corporation.
The following table sets forth certain information with respect to the
beneficial ownership of common stock of NTC as of the date of this filing
by: (i) each person who is known by the Company to beneficially own 5% or more
of the outstanding shares of common stock of NTC; (ii) each director of the
Company; (iii) each executive officer of the Company; and (iv) the Company's
executive officers and directors as a group. The address of each such person is
in care of the Company, 1201 Third Avenue, Suite 3600, Seattle, Washington
98101.
NUMBER OF PERCENTAGE OF
SHARES BENEFICIALLY SHARES BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED
- ---------------- ------------------- -------------------
John S. Whetzell...................................... 1,006,826 22.8%
Adele P. Butler....................................... 530,000 12.1%
Pamela B. McCabe...................................... 510,144 11.6%
Robert M. Arnold...................................... 384,000 8.7%
Richard I. Clark...................................... 306,826 7.0%
Robert A. Mandich..................................... 278,400 6.3%
James E. Hanlon....................................... 56,826 1.3%
John E. Iverson....................................... 50,000 1.1%
Gary S. Jones......................................... 46,493 *
James A. Penney....................................... 46,026 *
Richard J. Dyste...................................... 42,826 *
H. Lee Johnson........................................ 9,826 *
All executive officers and directors as a group
(eight persons)....................................... 1,567,643 35.4%
- ----------
* Represents less than 1% of the shares beneficially owned.
(b) CHANGES IN CONTROL. NTC has pledged the stock of the Company as
collateral pursuant to the terms of the Company's Senior Credit Facility.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS.
The Company is part of an affiliated group of corporations and limited
partnerships controlled, directly or indirectly, by NTC (the "NTC Affiliates").
NTC, in turn, is owned by the individuals and in the percentages set forth in
the table above. In addition to the Company, NTC has three other direct,
wholly-owned subsidiaries: Northland Communications Corporation ("NCC");
Northland Cable Services Corporation ("NCSC"); and Northland Media, Inc.
("NMI"). In turn, NCC is the sole shareholder of Northland Cable Properties,
Inc. ("NCP") and is the managing general partner of Northland Cable Properties
Five Limited Partnership ("NCP-5"), Northland Cable Properties Six Limited
Partnership ("NCP-6"), Northland Cable Properties Seven Limited Partnership
("NCP-7"), Northland Cable Properties Eight Limited Partnership ("NCP-8") and
Northland Premier Cable Limited Partnership ("Premier" and, together with NCP-
22
5, NCP-6, NCP-7 and NCP-8, the "Limited Partnerships"). In addition, NCP-5 is
the sole shareholder of Corsicana Media, Inc. NCSC is the sole shareholder of
Cable Ad-Concepts, Inc. ("CAC") and NMI is the sole shareholder of Statesboro
Media, Inc. Each of the Company's directors is also a director of NTC and each
of its wholly-owned direct subsidiaries and certain other NTC Affiliates and the
Company's officers are also officers of certain of the NTC Affiliates.
MANAGEMENT AGREEMENT WITH NTC
NTC currently supervises all aspects of the business and operations of the
Company pursuant to an Operating Management Agreement between the Company and
NTC dated August 23, 1994 (the "Management Agreement"). The Management Agreement
continues in effect until terminated by either party on 30-days' written notice.
The Management Agreement provides that NTC shall render or cause to be
rendered supervisory services to the Company, including, among other things
supervising and monitoring: (i) the affairs, management and operations of the
Company and its systems; (ii) the accounting and other financial books and
records of the Company and its systems; (iii) the hiring, training and
supervision of the Company's employees; and (iv) the Company's fulfillment of
its contractual obligations in connection with its systems. In return for its
management services, NTC receives a management fee, payable quarterly, equal to
5.0% of the Company's gross revenues (the "Management Fee"). For the years ended
December 31, 1995, 1996 and 1997, the Company paid a Management Fee of $1.3
million, $1.6 million and $1.9 million, respectively.
In addition to the Management Fee, the Management Agreement provides that
NTC is entitled to reimbursement from the Company for various expenses incurred
by NTC or the NTC Affiliates on behalf of the Company allocable to its
management of the Company, including travel expenses, pole and site rental,
lease payments, legal expenses, billing expenses, insurance, governmental fees
and licenses, headquarters supplies and expenses, pay television expenses,
equipment and vehicle charges, operating salaries and expenses, administrative
salaries and expenses, postage and office maintenance. These expenses are
generally allocated among the Company and other managed affiliates based upon
relative subscriber counts and revenues. NTC historically has assigned its right
to reimbursement from the Company to its direct subsidiary, NCC, and expects to
continue to do so in the future. For the years ended December 31, 1995, 1996 and
1997, the Company reimbursed Northland Communications Corporation approximately
$1.4 million, $1.7 million and $2.1, respectively, for such expenses.
