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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, 1998
[ ] 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 Identification No.)
incorporation or organization)
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
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(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1638891
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
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(Address of principal executive offices) (Zip Code)
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 [X] No [ ]
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, 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 focused on
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. ("NCPI") - formed in February
1995 and principally involved in the direct ownership of local
cable television systems. At December 31, 1998, NCPI is the sole
member of Northland Cable Ventures LLC.
NORTHLAND CABLE VENTURES LLC ("NCV") - formed in June 1998
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 billing and financial record keeping for
Northland-affiliated cable systems. Sole shareholder of Cable
Ad-Concepts.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally
involved in the sale, development and production of video
commercial advertisements that are cablecast on Northland-
affiliated cable systems.
NORTHLAND MEDIA, INC. - formed in April 1995 as a holding company. Sole
shareholder of the two following entities:
STATESBORO MEDIA, INC. - formed in April 1995 and principally
involved in operating an AM radio station serving the community
of Statesboro, Georgia and surrounding areas.
CORSICANA MEDIA, INC. - purchased in September 1998 and
principally involved in operating an AM radio station serving the
community of Corsicana, Texas 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,
1998, the total number of basic subscribers served by the Systems was 128,947,
and the Company's penetration rate (basic subscribers as a percentage of homes
passed) was approximately 65%.
The Company has 91 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.
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.
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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, 1998.
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 .. 95,825 60,477 63.1% 46.9% 22,085 36.5% $38.08 43.3%
Washington ............ 34,925 25,072 71.8% 19.4% 6,517 26.0% $36.03 42.8%
Texas ................. 47,948 30,176 62.9% 23.4% 9,064 30.0% $34.02 44.9%
California ............ 19,090 13,222 69.3% 10.3% 4,749 35.9% $33.65 45.7%
------- ------- ------ ------ ------- ------ ------ ------
Total Systems(6) ...... 197,788 128,947 65.2% 100.0% 42,415 32.9% $36.37 43.7%
- ----------
(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 ten headends serving 60,477 subscribers. Four headends, located in
Aiken, Greenwood and Clemson, South Carolina and Statesboro, Georgia, serve
54,096 subscribers or 89.5% of the total subscribers in the region. The region
is currently operated from four primary local offices located in Aiken,
Greenwood, Clemson and Statesboro.
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, approximately 80% of the subscribers are served by
plant with 400 MHz channel capacity. 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 ultimately support a 750
MHz capacity. 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.
Aiken, South Carolina. The Aiken area systems serve 17,521 subscribers from
three headends. The Aiken headend serves 89.1% of the subscribers, has a 550
MHz channel capacity and is addressable. The Aiken area has a diversified
industrial base consisting of local, national and foreign manufacturing
companies covering such diverse industries such as pharmaceuticals,
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textiles, industrial robotics, gardening seeds and prefabricated homes. The
largest employer in the Aiken area is the Westinghouse Savannah River Company.
The office and two of the headend sites are owned by the Company.
Greenwood, South Carolina. The Greenwood area systems serve 17,930 subscribers
from three headends. The Greenwood headend serves 90.7% of the subscribers and
has a minimum of 400 MHz channel capacity. The Company expects to upgrade the
Greenwood system to 550 MHz capacity in the near future. Although this system
currently employs fiber optic technology, the Company plans to design and
construct an expanded fiber optic backbone designed to support 750 MHz
capacity in the near future. The Greenwood area has a diversified industrial
base consisting of local, national and foreign manufacturing companies
covering such diverse industries such as pharmaceuticals, textiles, industrial
robotics, gardening seeds and prefabricated homes. The Company owns all three
of its headend sites.
Statesboro, Georgia. The Statesboro system serves 9,194 subscribers from a
single headend with approximately 90% of the subscribers served by 450 MHz
channel capacity. The Statesboro system offers Northland Cable News, has a
strong advertising sales effort and its office and headend site are 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 25,072 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
20,536 subscribers or 81.9% of the Company's total subscribers in the region.
Port Angeles, Washington. The Port Angeles system serves 8,255 subscribers
from one headend. The system utilizes a fiber optic backbone designed to
support a 750 MHz capacity with all of the subscribers served by 330 MHz
capacity plant. A 450 MHz upgrade is planned to begin in early 2000. 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 5,352
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 capacity is 50.0% accomplished, with completion
expected by year-end 2000. A 550 MHz design upgrade is now 35.0%
accomplished, with completion expected by year-end 2000. 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. The system also launched high speed internet service to its
subscribers in the first quarter of 1999.
Moses Lake, Washington. The Moses Lake area systems serve 11,465 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 capacity. With the resulting increased
channel capacity, the Company has 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 and TVW which is a state version of C-SPAN. Each system
maintains a separate headend facility for reception 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 450 MHz
capacity by year-end 2000. 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 30,176 subscribers. Three of the region's headends are
scheduled to be interconnected by year-end 1999. Seven headends currently serve
69.1% 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 7,367 subscribers
from a cluster of four headends. Stephenville is home to Tarleton State
College, an affiliate of Texas A&M University. Approximately 94.7% of the
subscribers currently are served by plant with 400 MHz capacity. The systems
have experienced steady growth in their tier subscriptions. The office and
three of the headend sites are owned by the Company.
Mexia, Texas. The Mexia area systems serve 8,802 subscribers from a cluster
of seven headends, with the two largest headends, Mexia and Fairfield/Teague,
serving 69.5% of the subscribers. Approximately 86.9% of subscribers
currently are
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serviced by plant with 400 MHz capacity, with the Mexia headend 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 8,547 subscribers
from a cluster of five headends. In February 1999 the Company completed a
fiber optic interconnect of the Kingsland system to the Marble Falls system,
thereby eliminating an additional headend. With the completion of the
Kingsland interconnect, approximately 65.2% 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 three headends in the Texas region serve 5,460 subscribers,
with all of the subscribers served by plant with 330 MHz capacity or better.
The California Region. The California Region serves 13,222 subscribers from
seven headends, which are operated from three offices located in Yreka, Oakhurst
and Mount Shasta, California. Three headends serve 11,462 subscribers or 86.7%
of the total subscribers in the region.
Oakhurst, California. The Oakhurst, California area is one of the entrances
to Yosemite National Park. The Oakhurst area systems serve 4,852 subscribers
from a cluster of five headends. The Oakhurst headend serves 63.7% 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 56.0% of Oakhurst
system's subscribers are served by 450 MHz capacity plant and the entire
Oakhurst system upgrade will be completed by 2001. 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 3,546 subscribers from a single headend. Yreka is the
county seat of Siskiyou County. The Yreka 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 2001. The
Yreka office and headend sites are owned by the Company.
