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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, 2000
[ ] 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.
--------------------------------
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1311836
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(State or other jurisdiction of incorporation or organization (I.R.S. Employer Identification No.)
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1638891
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
3600 WASHINGTON MUTUAL TOWER
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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
Securities registered pursuant to including Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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(NONE) (NONE)
Securities registered pursuant to Section 12(g) of the Act:
10 1/4% SENIOR SUBORDINATED NOTES DUE 2007
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(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 39 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 specialized in providing cable television and related
services in non-urban markets since 1981. Other subsidiaries of NTC include:
NORTHLAND COMMUNICATIONS CORPORATION ("NCC") - formed in March
1981 and principally involved in the ownership and management of
cable television systems. NCC is the sole shareholder of Northland
Cable Properties, Inc.
NORTHLAND CABLE PROPERTIES, INC. ("NCPI") - formed in
February 1995 and principally involved in the direct
ownership of local cable television systems. At December
31, 1999, NCPI is the majority 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 ("NCSC") - 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 and is the 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 from an
affiliate 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. The Company has increased its basic and premium
subscribers through strategic acquisitions, selective system upgrades and
extensions of its cable systems. As of December 31, 2000, the total number of
basic subscribers served by the Systems was 124,294, and the Company's
penetration rate (basic subscribers as a percentage of homes passed) was
approximately 63%.
The Company has 90 non-exclusive franchises to operate the Systems. These
franchises, which will expire at various dates through 2022, have been granted
by local and county authorities in the areas in which the Systems operate.
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 are as
of December 31, 2000.
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)(6)
------ --------- ----------- ----------- ----------- -------- ----------- ---------- ------
So. Carolina
/Georgia........ 95,825 60,064 62.7% 48.3% 20,241 33.7% $41.65 44.5%
Washington...... 34,925 24,702 70.7% 19.9% 5,812 23.5% $39.41 42.8%
Texas........... 47,948 27,765 57.9% 22.3% 7,926 28.5% $39.21 44.3%
California...... 19,090 11,763 61.6% 9.5% 4,331 36.8% $37.64 41.0%
------ ------ ---- --- ----- ---- ------ ----
Total Systems... 197,788 124,294 62.8% 100.0% 38,310 30.8% $40.28 43.8%
(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 nine headends serving 60,064 subscribers. Four headends, located in
Aiken, Greenwood and Clemson, South Carolina and Statesboro, Georgia, serve
55,098 subscribers or 91.7% 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 15,161
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 12,633 subscribers,
and is in the final stages of a 450 MHz upgrade project. Approximately
80% of the subscribers are served by plant with 450 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. The Company
began offering digital television service in the Clemson system during
2000. Additionally, the Clemson area systems 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 18,128 subscribers
from three headends. The Aiken headend serves 89.2% 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, 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.
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Greenwood, South Carolina. The Greenwood area systems serve 17,958
subscribers from two headends. The Greenwood headend serves 97.3% of the
subscribers and has a minimum of 400 MHz channel capacity. The Company
began the upgrade of the Greenwood system to 550 MHz capacity in 2000.
Although this system employed fiber optic technology, the Company has
constructed an expansion of the fiber optic backbone designed to support
860 MHz capacity. Additionally, a fiber optic backbone interconnect was
constructed to the Saluda and Edgefield systems for future system upgrade
and connection. The Greenwood area has a diversified industrial base
consisting of local, national and foreign manufacturing companies
covering such diverse industries such as pharmaceuticals, photo film
textiles, industrial robotics, gardening seeds and prefabricated homes.
The Company owns all three of its headend sites.
Statesboro, Georgia. The Statesboro system serves 8,817 subscribers from
a single headend with approximately 90% of the subscribers served by 450
MHz channel capacity. Continued construction of a fiber backbone with
ability to deliver 860 MHz of bandwidth is underway. The Company began
offering digital television service in the Statesboro system during 2000.
The Statesboro system has a strong advertising sales effort and its
office and headend site are owned by the Company. Statesboro is home to
Georgia Southern University.
The Washington Region. The Washington Region serves 24,702 subscribers
from six headends and is operated from three offices located in Port Angeles,
Bainbridge Island, and Moses Lake, Washington. The three largest headends serve
20,067 subscribers, or 81.2% of the Company's total subscribers in the region.
Port Angeles, Washington. The Port Angeles system serves 7,257
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 550 MHz upgrade is planned to begin in early
2002. The Company began offering digital television service in the Port
Angeles system during 2000. 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 6,747
subscribers from two headends. Although physically close to Seattle,
hilly terrain makes for poor off-air reception in many areas of the
island. The construction of a fiber optic backbone designed to support a
750 MHz capacity is 80% accomplished, with completion expected by mid
2002. A 550 MHz upgrade is now complete. The Company began offering
digital television service in the Bainbridge Island system in 2000. The
system's combination office and headend site is owned.
Moses Lake, Washington. The Moses Lake area systems serve 10,698
subscribers from three headends. The Moses Lake headend serves 60.8% of
the subscribers and was recently upgraded to 450 MHz channel capacity
which included the expansion of the fiber optic backbone designed to
support a 750 MHz capacity. The Company launched a new product digital
tier in the fourth quarter of 1999 that it believes will enhance the
financial performance of that system. In addition to the 53 analog
channels, 103 digital channels were added including, 17 basic, 14 pay, 32
pay-per-view, and 40 audio. 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. An upgrade of the Othello system to 450 MHz was recently
completed. The Ephrata system is intended to be upgraded to 550 MHz
capacity by year-end 2002.