ARRANGEMENTS BETWEEN NORTHLAND CABLE NEWS, INC. AND AFFILIATES
Pursuant to an arrangement commenced in July 1994, Northland Cable News,
Inc. receives monthly program license fees from the Company as well as NCP-5,
NCP-6, NCP-7 and NCPI as payment for Northland Cable News programming provided
to such affiliates. The aggregate amount of such fees is based upon costs
incurred in providing such programming, and is allocated among the Participating
Affiliates based upon relative subscriber counts. Total license fees received
from affiliates for the years ended December 31, 1995, 1996 and 1997, were
$602,263, $619,466 and $752,365, respectively.
ARRANGEMENTS WITH CABLE AD-CONCEPTS, INC.
Cable Ad-Concepts, Inc. ("CAC") is a wholly owned indirect subsidiary of
NTC engaged in the business of developing and producing video commercial
advertisements for cablecast on certain systems owned by NTC. NTC affiliates
which utilize CAC's services are the Company, each of the Limited Partnerships
and NCPI. The aggregate amount of the fees charged by CAC to its affiliates is
based upon costs incurred in providing such advertisements, and is allocated
among participating affiliates based upon relative subscriber counts. Total fees
paid to CAC by the Company for the years ended December 31, 1995, 1996 and 1997,
were $161,627, $196,491 and $251,899, respectively.
23
ARRANGEMENTS WITH NORTHLAND CABLE SERVICES CORPORATION
Northland Cable Services Corporation ("NCSC") is a wholly owned direct
subsidiary of NTC engaged in the business of providing Software for billing
purposes and billing system support to the Company, NCPI and each of the
Limited Partnerships. The aggregate amount of the fees charged by NCSC to its
affiliates is based upon costs incurred in providing such billing services,
and is allocated among participating affiliates based upon relative subscriber
counts and revenues. Fees paid by the Company to NCSC for billing services for
the years ended December 31, 1995, 1996 and 1997, were $175,632, $231,756
and $261,424, respectively.
OPERATING AGREEMENTS WITH AFFILIATES
The Company is party to operating agreements with NCP-7 pursuant to which,
in certain instances, the Company serves as the local managing agent for certain
of NCP-7's systems and, in other instances, NCP-7 serves as the local managing
agent for certain of the Company's systems. In addition, the Company and its
affiliates render miscellaneous services to one another on a cost-of- service
basis. For the years ended December 31, 1996 and 1997, the Company paid
affiliates an aggregate of $184,952 and $125,683, respectively, for such
services and received $100,800 and $116,067, respectively, for performing such
services for affiliates.
CAPITAL CONTRIBUTION
Effective June 30, 1997, the Company received a non-cash capital
contribution of approximately $9.3 million which replaced, in its entirety, the
then outstanding net unsecured advances that had previously been owed to NTC and
other affiliates of the Company other than amounts due for normal operations,
management fees paid to NCC and for services provided by affiliated entities as
discussed above. As of December 31, 1997, the Company had no outstanding
unsecured indebtedness to affiliates. See Note 2 of the Company's consolidated
financial statements.
(b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and
Assistant Secretary of the Company, is a partner of the law firm of Ryan,
Swanson & Cleveland, which has rendered and is expected to continue to render
legal services to the Company and its' affiliates.
(c) INDEBTEDNESS OF MANAGEMENT. None.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
SEQUENTIALLY
NUMBERED
PAGE
(1) FINANCIAL STATEMENTS:
Report of Independent Public Accountants...................____
Consolidated Balance Sheets--December 31, 1997.............____
And 1996
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995.....................____
Consolidated Statements of Changes in Shareholder's
Capital (Deficit) for the years ended
December 31, 1997, 1996 and 1995...........................____
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.....................____
Notes to Financial Statements--December 31,
1997.......................................................____
(2) EXHIBITS:
10.1 Amended and Restated Credit Agreement between Northland
Cable Television, Inc. and First National Bank of
Chicago as agent dated November 12, 1997.(1)
- ----------
(1) Incorporated by reference from the Company's Form S-4 Registration
statement declared effective February 17, 1998.
(b) REPORTS ON FORM 8-K. No Company reports on Form 8-K have been filed
during the fourth quarter of the fiscal year ended December 31, 1997.
25
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CABLE TELEVISION, INC.