Mount Shasta, California. The Mount Shasta, California system, serves 4,824
subscribers from a primary headend and is located in close proximity to the
Company's Yreka system. The system sits at the foot of 14,162' Mt. Shasta,
which attracts tourists year round with skiing, hiking and golf courses
nearby. The communities of Mount Shasta and Dunsmuir are connected by fiber
optic backbone and the communities of Weed and McCloud are connected via AML
microwave. Portions of the system serving approximately 85% of the
subscribers are currently at 330 MHz capacity. The Mount Shasta area has a
strong economic base. Forestry, forest services and tourism are the major
industries. Annual population growth from 1990 through 1997 averaged 2.3% in
the area.
As of December 31, 1998, the Company had approximately 208 full-time
employees and 10 part-time employees. Fourteen 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
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"pay channels" in addition to the basic service. These pay channels include such
services as Showtime, Home Box Office, Cinemax, Disney, The Movie Channel,
Encore and Starz.
COMPETITION
Cable Television systems currently experience competition from several
sources.
BROADCAST TELEVISION
Cable television systems have traditionally competed with broadcast
television, which consists of television signals that the viewer is able to
receive directly on his television without charge using an "off-air" antenna.
The extent of such competition is dependent in part upon the quality and
quantity of signals available by such antenna reception as compared to the
services provided by the local cable system. Accordingly, it has generally been
less difficult for cable operators to obtain higher penetration rates in rural
areas where signals available off-air are limited, than in metropolitan areas
where numerous, high quality off-air signals are often available without the aid
of cable television systems.
OVERBUILDS
Cable television franchises are not exclusive, so that more than one cable
television system may be built in the same area (known as an "overbuild"), with
potential loss of revenues to the operator of the original cable television
system. Constructing and developing a cable television system is a capital
intensive process, and it is often difficult for a new cable system operator to
create a marketing edge over the existing system. Generally, an overbuilder
would be required to obtain franchises from the local governmental authorities,
although in some instances, the overbuilder could be the local government
itself. In any case, an overbuilder would be required to obtain programming
contracts from entertainment programmers and, in most cases, would have to build
a complete cable system, including headends, trunk lines and drops to individual
subscribers homes, throughout the franchsie areas.
Federal cross-ownership restrictions historically limited entry by local
telephone companies into the cable television business. The 1996 Telecom Act
eliminated this cross-ownership restriction, making it possible for companies
with considerable resources to overbuild existing cable operators and enter the
business. Several telephone companies have begun seeking cable television
franchises from local governmental authorities and constructing cable television
systems. The Company cannot predict at this time the extent of telephone company
competition that will emerge in areas served by the Company's cable television
systems. The entry of telephone companies as direct competitors, however, is
likely to continue over the next several years and could adversely affect the
profitability and market value of the Company's systems. The entry of electric
utility companies into the cable television business, as now authorized by the
1996 Telecom Act, could have a similar adverse effect.
DBS
High powered direct-to-home satellites have made possible the wide-scale
delivery of programming to individuals throughout the United States using small
roof-top or wall-mounted antennas. Several companies began offering direct
broadcast satellite ("DBS") service over the last few years and recently
announced mergers should strengthen the surviving companies. Companies offering
DBS service use video compression technology to increase channel capacity of
their systems to 100 or more channels and to provide packages of movies,
satellite networks and other program services which are competitive to those of
cable television systems. DBS faces technical and legal obstacles to offering
its customers popular local broadcast programming. At least one DBS provider,
however, is now attempting to do so, and the FCC and Congress are considering
proposals that would enhance the ability of DBS companies to provide popular
broadcast programming, including broadcast network programming. In addition to
emerging high-powered DBS competition, cable television systems face competition
from several low-powered providers, whose service requires use of much larger
home satellite dishes. The ability of DBS service providers to compete
successfully with the cable television industry will depend on, among other
factors, the availability of equipment at reasonable prices and the relative
attractiveness of the programming options offered by the cable television
industry and DBS competitors.
PRIVATE CABLE
Additional competition is provided by private cable television systems,
known as Satellite Master Antenna Television ("SMATV"), serving multi-unit
dwellings such as condominiums, apartment complexes, and private residential
communities. These private cable systems may enter into exclusive agreements
with apartment owners and homeowners associations, which may preclude operators
of franchised systems from serving residents of such private complexes. Private
cable requirements that
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do not cross public rights of way are free from the federal, state and local
regulatory requirements imposed on franchised cable television operators.
MMDS
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service ("MMDS") systems,
commonly called wireless cable, which are licensed to serve specific areas. MMDS
uses low-power microwave frequencies to transmit television programming
over-the-air to paying subscribers. The MMDS industry is less capital intensive
than the cable television industry, and it is therefore more practical to
construct MMDS systems in areas of lower subscriber penetration.
Cable television systems are also in competition in various degrees with
other communications and entertainment media, including motion pictures, home
video cassette recorders, internet data delivery and internet video delivery.
REGULATION AND LEGISLATION
The operation of cable television systems is extensively regulated by the
FCC, some state governments and most local governments. The Telecommunications
Act of 1996 ("1996 Telecom Act") alters the regulatory structure governing the
nation's telecommunications providers. It removes barriers to competition in
both the cable television market and the local telephone market. Among other
things, it also reduces the scope of cable rate regulation.
The 1996 Telecom Act requires the FCC to undertake a host of implementing
rulemakings, the final outcome of which cannot yet be determined. Moreover,
Congress and the FCC have frequently revisited the subject of cable regulation.
Future legislative and regulatory changes could adversely affect the Company's
operations, and there have been recent calls to maintain or even tighten cable
regulation in the absence of widespread effective competition. This section
briefly summarizes key laws and regulations affecting the operation of the
Company's cable systems and does not purport to describe all present, proposed,
or possible laws and regulations affecting the Company.
CABLE RATE 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
franchise area. Federal law now defines "effective competition" on a
community-specific basis as essentially 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 ("PEG") 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 FCC itself directly administers rate regulation of any cable
programming service tiers ("CPST"), which typically contain satellite-delivered
programming. Under the 1996 Telecom 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 carriage. 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.