By /s/ John S. Whetzell Date:
---------------------------
John S. Whetzell, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES CAPACITIES DATE
- ---------- ---------- ----
/s/ John S. Whetzell Director, Chairman of the Board and ________
- ------------------------ President
John S. Whetzell
/s/ Richard I. Clark Director, Vice President, Treasurer and ________
- ------------------------ Assistant Secretary
Richard I. Clark
/s/ Gary S. Jones Vice President ________
- ------------------------
Gary S. Jones
/s/ John E. Iverson Director and Assistant Secretary ________
- ------------------------
John E. Iverson
26
EXHIBITS INDEX
Sequentially
Exhibit Numbered
Number Description Page
27.0 Financial Data Schedule ___________
27
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland
Telecommunications Corporation)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Northland Cable Television, Inc.:
We have audited the accompanying consolidated balance sheets of Northland Cable
Television, Inc. (a Washington corporation and a wholly owned subsidiary of
Northland Telecommunications Corporation) and subsidiary as of December 31, 1997
and 1996, and the related consolidated statements of operations, changes in
shareholder's deficit and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Television,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Seattle, Washington,
March 2, 1998
/s/ Arthur Andersen LLP
_______________________
29
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
---------------------------------
1997 1996
------------- -------------
CURRENT ASSETS:
Cash $ 1,238,581 $ 2,486,237
Due from limited partnerships 20,545 36,129
Accounts receivable 1,355,005 1,289,840
Prepaid expenses 291,566 273,246
------------- -------------
Total current assets 2,905,697 4,085,452
------------- -------------
UNSECURED ADVANCES TO PARENT -- 1,003,457
------------- -------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 68,269,709 61,891,985
Less -- Accumulated depreciation (28,887,486) (23,167,487)
------------- -------------
39,382,223 38,724,498
Franchise agreements (net of accumulated amortization of
$29,467,711 and $23,222,978, respectively) 35,773,674 38,553,555
Goodwill (net of accumulated amortization of $1,874,161
and $1,701,050, respectively) 5,050,272 5,223,383
Other intangible assets (net of accumulated amortization
of $2,142,891 and $1,196,286, respectively) 8,620,112 4,008,918
Fund deposited in escrow for purchase of cable television system
690,000 --
------------- -------------
89,516,281 86,510,354
------------- -------------
Total assets $ 92,421,978 $ 91,599,263
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 662,141 $ 779,724
Subscriber prepayments 1,106,327 868,030
Accrued expenses 4,591,610 2,952,100
Converter deposits 103,393 104,325
Due to affiliates 217,426 407,692
Current portion of notes payable 1,140,292 5,550,314
------------- -------------
Total current liabilities 7,821,189 10,662,185
NOTES PAYABLE 106,822,221 96,604,418
UNSECURED ADVANCES FROM AFFILIATES -- 10,341,650
------------- -------------
Total liabilities 114,643,410 117,608,253
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDER'S DEFICIT:
Common stock (par value $1.00 per share, authorized 50,000 shares; 10,000
shares issued and outstanding) and additional paid-in capital 11,560,527 2,222,334
Accumulated deficit (33,781,959) (28,231,324)
------------- -------------
Total shareholder's deficit (22,221,432) (26,008,990)
------------- -------------
Total liabilities and shareholder's deficit $ 92,421,978 $ 91,599,263
============= =============
The accompanying notes are an integral part of
these consolidated balance sheets.
30
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
------------ ------------ ------------
REVENUES:
Service revenues $ 38,765,443 $ 32,560,981 $ 26,395,398
Programming and production revenues from affiliates 752,365 619,466 602,263
------------ ------------ ------------
Total Revenues 39,517,808 33,180,447 26,997,661
------------ ------------ ------------
OPERATING EXPENSES:
Cable system operations (including $230,139, $284,896 and $177,976,
net paid to affiliates) 12,913,220 10,499,947 8,541,989
General and administrative (including $2,350,772, $1,902,405 and
$1,665,688 paid to affiliates) 7,290,209 5,955,139 4,709,765
Management fees paid to parent 1,935,302 1,625,118 1,320,492
Depreciation and amortization 12,790,514 10,727,032 9,022,367
------------ ------------ ------------
Total operating expenses 34,929,245 28,807,236 23,594,613
------------ ------------ ------------
Income from operations 4,588,563 4,373,211 3,403,048
OTHER INCOME (EXPENSE):
Interest expense (10,240,023) (8,263,318) (7,214,737)
Other, net (Note 7) 100,825 (338,921) 53,572
------------ ------------ ------------
Loss before provision for income taxes (5,550,635) (4,229,028) (3,758,117)
PROVISION FOR INCOME TAXES -- -- --
------------ ------------ ------------
NET LOSS $ (5,550,635) $ (4,229,028) $ (3,758,117)
============ ============ ============
The accompanying notes are an integral part of
these consolidated statements.
31
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT
Common Stock and
Additional Paid-in
Capital
------------------------------ Accumulated
Shares Amount Deficit Total
------------ ------------ ------------ ------------
BALANCE, December 31, 1994 10,000 $ 2,222,334 $(20,244,179) $(18,021,845)
Net loss -- -- (3,758,117) (3,758,117)
------------ ------------ ------------ ------------
BALANCE, December 31, 1995 10,000 2,222,334 (24,002,296) (21,779,962)
Net loss -- -- (4,229,028) (4,229,028)
------------ ------------ ------------ ------------
BALANCE, December 31, 1996 10,000 2,222,334 (28,231,324) (26,008,990)
Capital contribution -- 9,338,193 -- 9,338,193
Net loss -- -- (5,550,635) (5,550,635)
------------ ------------ ------------ ------------
BALANCE, December 31, 1997 10,000 $ 11,560,527 $(33,781,959) $(22,221,432)
============ ============ ============ ============
The accompanying notes are an integral part of
these consolidated statements.
32
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,550,635) $ (4,229,028) $ (3,758,117)
Adjustments to reconcile net loss to
net cash provided by operating activities --
Depreciation and amortization 12,790,514 10,967,474 9,224,474
Other 353,236 320,513 79,295
(Increase) decrease in operating assets:
Due from limited partnerships 15,584 116,164 (57,956)
Accounts receivable (65,165) (383,060) (302,663)
Prepaid expenses (18,320) 33,722 (62,597)
(Decrease) increase in operating liabilities:
Accounts payable (117,583) (120,904) 328,781
Subscriber prepayments 238,297 187,517 98,394
Other current liabilities 1,638,578 1,149,851 1,231
------------- ------------- -------------
Net cash provided by operating activities 9,284,506 8,042,249 5,550,842
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems (6,495,315) (22,180,347) (21,717,081)
Investment in cable television properties (4,012,320) (2,843,391) (2,731,117)
Funds deposited in escrow for purchase of cable television system (690,000) -- --
Insurance proceeds and other 156,887 376,630 9,582
Franchise fees and other intangibles (62,249) (183,211) (41,279)
------------- ------------- -------------
Net cash used in investing activities (11,102,997) (24,810,319) (24,479,895)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable $ 105,000,000 $ 21,995,000 $ 19,655,298
Principal payments on notes payable (99,200,325) (2,589,354) (2,437,231)
Loan fees (5,038,574) (1,063,118) (55,573)
(Payments to) advances from affiliates (190,266) (50,516) 201,358
------------- ------------- -------------
Net cash provided by financing activities 570,835 18,292,012 17,363,852
------------- ------------- -------------
(DECREASE) INCREASE IN CASH (1,247,656) 1,503,942 (1,565,201)
CASH, beginning of year 2,486,237 982,295 2,547,496
------------- ------------- -------------
CASH, end of year $ 1,238,581 $ 2,486,237 $ 982,295
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest
$ 8,977,394 $ 7,673,330 $ 7,360,315
============= ============= =============
Cash paid during the period for state income taxes $ 4,654 $ 21,592 $ 5,610
============= ============= =============
The accompanying notes are an integral part of these consolidated statements.
33
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Formation and Business
Northland Cable Television, Inc. (NCTV), a Washington corporation, was formed to
own and operate cable television systems. As of December 31, 1997, NCTV had 63
nonexclusive franchises to operate cable television systems. These franchises
expire at various dates through 2020.
Northland Cable News, Inc. (NCN), a Washington corporation which was formed to
develop and distribute programming to certain of the Company's affiliated
entities, is a wholly owned subsidiary of NCTV. NCTV and NCN are collectively
referred to as the Company.
Related Companies
The Company and its affiliates, Northland Communications Corporation and
subsidiary (NCC); Northland Cable Services Corporation and subsidiaries (NCSC);
and Northland Media, Inc. and subsidiary (NMI) are wholly owned subsidiaries of
Northland Telecommunications Corporation (NTC or Parent). NCC is the managing
general partner of six limited partnerships, which own and operate cable
television systems. Additionally, NCC owns and operates cable systems through
Northland Cable Properties, Inc. (NCP, Inc.), its wholly owned subsidiary. NCSC
is the parent company for Cable Television Billing, Inc. (CTB) and Cable
Ad-Concepts, Inc. (CAC). CTB provides billing services to cable systems owned by
managed limited partnerships of NCC and wholly owned systems of the Company and
NCC. CAC develops and produces video commercial advertisements to be cablecast
on Northland affiliated cable systems. NMI was formed as a holding company to
own certain noncable related assets.
Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of NCTV and its
wholly owned subsidiary, NCN. Significant intercompany accounts and transactions
have been eliminated.
Acquisition of Cable Television Systems
Cable television system acquisitions are accounted for as purchase transactions
and their cost is allocated to the estimated fair market value of net tangible
assets acquired and other determinable intangible costs. Any excess is allocated
to goodwill.
34
-2-
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments in short-term, highly
liquid securities, which have maturities when purchased of three months or less.
Property and Equipment
Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred. Depreciation of property and equipment is provided using the
straight-line method over the following estimated service lives:
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold improvements 5-20 years
The Company periodically reviews the carrying value of its long-lived assets,
including property, equipment and intangible assets, whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. To the
extent the estimated future cash inflows attributable to the asset, less
estimated future cash outflows, is less than the carrying amount, an impairment
loss is recognized.