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SMALL OPERATORS
The FCC and Congress have provided various forms of rate relief for
smaller cable systems owned by smaller operators. If requisite eligibility
criteria are satisfied, a cable operator may be allowed to rely on a vastly
simplified cost-of-service rate justification and/or may be allowed to avoid
regulation of CPST rates entirely. Under FCC regulations, cable systems serving
15,000 or fewer subscribers, which are owned by or affiliated with a cable
company serving in the aggregate no more than 400,000 subscribers, can submit a
simplified cost-of-service filing under which the regulated rate (including
equipment charges) will be presumed reasonable if it equates to no more than
$1.24 per channel. Eligibility for this relief continues if the small cable
system is subsequently acquired by a larger cable operator, but is lost when and
if the individual system serves in excess of 15,000 subscribers. The 1996
Telecom Act immediately deregulated the CPST rates of cable systems serving
communities with fewer than 50,000 subscribers, which are owned by or affiliated
with entities serving, in the aggregate, no more than one percent of the
nation's cable customers (approximately 617,000) and having no more than $250
million in annual revenues. All but two of the Company's systems currently
qualify for such regulatory relief.
The 1996 Telecom Act sunsets FCC regulation of CPST rates for all systems
(regardless of size) on March 31, 1999. Certain critics of the cable television
industry, however, have called for a delay in the regulatory sunset and some
have even urged more rigorous rate regulation, including limits on operators
passing through to their customers increased programming costs and bundling
together multiple programming services. The 1996 Telecom Act 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.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom 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 public rights-of-way when cable operators provide
telecommunications service. The favorable pole attachment rates afforded cable
operators under federal law can be gradually increased by utility companies
owning the poles (beginning in 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 Telecom Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. The Eighth Circuit Court
of Appeals vacated certain aspects of the FCC's initial interconnection order,
but that decision was reversed by the U.S. Supreme court in January 1999.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Telecom 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 Telecom Act, an LEC (electric utility or other entity)
providing video programming to subscribers through wired facilities 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. The Fifth Circuit Court of Appeals recently reversed certain of the
FCC's OVS rules, including the FCC's preemption of local franchising.
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 Telecom Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption". The 1996 Telecom Act also provides the FCC with
the limited authority to grant waivers of the buyout prohibition (subject to LFA
approval).
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ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The 1996 Telecom 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.
Again, because of their resources, electric utilities could be formidable
competitors to traditional cable systems.
ADDITIONAL OWNERSHIP RESTRICTIONS
The 1996 Telecom 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 Telecom Act leaves in
place existing restrictions on cable cross-ownership with SMATV and MMDS
facilites, but lifts those restrictions where the cable operator is subject to
effective competition. The FCC permits 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, although the
FCC recently expressed an interest in reviewing and reimposing this limit.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements that
allow local commercial television broadcast stations to elect once every three
years between (a) requiring a cable system to carry the station ("must carry")
(b) negotiating for payments of granting permission to the cable operator to
carry the station ("retransmission consent"). Less popular stations typically
elect "must carry", and more popular stations typically elect "retransmission
consent". Must carry requests can dilute the appeal of a cable system's
programming offerings and retransmission consent demands may require substantial
payments or other concessions. Either option has a potentially adverse affect on
the Company's business. The burden associated with "must carry" may increase
substantially if broadcasters proceed with planned conversion to digital
transmission and the FCC determines that cable systems must carry all analog and
digital broadcasters in their entirety. A rulemaking is now pending at the FCC
regarding the imposition of dual digital and analog must carry.
ACCESS CHANNELS
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 the
designated channel capacity, but use of commercial leased access channels has
been relatively limited to date.
ACCESS TO PROGRAMMING
To spur development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes video
programmers affiliated with cable companies 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. There recently has been increased interest in further
restricting the marketing practices of cable programmers, including subjecting
programmers who are not affiliated with cable operators to all of the existing
program access requirements. In addition, some cable critics have argued that
vertically integrated, non-satellite programming (such as certain regional
sports networks) which is now exempt from the ban on exclusive programming,
should be subjected to this prohibition.
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INSIDE WIRING
The FCC determined that an incumbent cable operator can be required by the
owner of a multiple dwelling unit ("MDU") complex to remove, abandon or sell the
"home run" wiring it initially provided. In addition, the FCC is reviewing the
enforceability of contracts to provide exclusive video service within a MDU
complex. The FCC has proposed abrogating all such contracts held by incumbent
cable operators, but allowing such contracts when held by new entrants. These
changes, and others now being considered by the FCC, would, if implemented, make
it easier for an MDU complex owner to terminate service from an incumbent cable
operator in favor of a new entrant and leave the already competitive MDU sector
even more challenging for incumbent operators. In a separate proceeding, the FCC
has preempted restrictions on the deployment of private antennas, including
satellite dishes, on rental property within the exclusive use of a tenant (such
as balconies and patios).
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 nonduplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, children's programming advertisements and closed captioning),
registration of frequency usage, lockbox availability, antenna structure
notification, tower marking and lighting, consumer protection and customer
service standards, technical standards, consumer electronics equipment
compatibility and Emergency Alert Systems. The FCC recently stated that cable
customers must be allowed to purchase cable converters from third party vendors,
and established a multi-year phase-in during which signals security functions
(which remain in the operator's exclusive control) would be unbundled from basic
converter functions (which could then be satisfied by third party vendors).
Details regarding this phase-in are still under FCC review. 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.
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 revenues to a
federal copyright royalty pool (that 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 contained in
television 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
nonbroadcast 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 order to cross 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 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. A number of states subject
cable television systems to the jurisdiction of centralized state governmental
agencies, some of which impose regulation of a character similar to that of a
public utility. Although LFAs have considerable discretion in establishing
franchise terms, there are certain federal limitations. For example, LFAs cannot
insist on franchise fees exceeding 5% of the system's gross revenues, cannot
dictate the particular technology used by the system, and cannot specify video
programming that must be carried on the system other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchises 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
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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.
INTERNET SERVICE
Although there is no significant federal regulation of cable system
delivery of Internet services at the current time, and the FCC recently issued a
report to Congress finding no immediate need to impose such regulation, this
situation may change as cable systems expand their broadband delivery of
Internet services. In particular, proposals have been advanced at the FCC that
would require cable operators to provide access to unaffiliated Internet service
providers and online service providers. Certain Internet service providers also
are attempting to use existing commercial leased access provisions to gain the
imposition of mandatory Internet access requirements as part of cable franchise
renewals or transfer approvals.
SUMMARY
The foregoing does not purport to be a summary of all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal legislation and regulations,
copyright licensing and, in many jurisdictions, state and local franchise
requirements are currently the subject of a variety of judicial proceedings,
legislative hearings and administrative and legislative proposals which could
change, in varying degrees, the manner in which cable television systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable television industry or the Company can be predicted at this time.