Intangible Assets
Costs assigned to goodwill, franchise agreements and loan fees and other
intangible assets are amortized using the straight-line method over the
following estimated useful lives:
Goodwill 40 years
Franchise agreements 10-20 years
Other intangible assets 1-10 years
Revenue Recognition
Cable television service revenue is recognized in the month service is provided
to customers. Advance payments on cable services to be rendered are recorded as
subscriber prepayments. Revenues resulting from the sale of local spot
advertising are recognized when the related advertisements or commercials appear
before the public. Local spot advertising revenues earned were $1,821,223,
$1,827,251 and $1,340,938, respectively, in 1997, 1996 and 1995. License fee
revenue is recognized in the period service is provided.
Derivatives
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-defined
interest rate risks. As discussed in Note 6, the Company enters into interest
rate swap agreements with major banks or financial institutions (typically its
bank) in which the Company pays a fixed rate and receives a floating rate with
the interest payments being calculated on a notional amount. Gains or losses
associated with changes in fair values of these swaps and the underlying
notional principal amounts are deferred and recognized against interest expense
over the term of the agreements in the Consolidated Statements of Operations.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to financial instruments but does not expect any
counterparties to
35
-3-
fail to meet their obligations. The Company deals only with highly rated
counterparties, and usually only its bank. These notional amounts do not
represent amounts exchanged by the parties and, thus, are not a measure of
exposure to the Company through its use of derivatives. The exposure in a
derivative contract is the net difference between what each party is required to
pay based on the contractual terms against the notional amount of the contract,
which in the Company's case are interest rates. The use of derivatives does not
have a significant effect on the Company's result of operations or its financial
position.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. TRANSACTIONS WITH MANAGED LIMITED PARTNERSHIP AND OTHER RELATED PARTIES:
Management Fees
Prior to the acquisition of the assets of Clemson-Seneca (see Note 10), the
Company received a fee for its services equal to 6.75% of Clemson-Seneca's gross
revenues, excluding revenues from the sale of cable television systems or
franchises.
The Company pays management fees to NTC equal to 5% of NCTV's gross revenues,
excluding revenues from the sale of cable television systems or franchises. The
Company paid $1,935,302, $1,625,118 and $1,320,492 to NTC in 1997, 1996 and
1995, respectively.
Program License and Production Fees
NCN receives monthly program license fees from affiliated entities for
programming produced by NCN. Total license fees earned from affiliates during
1997, 1996 and 1995 were $752,365, $619,466 and $602,263, respectively.
Unsecured Advances to Parent and Advances from Affiliates
The Company's advances from affiliates are intended to be repaid through future
cash flow generated by the Company. Under the terms of an intercompany borrowing
arrangement, the Company had agreed to repay all outstanding advances due to
affiliates by December 31, 2002; effective June 30, 1997, the Company received a
capital contribution that was treated as a non-cash transaction in the
statements of cash flows of $9,338,194 from NTC which replaced the net unsecured
advances that had previously been owed to NTC and other affiliates of the
Company.
Reimbursements
NTC provides or causes to be provided certain centralized services to the
Company and other affiliated entities. NTC is entitled to reimbursement from the
Company for various expenses incurred by it or its affiliates on behalf of the
Company allocable to its management of the Company, including travel expenses,
pole and site rental, lease payments, legal expenses, billing expenses,
insurance, governmental fees and licenses, headquarters supplies and expenses,
pay television expenses, equipment and vehicle charges, operating salaries and
expenses, administrative
36
-4-
salaries and expenses, postage and office maintenance. NTC has historically
assigned its reimbursement rights to NCC.
The amounts billed to the Company are based on costs incurred by affiliates in
rendering the services. The costs of certain services are charged directly to
the Company, based upon the personnel time spent by the employees rendering the
service. The cost of other services is allocated to the Company and affiliates
based upon relative size and revenue. Management believes that the methods used
to allocate services to the Company are reasonable. Amounts charged for these
services were $2,057,916, $1,670,409 and $1,425,316 for 1997, 1996 and 1995,
respectively.
In 1997, 1996 and 1995, the Company was charged billing maintenance fees by CTB
for billing system support of $261,424, $231,756 and $175,632, respectively. CAC
billed the Company $251,899, $196,491 and $161,627, for advertising services in
1997, 1996 and 1995, respectively.
The Company has operating management agreements with affiliated entities managed
by NCC. Under the terms of these agreements, the Company or an affiliate serves
as the managing agent for certain cable television systems and is reimbursed for
certain operating, administrative and programming expenses. The Company paid
$9,616, $84,151 and $65,921, net, under the terms of these agreements during
1997, 1996 and 1995, respectively.
3. NORTHLAND CABLE NEWS:
As discussed in Note 1, NCN was formed to develop and distribute local news,
sports and information programming to NCTV and certain of the Company's
affiliates. The Company's payment obligations under the $100 million of senior
notes discussed in Note 6 are fully and unconditionally, jointly and severally
guaranteed on a senior subordinated basis by NCN. The guarantee of NCN is
subordinated to the prior payment in full of all senior debt of NCN (as of
December 31, 1997 NCN had no senior debt outstanding) and the amounts for which
NCN will be liable under the guarantee issued from time to time with respect to
senior debt. Separate financial statements of NCN have not been presented
because management has determined that they would not be material to financial
statement readers. Summary financial information of NCN is presented below.