The Company expects to adapt its business to adjust to the changes that
may be required under any scenario of regulation. At this time, the Company
cannot assess the effects, if any, that present regulation may have on the
Company's operations and potential appreciation of its Systems. There can be no
assurance that the final form of regulation will not have a material adverse
impact on the Company's operations.
ITEM 2. PROPERTIES
The Company's cable television systems are located in and around
Stephenville, Marble Falls, Crockett, Mexia and Navasota, Texas; Bainbridge
Island, Moses Lake and Port Angeles, Washington; Clemson, Aiken and Greenwood,
South Carolina; Statesboro, Georgia; and Yreka, Mount Shasta 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 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 as
presently conducted.
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ITEM 3. LEGAL PROCEEDINGS
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, 1998.
(c) During 1998, the Company did not pay cash dividends and has no intentions
of paying cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
SUMMARY OF OPERATIONS:
Revenue $ 56,002,667 $ 39,517,808 $ 33,180,477 $ 26,997,661 $ 15,687,304
Operating income (loss) 4,655,761 4,588,563 4,373,211 3,403,048 2,786,706
Net loss (7,758,291) (5,550,635) (4,229,028) (3,758,117) (384,515)
DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Total assets $ 156,586,254 $ 92,421,978 $ 91,599,263 $ 75,754,590 $ 61,694,734
Notes payable 177,340,000 107,962,513 102,154,732 83,144,911 65,531,020
Total liabilities 186,565,977 114,643,410 117,608,253 97,534,552 79,716,579
Shareholder's deficit (29,979,723) (22,221,432) (26,008,990) (21,779,962) (18,021,845)
Increases in 1998 Selected Financial Data were primarily attributable to the
January 1998 acquisition of cable television systems serving approximately
35,700 basic subscribers in portions of Aiken, Greenwood, McCormick, Laurens,
Abbeville, Saluda and Edgefield Counties in western South Carolina (the "South
Carolina Acquisitions"). See "ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1998 AND 1997
Basic subscribers increased 35,272 or 37.7%, from 93,675 to 128,947 for the
year ended December 31, 1998.
Revenues increased $16.5 million or 41.8%, from $39.5 million to $56.0
million in 1998. This increase was primarily attributable to the South Carolina
Acquisitions, which accounted for approximately $15.7 million of the 1998
revenue increase. Average monthly revenue per basic subscriber increased $1.43
or 4.1%, from $34.94 to $36.37 for the year ended December 31, 1998. Such
increase was attributable to: (i) rate increases implemented in a majority of
the Company's systems during the year; and (ii) revenue from the increase in
penetration of new product tiers; and (iii) increases in ad sales revenue. Basic
revenue per average basic subscriber increased $1.74 or 7.3%, from $23.74 to
$25.48 for the year ended December 31, 1998. Excluding the impact of the system
acquisitions and dispositions in 1997 and 1998: (i) revenues would have
increased $1.2 million or 3.1%, from $38.2 million to $39.4 million; and (ii)
revenue per average basic subscriber would have increased $1.31 or 3.7%, from
$35.67 to $36.98.
Operating expenses, which include costs related to programming, technical
personnel, repairs and maintenance and advertising sales, increased $5.7 million
or 44.2%, from $12.9 million to $18.6 million for the year ended December 31,
1998. Operating expenses as a percentage of revenues increased from 32.7% to
33.2% for the year ended December 31, 1998. A substantial portion of these
increases was due to the South Carolina Acquisitions, which increased operating
expenses $5.2 million or 40.3%. Excluding the impact of the system acquisitions
and dispositions in 1997 and 1998, operating expenses would have increased
approximately $600,000 or 4.9%, from $12.3 million to $12.9 million for the year
ended December 31, 1998. 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 $2.9 million or 39.7%, from
$7.3 million to $10.2 million for the year ended December 31, 1998. This
increase was attributable primarily to the South Carolina Acquisitions, which
increased general and administrative expenses approximately $3.2 million or
43.8%. Excluding the impact of the system acquisitions and dispositions in 1997
and 1998, general and administrative expenses would have decreased approximately
$100,000 or 1.4%, from $6.9 million to $6.8 million for the year ended December
31, 1998. Such decrease is due to a one-time adjustment to copyright fees and
property insurance off-set by: (i) annual wage and benefit increases; and (ii)
increases in revenue-based expenses such as franchise fees.
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Management fees increased $900,000 or 47.4%, from $1.9 million to
$2.8 million for the year ended December 31, 1998. 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 $7.0 million or 54.7%, from
$12.8 million to $19.8 million for the year ended December 31, 1998. Such
increase was due to the South Carolina Acquisitions and the Company's capital
expenditures.
Interest expense increased by $7.4 million or 72.5%, from $10.2 million to
$17.6 million for the year ended December 31, 1998. Such increase was primarily
attributable to increased borrowings incurred in connection with the South
Carolina Acquisitions. The Company's average outstanding indebtedness increased
$72.1 million or 68.9%, from $104.6 million to $176.7 million for the year ended
December 31, 1998.
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 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.
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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 group of banks.
For the years ended December 31, 1996 and 1997 and 1998, the Company's net cash
provided from operations was $8.0 million, $9.1 million, $9.6 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, 1999 are
expected to be $18.9 million. The Company anticipates that cash flow from
operations will be sufficient to service its debt and to fund capital
expenditures through December 31, 1999. The Company's debt service obligations
for the year ended December 31, 2000 are anticipated to be $19.5 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 $9.6 million for the year ended
December 31, 1998. Adjustments to the $7.8 million net loss for the period to
reconcile to net cash provided by operating activities consisted primarily of
$20.7 million of depreciation and amortization, off-set by the $5.1 million gain
on disposal of assets primarily due the disposition of the Woodburn, Oregon
system and other changes in operating balance sheet accounts.
Net cash used in investing activities was $77.2 million for the year ended
December 31, 1998, and consist primarily of $77.7 million for the South Carolina
Acquisitions and the Mount Shasta, California acquisition, capital expenditures
of $6.3 million off-set by $7.1 million in proceeds primarily from the Woodburn,
Oregon disposition.
Net cash provided by financing activities was $69.1 million for the year
ended December 31, 1998. The Company had $78 million in additions to long term
debt and made $8.6 million of principal payments on notes payable.
EBITDA increased approximately $7 million or 40.2%, from $17.4 million to
$24.4 million for the year ended December 31, 1998. EBITDA Margin decreased from
44.1% to 43.6% for the year ended December 31, 1998. These changes were
attributable primarily to the South Carolina Acquisitions, which contributed
approximately $6.5 million of EBITDA for the year ended December 31, 1998. The
EBITDA Margin for the South Carolina Acquisitions was 41.4% for the year ended
December 31, 1998. Excluding the impact of the system acquisitions and
dispositions in 1997 and 1998, EBITDA would have increased $600,000 or 3.5%,
from $17.1 million to $17.7 million and EBITDA Margin would have increased from
44.8% to 44.9% for the year ended December 31, 1998.
Net cash provided by operating activities was $9.1 million for the year ended
December 31, 1997. Adjustments to the $5.6 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 $800,000 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 44.1% 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.
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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
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.
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 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, 1998 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
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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.
At December 31, 1998, the outstanding balance under the Senior Credit
Facility was $77,340,000. As of the date of this filing, interest rates on the
Senior Credit Facility were as follows: $64,000,000 fixed at 8.53% under the
terms of a self-amortizing interest rate swap agreement with the Company's
lender expiring December 31, 2000; $7,000,000 fixed at 7.73% under the terms of
a interest rate swap agreement with the Company's lender expiring December 4,
2000; $3,500,000 at a LIBOR based rate of 8.06% expiring March 31, 1999;
$2,764,000 at a LIBOR based rate of 7.94% expiring September 9, 1999. The
balance of $76,000 bears interest at the prime rate plus 1.50% (currently
9.25%). 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.
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. The Company periodically 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 fail to meet their obligations. 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.
Expected Maturity Date
1999 2000 2001 2002 2003 Thereafter Total
Liabilities
Debt Maturity 2,250,000 3,000,000 7,000,000 11,000,000 14,750,000 139,340,000 177,340,000
Debt Interest Payments 16,652,318 16,404,255 15,931,755 15,081,255 13,864,568 41,675,445 119,609,596
Average Interest Rate 9.45% 9.45% 9.45% 9.45% 9.45% 9.45% 9.45%
Interest Rate Swaps
Variable to Fixed
Notional Amount -- 58,750,000 -- -- -- -- 58,750,000
Average Pay Rate* -- 5.78% -- -- -- -- 5.78%
Average Receive Rate* -- 5.28% -- -- -- -- 5.28%
Notional Amount -- 7,000,000 -- -- -- -- 7,000,000
Average Pay Rate* -- 4.98% -- -- -- -- 4.98%
Average Receive Rate* -- 5.28% -- -- -- -- 5.28%
* plus an applicable margin, currently 2.75%
It is the Company's policy to renegotiate swap agreements on or near expiration.
ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS
On January 2, 1998, the Company acquired substantially all of the
operating assets and franchise rights of cable television systems serving
approximately 35,700 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. The
remaining balance of $344,255 held in escrow was paid in June 1998 once
agreement was reached regarding certain purchase price adjustments. The
Acquisition was financed through borrowings under the senior credit facility.
On May 15, 1998 the Company sold all of its cable operations in the state of
Oregon (the "Woodburn System") to North Willamette Telecom, Inc. The net
proceeds from the sale of the system were approximately $6,874,000, of which
$6,424,000 was utilized to reduce amounts outstanding under the Senior Credit
Facility. The Woodburn System served approximately 4,300 basic subscribers.
On December 1, 1998, the Company acquired the operating assets and franchise
rights to cable systems serving approximately 5,100 basic subscribers in the
communities of Mt. Shasta, McCloud, Weed, and Dunsmuir, California, located in
Shasta and Siskiyou Counties (the "Mt. Shasta System") from MediaOne Group, Inc.
The systems were acquired at a purchase price of $7,605,000 adjusted at closing
for the proration of certain revenues and expenses. Of the total purchase price,
Media One Group, Inc. received $7,580,769 on December 1, 1998. The acquisition
was financed through borrowings under the Senior Credit Facility.
CAPITAL EXPENDITURES
For the year ended December 31, 1998, the Company had capital expenditures of
$6.3 million. Capital expenditures included: (i) expansion and improvements of
cable properties; (ii) additions to plant and equipment; (iii) maintenance of
existing equipment; (iv) cable line drops and extensions and installations of
cable plant facilities; and (v) vehicle replacements.
The Company plans to invest approximately $14.3 million capital expenditures
in 1999 and 2000. This represents anticipated expenditures for upgrading and
rebuilding certain distribution facilities, new product launches, extensions of
distribution facilities to add new subscribers, vehicle replacements 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 have
been modified to address year 2000 compliance issues. These modifications were
substantially complete at the end of 1998. Management has completed the process
of replacing Programs and Systems related to financial reporting which will
resolve year 2000 compliance issues. The aggregate cost to the
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Company to address year 2000 compliance issues is not expected to be material to
its results of operations, liquidity and capital resources.
Management is currently focusing its efforts on the impact of the year 2000
compliance issue on service delivery and has established an internal team to
address this issue. The internal team is identifying and testing all date
sensitive equipment involved in delivering service to its customers. In
addition, management will assess its options regarding repair or replacement of
affected equipment during this testing. The aggregate cost to the Company to
resolve year 2000 compliance issues related to service delivery equipment is not
expected to be material to its results of operations, liquidity and capital
resources.
The provision of cable television services is significantly dependent on the
Company's ability to adequately receive programming signals via satellite
distribution or off air reception from various programmers and broadcasters. The
Company has inquired of certain significant programming vendors with respect to
their year 2000 issues and how they might impact the operations of the Company.
As of the date of this filing no significant programming vendors identify year
2000 issues in the future and are unable to resolve such issues in a timely
manner, it could result in a material financial risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Company for the years ended December
31, 1998, 1997 and 1996 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.