For the Year Ended December 31,
-----------------------------------------------
1997 1996 1995
----------- ----------- -----------
INCOME STATEMENT INFORMATION:
Revenues from affiliates $ 1,516,380 $ 1,372,211 $ 1,438,359
Less: intercompany revenue (764,015) (752,745) (836,096)
----------- ----------- -----------
Total revenues 752,365 619,466 602,263
Operating expenses 1,128,360 1,051,556 1,026,501
Other, net 660 3,827 (15,926)
----------- ----------- -----------
Net loss $ (375,335) $ (428,263) $ (440,164)
=========== =========== ===========
37
-5-
December 31,
-----------------------------
1997 1996
----------- -----------
BALANCE SHEET INFORMATION:
Current assets $ 1,483,466 $ 1,090,461
Less: intercompany elimination (1,362,693) (913,669)
----------- -----------
Total current assets 120,773 176,792
Non-current assets 212 190
----------- -----------
Total Assets $ 120,985 $ 176,982
=========== ===========
Current liabilities $ 50,619 $ 46,270
Other liabilities -- --
----------- -----------
Total liabilities $ 50,619 $ 46,270
=========== ===========
4. PROPERTY AND EQUIPMENT:
December 31,
----------------------------
1997 1996
----------- -----------
Land and buildings $ 2,067,350 $ 1,803,610
Distribution plant 62,051,468 56,471,372
Other equipment 3,893,401 3,360,770
Leasehold improvements 46,170 39,805
Construction-in-progress 211,320 216,428
----------- -----------
$68,269,709 $61,891,985
=========== ===========
5. ACCRUED EXPENSES:
December 31,
--------------------------
1997 1996
---------- ----------
Programmer license fees $1,242,544 $1,000,147
Accrued franchise fees 726,058 647,619
Accrued interest 1,391,239 565,704
Other 1,231,769 738,630
---------- ----------
$4,591,610 $2,952,100
========== ==========
38
-6-
6. NOTES PAYABLE:
December 31,
------------------------------
1997 1996
------------ ------------
Revolving credit and term loan amended in 1997 $ 7,822,221 $101,999,998
Senior subordinated notes 100,000,000 --
Other 140,292 154,734
------------ ------------
107,962,513 102,154,732
------------ ------------
Less-current portion 1,140,292 5,550,314
------------ ------------
$106,822,221 $ 96,604,418
============ ============
Revolving Credit and Term Loan
On November 12, 1997, the Company entered into an amended and restated revolving
credit and term loan facility (the Facility). The Facility provides for
borrowings up to $100,000,000,including a $75,000,000 term loan, and a
$25,000,000 revolving credit facility, both of which mature December 31, 2005.
The Facility is collateralized by a first lien position on all present and
future assets and stock of the Company. Interest rates vary based on certain
financial covenants; currently 9.0%. Graduated principal and interest payments
are due quarterly until maturity on December 31, 2005. The Company will use the
additional proceeds to finance the acquisition of cable systems located in
Aiken, Greenwood, Saluda, Ware Shoals, McCormick and Edgefield, South Carolina
(the "South Carolina Systems") and to provide working capital (See Note 11). The
estimated fair value of the revolving credit and term loan facility is equal to
its carrying value because of its variable interest rate nature.
On January 2, the Company purchased all operating assets of the South Carolina
Systems, increasing its balance outstanding under the Facility to $75,850,000.
Under the terms of the credit agreement, graduated principal payments are due
quarterly commencing March 31, 1998.
Under the revolving credit and term loan agreement, the Company has agreed to
restrictive covenants which require the maintenance of certain ratios, including
a Pro forma Debt Service Ratio of 1.15 to 1 and a Leverage Ratio of 7.00 to 1,
among other restrictions. The Company submits quarterly debt compliance reports
to its creditor under this arrangement.
Senior Subordinated Notes
On November 12, 1997, the Company completed the issuance and sale of
$100,000,000 in principal amount of 10.25% Senior Subordinated Notes (the Notes)
due November 15, 2007. The Company used the proceeds to repay a portion of the
amounts outstanding under the Facility and to pay fees and expenses incurred in
connection with the issuance. The estimated fair value of the $100,000,000 Notes
at December 31, 1997, was $105,375,000, based on available market information.
39
-7-
The Notes will be redeemable at the option of the Company, in whole or in part,
at any time on or after November 15, 2002 at the following prices (expressed as
percentages of principal amount) if redeemed during the 12-month period
beginning on November 15 of the years dated below, in each case together with
interest accrued to the redemption date:
Year Percentage
- -------------------- ----------
2002 105.125%
2003 103.417%
2004 101.708%
2005 and thereafter 100.000%
The indenture pursuant to which the Notes were issued, among other things,
limits the ability of the Company and its subsidiaries to incur additional
indebtedness or issue preferred stock; make certain restricted payments; grant
liens on assets; merge, consolidate or transfer substantially all of their
assets; enter into certain transactions with related persons; make certain
payments affecting subsidiaries; sell assets; and issue capital stock of
subsidiaries. Additionally, the Company has agreed to restrictive covenants
which require the maintenance of certain ratios, including a debt to cash flow
ratio of 7.00 to 1. The Company submits quarterly debt compliance reports to a
trustee.
In the event of a change of control of the Company as defined in the indenture,
holders of the Notes will have the right to require the Company to make an offer
to repurchase such Notes, in whole or in part, at a price of 101% of the
aggregate principal amount thereof plus accrued and unpaid interest to the date
of repurchase.
Principal Payments
Annual maturities of notes payable after December 31, 1997 based on amounts
outstanding at December 31, 1997 are as follows:
1998 $ 1,140,292
1999 2,250,000
2000 3,000,000
2001 1,572,221
2002 -
Thereafter 100,000,000
------------
$107,962,513
============
Interest Rate Swap Agreement
On January 8, 1998 the Company entered into a interest rate swap agreement with
a notional amount of $65,000,000, to reduce the impact of changes in interest
rates. This agreement effectively changes the Company's interest rate exposure
to a fixed rate of 5.78%, plus an applicable margin based on certain financial
covenants (the margin at January 8, was 3.00%). The maturity date of the swap is
December 31, 2000.
40
-8-
7. OTHER, NET:
Other, net in other income (expense) in the consolidated statements of
operations consists of:
For the Years Ended
December 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
MANAGEMENT OPERATIONS:
Management fees from affiliate $ -- $ -- $ 120,618
General and administrative expense -- -- (27,683)
GAIN (LOSS) ON DISPOSAL OF ASSETS 76,311 (365,614) (80,045)
INTEREST INCOME 29,166 54,331 65,158
OTHER (4,652) (27,638) (24,476)
--------- --------- ---------
$ 100,825 $(338,921) $ 53,572
========= ========= =========
8. INCOME TAXES:
The operations of the Company and its affiliates are included for federal income
tax purposes in a consolidated federal income tax return filed by NTC. For
financial reporting purposes, the provision for income taxes is computed as if
the Company filed a separate federal income tax return utilizing the tax rate
applicable to NTC on a consolidated basis.
Deferred income taxes are determined on the asset and liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." The asset and liability method requires the
recognition of deferred income taxes for the expected future tax consequences of
temporary differences between the carrying amounts on the financial statements
and the tax bases of assets and liabilities.
The primary components of deferred income taxes are as follows:
December 31,
-------------------------------
1997 1996
------------ ------------
DEFERRED TAX ASSETS:
Net operating loss carryforward $ 13,056,000 $ 11,035,000
Valuation allowance (8,686,000) (6,686,000)
------------ ------------
4,370,000 4,349,000
DEFERRED TAX LIABILITIES:
Property and equipment 4,370,000 4,349,000
------------ ------------
$ -- $ --
============ ============
41
-9-
The federal income tax net operating loss carryforward of approximately
$38,400,000 expires beginning in the years 2003 through 2012. Management
believes that the available objective evidence creates sufficient uncertainty
regarding the realization of the net deferred tax assets due to the recurring
operating losses being incurred by the Company. Accordingly, a valuation
allowance has been provided for the net deferred tax assets of the Company. The
change in the valuation allowance was $2,000,000, $1,456,000 and $1,250,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
The difference between the statutory tax rate and the tax benefit of zero
recorded by the Company is due to the Company's full valuation allowance against
its net deferred tax asset.
9. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Company leases certain tower sites, office facilities and pole attachments
under leases accounted for as operating leases. Rental expense (including
month-to-month leases) was $601,103, $439,261 and $434,101 in 1997, 1996 and
1995, respectively. Minimum lease payments to the end of the lease terms are as
follows:
1998 $ 50,750
1999 35,505
2000 18,593
2001 16,866
2002 15,292
Thereafter 76,317
--------
$213,323
========
Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted. This act dramatically changed federal telecommunications laws and the
future competitiveness of the industry. Many of the changes called for by the
1996 Act will not take effect until the Federal Communications Commission (FCC)
issues new regulations which, in some cases, may not be completed for a few
years. Because of this, the full impact of the 1996 Act on the Company's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Company's operations, follows.