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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....... 57 Director, Chairman of the Board and President
Richard I. Clark....... 41 Director, Vice President, Treasurer and Assistant
Secretary
James A. Penney........ 44 Vice President and Secretary
Gary S. Jones.......... 41 Vice President
Richard J. Dyste....... 53 Vice President, Technical Services
James E. Hanlon........ 65 Divisional Vice President
H. Lee Johnson......... 55 Divisional Vice President
John E. Iverson........ 62 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 four affiliated limited partnerships), Northland Cable
Services Corporation ("NCSC"), Cable Ad-Concepts, Inc., Northland Cable News,
Inc., Northland Cable Properties, Inc. (NCPI), Northland Cable Ventures LLC
(NCV), 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 24 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 20 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 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 P.L.L.C. 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
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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 over 30 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 P.L.L.C. He is a member of the Washington
State Bar Association and American Bar Association and has been practicing law
for more than 36 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 employees 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.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1998 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 .............................. 1,009,661 22.7%
Adele P. Butler ............................... 530,000 11.9%
Pamela B. McCabe .............................. 510,144 11.4%
Robert M. Arnold .............................. 384,000 8.6%
Richard I. Clark .............................. 309,661 6.9%
Robert A. Mandich ............................. 278,400 6.2%
James E. Hanlon ............................... 59,661 1.3%
John E. Iverson ............................... 50,000 1.1%
Gary S. Jones ................................. 49,328 1.1%
James A. Penney ............................... 48,861 1.1%
Richard J. Dyste .............................. 47,661 1.1%
H. Lee Johnson ................................ 17,661 *
All executive officers and directors as a group
(eight persons) ............................... 1,592,494 35.7%
- ----------
* 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. ("NCPI") and is the managing general partner of 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-6, NCP-7 and NCP-8, the "Limited Partnerships"). In addition,
NCPI is the sole member and manager of Northland Cable Ventures, LLC ("NCV"),
NCSC is the sole shareholder of Cable Ad-Concepts, Inc. ("CAC") and NMI is the
sole shareholder of Statesboro Media, Inc. and Corsicana 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.
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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, 1996, 1997 and 1998, the Company paid a Management Fee of $1.6
million, $1.9 million and $2.8 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, 1996, 1997 and 1998, the Company
reimbursed Northland Communications Corporation approximately $1.7 million, $2.1
million and $2.6 million, 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-6, NCP-7,
NCP-8, NCPI and NCV 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, 1996, 1997 and 1998, were
$619,466, $752,365 and $676,790, 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,
NCPI and NCV. 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, 1996, 1997 and 1998,
were $196,491, $251,899 and $250,637, respectively.
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, NCV 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, 1996, 1997 and 1998, were $231,756, $261,424 and
$332,690, respectively.
OPERATING AGREEMENTS WITH AFFILIATES
The Company is party to operating agreements with NCP-6 and NCP-7 pursuant to
which, in certain instances, the Company serves as the local managing agent for
certain of NCP-6's and 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, 1997 and 1998,
the Company paid (received) affiliates an aggregate of $84,151, $9,616 and
$(41,954), 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
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entities as discussed above. As of December 31, 1998, 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 member of the law firm of Ryan, Swanson &
Cleveland P.L.L.C., which has rendered and is expected to continue to render
legal services to the Company and its' affiliates.
(c) INDEBTEDNESS OF MANAGEMENT. None.
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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, 1998 And 1997................ ____
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996................................. ____
Consolidated Statements of Changes in Shareholder's Capital (Deficit)
for the years ended December 31, 1998, 1997 and 1996................... ____
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996................................. ____
Notes to Financial Statements--December 31, 1998....................... ____
(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, 1998.
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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
--------------------------------
John S. Whetzell, President
Date: March 30, 1999
--------------
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 March 30, 1999
- ------------------------------------- President
John S. Whetzell
/s/ RICHARD I. CLARK Director, Vice President, Treasurer and March 30, 1999
- ------------------------------------- Assistant Secretary
Richard I. Clark
/s/ GARY S. JONES Vice President March 30, 1999
- -------------------------------------
Gary S. Jones
/s/ JOHN E. IVERSON Director and Assistant Secretary March 30, 1999
- -------------------------------------
John E. Iverson
25
26
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland
Telecommunications Corporation)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
27
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, 1998
and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Seattle, Washington,
March 4, 1998
28
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
----------------------------------
1998 1997
------------- --------------
CURRENT ASSETS:
Cash $ 2,750,972 $ 1,238,581
Due from affiliates 106,454 20,545
Accounts receivable 2,043,581 1,355,005
Prepaid expenses 285,591 291,566
------------- ----------
Total current assets 5,186,598 2,905,697
------------- ----------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 90,024,509 68,269,709
Less-- Accumulated depreciation (33,113,526) (28,887,486)
------------- ----------
56,910,983 39,382,223
Franchise agreements (net of accumulated amortization of $20,153,805
and $29,467,711, respectively) 80,571,948 35,773,674
Goodwill (net of accumulated amortization of $2,047,272 and
$1,874,161, respectively) 4,877,161 5,050,272
Other intangible assets (net of accumulated amortization of
$3,867,502 and $2,142,891, respectively)
9,039,564 8,620,112
Funds deposited in escrow for purchase of cable television system
-- 690,000
------------- ----------
151,399,656 89,516,281
------------- ----------
Total assets $ 156,586,254 $ 92,421,978
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
December 31,
---------------------------------
1998 1997
------------- -------------
CURRENT LIABILITIES:
Accounts payable $ 773,233 $ 662,141
Subscriber prepayments 1,846,362 1,106,327
Accrued expenses 6,250,827 4,591,610
Converter deposits 109,311 103,393
Due to affiliates 246,244 217,426
Current portion of notes payable 2,250,000 1,140,292
------------- -------------
Total current liabilities 11,475,977 7,821,189
NOTES PAYABLE 175,090,000 106,822,221
------------- -------------
Total liabilities 186,565,977 114,643,410
------------- -------------
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 11,560,527
Accumulated deficit (41,540,250) (33,781,959)
------------- -------------
Total shareholder's deficit (29,979,723) (22,221,432)
------------- -------------
Total liabilities and shareholder's deficit $ 156,586,254 $ 92,421,978
============= =============
The accompanying notes are an integral part of these
consolidated balance sheets.
29
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
REVENUES:
Service revenues $ 55,325,877 $ 38,765,443 $ 32,560,981
Programming and production revenues from
affiliates 676,790 752,365 619,466
------------ ------------ ------------
Total Revenues 56,002,667 39,517,808 33,180,447
------------ ------------ ------------
OPERATING EXPENSES:
Cable system operations (including $118,020,
$230,139 and $284,896, net paid to affiliates)
18,566,360 12,913,220 10,499,947
General and administrative (including
$2,755,688, $2,350,772 and $1,902,405 paid to
affiliates) 10,227,795 7,290,209 5,955,139
Management fees paid to parent 2,760,263 1,935,302 1,625,118
Depreciation and amortization 19,792,488 12,790,514 10,727,032
------------ ------------ ------------
Total operating expenses 51,346,906 34,929,245 28,807,236
------------ ------------ ------------
Income from operations 4,655,761 4,588,563 4,373,211
OTHER INCOME (EXPENSE):
Interest expense (17,625,998) (10,240,023) (8,263,318)
Other, net (Note 7) 5,211,946 100,825 (338,921)
------------ ------------ ------------
NET LOSS $ (7,758,291) $ (5,550,635) $ (4,229,028)
============ ============ ============
The accompanying notes are an integral part of these
consolidated statements.