Cable Programming Service Tier Regulation
FCC regulation of rates for cable programming service tiers has been eliminated
for small cable systems owned by small companies. Small cable systems are those
having 50,000 or fewer subscribers which are owned by companies with fewer than
1% of national cable subscribers (approximately 600,000). NCTV qualifies as a
small cable company and all of the Company's cable systems qualify as small
cable systems. Basic tier rates remain subject to regulations by the local
franchising authority under most circumstances until effective competition
exists. The 1996 Act expands the definition of effective competition to include
the offering of video programming
42
-10-
services directly to subscribers in a franchised area served by a local
telephone exchange carrier, its affiliates or any multichannel video programming
distributor which uses the facilities of the local exchange carrier. The FCC has
not yet determined the penetration criteria that will trigger the presence of
effective competition under these circumstances.
Telephone Companies
The 1996 Act allows telephone companies to offer video programming services
directly to customers in their service areas immediately upon enactment. They
may provide video programming as a cable operator fully subject to any provision
of the 1996 Act; a radio-based multichannel programming distributor not subject
to any provisions of the 1996 Act; or through nonfranchised "open video systems"
offering nondiscriminatory capacity to unaffiliated programmers, subject to
select provisions of the 1996 Act. Although management's opinion is that the
probability of competition from telephone companies in rural areas is unlikely
in the near future, there are no assurances that such competition will not
materialize.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public, Educational and Governmental and leased
access channels.
Self-Insurance
NCTV began self-insuring for aerial and underground plant in 1996. Beginning in
1997, NCTV began making quarterly contributions into an insurance fund
maintained by NTC which covers all Northland entities and would defray a portion
of any loss should NCTV be faced with a significant uninsured loss. To the
extent NCTV's losses exceed the fund's balance, NCTV would absorb any such loss.
If NCTV were to sustain a material uninsured loss, such reserves could be
insufficient to fully fund such a loss. The resulting reduction in cash flow
caused by interrupted service, together with the capital cost of replacing such
equipment and physical plant, could have a material adverse effect on NCTV, its
financial condition, prospects and debt service ability.
Amounts paid to NTC, which maintains the fund for the Company and its
affiliates, are expensed as incurred and are included in the consolidated
statements of operations. To the extent a loss has been incurred related to
risks that are self-insured, the Company records an expense and an associated
liability for the amount of the loss, net of any amounts to be drawn from the
fund. For the year ended December 31, 1997, the Company made payments of $55,526
to the fund. As of December 31, 1997, the fund had a balance of $129,700.
10. ACQUISITION OF SYSTEMS:
During 1995, the Company purchased the assets of Clemson-Seneca and the
operating assets of cable television systems in Oconee County, South Carolina;
Madera County, California; and communities in and around Mexia, Texas, adding
approximately 15,000 basic subscribers. The aggregate purchase price of the
assets was approximately $21,600,000.
43
-11-
On October 11, 1996, the Company acquired substantially all of the operating
assets and franchise rights of cable systems serving approximately 12,500 basic
subscribers in or around the communities of Moses Lake, Othello, Ephrata and
certain unincorporated areas of Grant and Adams counties, all in the state of
Washington from Marcus Cable Associates, L.P. (Marcus). The purchase price of
the system was $21,031,760, which Marcus received at closing.
On January 31, 1997, the Company acquired substantially all of the operating
assets and franchise rights of the cable television system in and around the
community of Waterwood, Texas. This system serves approximately 400 basic
subscribers. The total purchase price was approximately $580,000.
On March 31, 1997, the Company acquired substantially all of the operating
assets and franchise rights of the cable television systems in and around the
communities of Marlin, Madisonville and Buffalo, Texas. These systems serve
approximately 3,600 subscribers. The total purchase price was approximately
$5,250,000.
In April 1997, the Company acquired substantially all of the operating assets
and franchise rights of the cable television system serving approximately 300
basic subscribers in Oconee County, South Carolina. The aggregate purchase price
of the assets was $380,000. As of December 31, the Company owed approximately
$8,000 under the holdback provision of the purchase agreement.
Pro forma operating results (unaudited) of the Company for 1997 and 1996,
assuming the acquisitions described above had been made at the beginning of
1996, follow:
For the years ended December 31,
--------------------------------
1997 1996
------------ ------------
(unaudited) (unaudited)
Service revenues $ 39,146,493 $ 37,845,418
============ ============
Net loss $ (5,555,889) $ (6,054,874)
============ ============
11. SUBSEQUENT TRANSACTION:
On January 2, 1998, the Company acquired substantially all operating assets and
franchise rights of cable television systems serving approximately 35,300 basic
subscribers in or around the communities of Aiken, Greenwood, Saluda, Ware
Shoals, McCormick and Edgefield, all in the state of South Carolina from
Intermedia Partners of Carolina, and Robin Cable Systems L.P. The systems were
acquired at a purchase price of $69,975,000 adjusted at closing for the
proration of certain revenues and expenses. Of the total purchase price the
Sellers received $69,630,745 on January 2, 1998. Under the terms of the asset
purchase agreement the remaining balance of $344,255 will be held in escrow for
a period of six months to be offset by any remaining post-closing adjustments.
Included on the balance sheet as of December 31, 1997, is a $690,000 escrow
payment previously deposited towards the purchase of the systems.