30
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, 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)
Net loss -- -- (7,758,291) (7,758,291)
------------ ------------ ------------ ------------
BALANCE, December 31, 1998 10,000 $ 11,560,527 $(41,540,250) $(29,979,723)
============ ============ ============ ============
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 CASH FLOWS
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,758,291) $ (5,550,635) $ (4,229,028)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Depreciation and amortization 19,792,488 12,790,514 10,727,032
Amortization of loan costs 907,760 429,547 240,442
(Gain) loss on disposal of assets (5,093,997) (76,311) 320,513
(Increase) decrease in operating assets:
Due from affiliates (85,909) 15,584 116,164
Accounts receivable (688,576) (65,165) (383,060)
Prepaid expenses 5,975 (18,320) 33,722
(Decrease) increase in operating liabilities:
Accounts payable 111,092 (117,583) (120,904)
Due to affiliate 28,818 (190,266) (50,516)
Subscriber prepayments 745,953 238,297 187,517
Other current liabilities 1,659,217 1,638,578 1,149,851
------------- ------------- -------------
Net cash provided by operating
activities 9,624,530 9,094,240 7,991,733
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems (77,711,038) (6,495,315) (22,180,347)
Investment in cable television properties
(6,279,489) (4,012,320) (2,843,391)
Funds deposited in escrow for purchase of cable
television system -- (690,000) --
Proceeds from disposition of cable systems
7,115,000 -- --
Insurance proceeds and other 24,327 156,887 376,630
Franchise fees and other intangibles (388,912) (62,249) (183,211)
------------- ------------- -------------
Net cash used in investing activities (77,240,112) (11,102,997) (24,830,319)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable $ 77,991,779 $ 105,000,000 $ 21,995,000
Principal payments on notes payable (8,614,292) (99,200,325) (2,589,354)
Loan fees (249,514) (5,038,574) (1,063,118)
------------- ------------- -------------
Net cash provided by financing activities
69,127,973 761,101 18,342,528
------------- ------------- -------------
(DECREASE) INCREASE IN CASH 1,512,391 (1,247,656) 1,503,942
CASH, beginning of year 1,238,581 2,486,237 982,295
------------- ------------- -------------
CASH, end of year $ 2,750,972 $ 1,238,581 $ 2,486,237
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 16,753,345 $ 8,977,394 $ 7,673,330
============= ============= =============
Cash paid during the period for state income taxes $ 17,946 $ 4,654 $ 21,592
============= ============= =============
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)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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, 1998, NCTV had 91
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 subsidiary (NCSC);
and Northland Media, Inc. and subsidiaries (NMI) are wholly owned subsidiaries
of Northland Telecommunications Corporation (NTC or Parent). NCC is the managing
general partner of four limited partnerships, which own and operate cable
television systems. Additionally, NCC owns and operates cable systems through
its wholly owned subsidiary, Northland Cable Properties, Inc. (NCPI). Northland
Cable Ventures, LLC, is a wholly owned subsidiary of NCPI which was formed to
own and operate cable television systems. NCSC is the parent company of Cable
Ad-Concepts, Inc. (CAC). NCSC 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, franchise agreements and other determinable intangible costs.
Any excess is allocated to goodwill.
33
- 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 would be 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:
Franchise agreements 10-20 years
Other intangible assets 1-10 years
Goodwill 40 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 $2,223,165,
$1,821,223 and $1,827,251, respectively, in 1998, 1997 and 1996. 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
34
- 3 -
fail to meet their obligations. 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.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 130 - In 1998, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income (loss) consists of net income (loss), foreign currency
translation adjustments and unrealized gains or losses on investment securities
available-for-sale. As of December 31, 1998, the Company had no comprehensive
income to report, therefore the adoption of SFAS No. 130 had no impact on
equity.
Statement of Position 98-5 - In April 1998, the AICPA released Statement of
Position 98-5, "Reporting on Start-Up Activities" (SOP 98-5). The new standard
requires that all entities expense costs of start-up activities as those costs
are incurred. SOP 98-5 defines "start-up costs" as those costs directly related
to pre-operating, pre-opening, and organization activities. This standard must
be adopted in fiscal years beginning after December 15, 1998.
The Company historically capitalized pre-opening costs and amortized such costs
over a five-year period. As of December 31, 1998, all pre-opening costs have
been amortized. As a result, the adoption of SOP 98-5 will not have an effect on
the Company's financial position or results of its operations.
Statement of Financial Accounting Standards No. 133 - In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the statement of
operations, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
The Company has not yet quantified the impacts of adopting SFAS No. 133 on the
financial statements and has not determined the timing of or method of adoption
of SFAS No. 133. However, the statement could increase volatility in earnings
and other comprehensive income.
35
- 4 -
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 RELATED PARTIES:
Management Fees
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 was charged $2,760,263, $1,935,302 and $1,625,118 by NTC in 1998, 1997
and 1996, 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
1998, 1997 and 1996 were $676,790, $752,365 and $619,466, 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 $9,338,193 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 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 $2,622,489, $2,057,916 and $1,670,409 for 1998, 1997 and 1996,
respectively.
In 1998, 1997 and 1996, the Company was charged software installation charges
and billing maintenance fees for billing system support of by NCSC, amounting to
$332,690, $261,424 and $231,756, respectively. CAC billed the Company $250,637,
36
- 5 -
$251,899 and $196,491, for advertising services in 1998, 1997 and 1996,
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
(received) paid $(41,954), $9,616 and $84,151, net, under the terms of these
agreements during 1998, 1997 and 1996, 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, 1998 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,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
INCOME STATEMENT INFORMATION:
Revenues from affiliates $ 1,436,970 $ 1,516,380 $ 1,372,211
Less: intercompany revenue (760,180) (764,015) (752,745)
----------- ----------- -----------
Total revenues 676,790 752,365 619,466
Operating expenses (1,098,153) (1,128,360) (1,051,556)
Other, net (5,594) 660 3,827
----------- ----------- -----------
Net loss $ (426,957) $ (375,335) $ (428,263)
=========== =========== ===========
December 31,
-----------------------------
1998 1997
----------- -----------
BALANCE SHEET INFORMATION:
Current assets $ 1,814,625 $ 1,483,678
Less: intercompany elimination (1,413,971) (1,362,693)
----------- -----------
Total assets $ 400,654 $ 120,985
=========== ===========
Current liabilities $ 48,342 $ 50,619
----------- -----------
Total liabilities $ 48,342 $ 50,619
=========== ===========
37
- 6 -
4. PROPERTY AND EQUIPMENT:
December 31,
----------------------------
1998 1997
----------- -----------
Land and buildings $ 2,161,451 $ 2,067,350
Distribution plant 83,188,349 62,051,468
Other equipment 4,332,951 3,893,401
Leasehold improvements 32,033 46,170
Construction-in-progress 309,725 211,320
----------- -----------
$90,024,509 $68,269,709
=========== ===========
5. ACCRUED EXPENSES:
December 31,
--------------------------
1998 1997
---------- ----------
Programmer license fees $2,408,360 $1,242,544
Franchise fees 1,179,518 726,058
Interest 1,356,132 1,391,239
Taxes 285,111 212,729
Payroll 264,191 210,798
Pole rental 176,576 171,858
Other 580,939 636,384
---------- ----------
$6,250,827 $4,591,610
========== ==========
6. NOTES PAYABLE:
December 31,
------------------------------
1998 1997
------------ ------------
Revolving credit and term loan amended in 1997 $ 77,340,000 $ 7,822,221
Senior subordinated notes 100,000,000 100,000,000
Other -- 140,292
------------ ------------
177,340,000 107,962,513
Less-current portion 2,250,000 1,140,292
------------ ------------
$175,090,000 $106,822,221
============ ============
38
- 7 -
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 8.42% (weighted average). Graduated principal and
interest payments are due quarterly until maturity on December 31, 2005. 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. As of December
31, 1998, $15,236,000 was available to borrow by the Company under the revolving
credit facility.
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. As of December 31, 1998, the Company was
in compliance with the terms of the loan agreement.
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, 1998, was $106,000,000, based on available market information.
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. As of December 31, 1998, the Company was in compliance with the terms
of the Notes.
39
- 8 -
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, 1998 based on amounts
outstanding at December 31, 1998 are as follows:
1999 $ 2,250,000
2000 3,000,000
2001 7,000,000
2002 11,000,000
2003 14,750,000
Thereafter 139,340,000
------------
$177,340,000
============
Interest Rate Swap Agreements
The Company has entered into interest rate swap agreements to reduce the impact
of changes in interest rates. Interest rate swap transactions generally involve
the exchange of fixed and floating interest payment obligations without exchange
of underlying principal amounts. At December 31, 1998, the Company had
outstanding two interest rate swap agreements with its bank, having a notional
principal amount of $71,000,000. These agreements effectively change the
Company's interest rate exposure to fixed rate of 5.70% (weighted average), plus
an applicable margin based on certain financial covenants (the margin at
December 31, 1998 was 2.75%).
Maturity Date Fixed Rate Notional Amount
------------- ---------- ---------------
December 31, 2000 5.78% $64,000,000
December 4, 2000 4.98% $ 7,000,000
At December 31, 1998, the Company would have been required to pay approximately
$860,254 to settle this agreement based on fair value estimate received from the
financial institution.
40
- 9 -
7. OTHER, NET:
Other, net in other income (expense) in the consolidated statements of
operations consists of:
For the Years Ended
December 31,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
GAIN (LOSS) ON DISPOSAL OF ASSETS $ 5,093,997 $ 76,311 $ (365,614)
INTEREST INCOME 135,895 29,166 54,331
OTHER (17,946) (4,652) (27,638)
----------- ----------- -----------
$ 5,211,946 $ 100,825 $ (338,921)
=========== =========== ===========
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,
-------------------------------
1998 1997
------------ ------------
DEFERRED TAX ASSETS:
Net operating loss carryforward
$ 15,402,000 $ 13,056,000
Valuation allowance (12,002,000) (8,686,000)
------------ ------------
3,400,000 4,370,000
DEFERRED TAX LIABILITIES:
Property and equipment 3,400,000 4,370,000
------------ ------------
$ -- $ --
============ ============
The federal income tax net operating loss carryforward of approximately
$34,110,000 expires beginning in the years 2003 through 2018. Management
believes that the available objective evidence creates sufficient uncertainty
regarding the
41
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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 $3,112,000, $2,000,000 and $1,456,000 for the years
ended December 31, 1998, 1997 and 1996, 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 $896,711, $601,103, $439,261 in 1998, 1997 and 1996,
respectively. Minimum lease payments to the end of the lease terms are as
follows:
1999 $ 97,183
2000 73,539
2001 68,521
2002 64,012
2003 64,092
Thereafter 102,872
--------
$470,219
========
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) and no more than $250
million in annual revenue. NCTV qualifies as a small cable company and all but
two 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
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.
42
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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 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 years ended December 31, 1998 and 1997, the Company was charged
$76,090 and 55,526, respectively, by the fund. As of December 31, 1998, the fund
had a balance of $249,617.
10. ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS:
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 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.
On January 2, 1998, the Company acquired substantially all operating assets and
franchise rights of cable television systems serving approximately 35,700 basic
subscribers in or around the communities of Aiken, Greenwood, Saluda, Ware
Shoals,
43
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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. The remaining balance of $344,255 held in escrow
was paid in June 1998 once agreement was reached regarding certain purchase
price adjustments. The Acquisition was financed through borrowings under the
senior credit facility.
On May 15, 1998, the Company sold all of its cable operations in the state of
Oregon (the "Woodburn System") to North Willamette Telecom, Inc. The net
proceeds from the sale of the system were approximately $6,875,000, of which
$6,424,000 was utilized to reduce amounts outstanding under the Senior Credit
Facility. The Woodburn System served approximately 4,300 basic subscribers.
On December 1, 1998, the Company acquired the operating assets and franchise
rights to cable systems serving approximately 5,100 basic subscribers in the
communities of Mt. Shasta, McCloud, Weed and Dunsmuir, California, located in
Shasta and Siskiyou Counties (the "Mt. Shasta System") from MediaOne Group, Inc.
The systems were acquired at a purchase price of $7,605,000 adjusted at closing
for the proration of certain revenues and expenses. Of the total purchase price
the Sellers received $7,580,769 on December 1, 1998. The acquisition was
financed through borrowings under the Senior Credit Facility.
Pro forma operating results (unaudited) of the Company for 1998 and 1997,
assuming the acquisitions and sales described above had been made at the
beginning of 1997, follow:
For the years ended
December 31,
-------------------------------
1998 1997
------------ ------------
(unaudited) (unaudited)
Service revenues $ 57,191,047 $ 54,841,278
============ ============
Net loss $ (8,037,644) $(12,550,449)
============ ============
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EXHIBITS INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
27.0 Financial Data Schedule _________
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