The Texas Region. The Texas Region is characterized by smaller systems,
with 17 headends serving 27,765 subscribers. Two of the region's headends were
interconnected in 2000. Seven headends currently serve 78.2% of the subscribers.
Additionally, the Company's management structure allows it to achieve operating
efficiencies, as only five local offices are required to service the region.
Stephenville, Texas. The Stephenville area systems serve 6,330
subscribers from a cluster of four headends. Stephenville is home to
Tarleton State College, an affiliate of Texas A&M University.
Approximately 94.4% of the subscribers currently are served by plant with
400 MHz or better 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 8,345 subscribers from a
cluster of seven headends, with the two largest headends, Mexia and
Fairfield/Teague, serving 70.4% of the subscribers. Approximately 70.6%
of subscribers currently are serviced by plant with 400 MHz capacity,
with the Mexia headend utilizing a fiber optic backbone. The Mexia area
has a diversified economy with Nucor Steel, Inc. as a major employer.
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Marble Falls, Texas. The Marble Falls area systems serve 8,068
subscribers from a cluster of three headends. In June 2000 the Company
completed a fiber optic interconnect of the Burnet system to the Marble
Falls system, thereby eliminating an additional headend. With the
completion of the Burnet interconnect, approximately 79.6% of the
subscribers in the area are served from a single headend. The combination
office and headend site in Marble Falls is owned by the Company. Over the
next three to five years the remaining systems in the Marble Falls area
are scheduled to be upgraded to 400 MHz or 550 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 5,022 subscribers,
with all of the subscribers served by plant with 330 MHz capacity or
better.
The California Region. The California Region serves 11,763 subscribers
from seven headends, which are operated from three offices located in Yreka,
Oakhurst and Mount Shasta, California. Three headends serve 10,189 subscribers
or 86.6% 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
4,353 subscribers from a cluster of five headends. The Oakhurst headend
serves 63.8% of the subscribers in the area. An upgrade of the Oakhurst
system to 450 MHz capacity is in process, and 90.0% of Oakhurst system's
subscribers are served by 450 MHz capacity plant. The entire Oakhurst
system upgrade will be completed by 2002. 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 3,097 subscribers from a single headend. Yreka is
the county seat of Siskiyou County. The Yreka system currently has a
minimum of 330 MHz capacity. An upgrade of the system to 450 MHz capacity
is in process with completion projected by year-end 2003. The Yreka
office and headend sites are owned by the Company.
Mount Shasta, California. The Mount Shasta, California system, serves
4,313 subscribers from a primary headend and is located in close
proximity to the Company's Yreka system. The system sits at the base of
14,162 foot Mt. Shasta, which attracts tourists year round with skiing,
hiking and golf courses nearby. The communities of Mount Shasta, Dunsmuir
and Weed are connected by fiber optic backbone and the community of
McCloud is connected via AML microwave. Portions of the system serving
approximately 85% of the subscribers are currently at 330 MHz capacity
with the remaining 15% at 450 MHz. The completion of an upgrade to 550
MHz is planned by year end 2003. The Company began offering digital
television service in the Mount Shasta system in 2000. 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, 2000, the Company had approximately 196 full-time
employees and 7 part-time employees. Eleven 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 generally 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 four categories:
basic subscribers, expanded basic subscribers, premium subscribers, and digital
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. "Expanded basic subscribers" are households that
subscribe to an additional level of programming service, the content of which
varies from system to system. "Premium subscribers" are households that
subscribe to one or more "pay channels" in addition to the basic service. These
pay channels include such services as Showtime, Home Box Office, Cinemax, The
Movie Channel, Encore and Starz. "Digital subscribers" are those who subscribe
to digitally delivered video and audio services where offered.
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COMPETITION
Cable television systems currently experience competition from several
sources, including broadcast television, cable overbuilds, direct broadcast
satellite services, private cable and multichannel multipoint distribution
service systems. 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. The following provides a summary description of these sources of
competition.
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 this competition is dependent in part upon the quality and
quantity of signals available by antenna reception as compared to the services
provided by the local cable system. Accordingly, cable operators find it less
difficult 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. The recent licensing of digital spectrum by the FCC will provide
incumbent broadcast licenses with the ability to deliver high definition
television pictures and multiple digital-quality program streams, as well as
advanced digital services such as subscription video.
OVERBUILDS
Cable television franchises are not exclusive, so that more than one
cable television system may be built in the same area. This is known as an
"overbuild." Overbuilds have the potential to result in 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 such
as headends, trunk lines and drops to individual subscribers homes throughout
the franchise 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. See "Regulation and Legislation"
below. It is therefore 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.
DIRECT BROADCAST SATELLITE SERVICE
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. The two leading DBS providers have
experienced dramatic growth over the last several years and together now serve
over 10 million customers nationwide. Companies offering direct broadcast
satellite service use video compression technology to increase channel capacity
of their systems to more than 100 channels and to provide packages of movies,
satellite networks and other program services which are competitive to those of
cable television systems. DBS companies historically faced significant legal and
technological impediments to providing popular local broadcast programming to
their customers. Recent federal legislation reduced this competitive
disadvantage. Nevertheless, technological limitations still affect DBS
companies, and it is expected that DBS companies will offer local broadcast
programming only in the top 50 to 100 U.S. markets for the foreseeable future.
The same legislation reduced the compulsory copyright fees paid by DBS companies
and allowed them to continue offering distant network signals to rural
customers. The availability of low or no cost DBS equipment, delivery of local
signals in some markets and exclusivity with respect to certain sports
programming has increased DBS's market share over recent years. The impact of
DBS services on the Company's market share within its service areas cannot be
precisely determined but is estimated to have taken away between 2% and 6%
depending upon the specific area.
PRIVATE CABLE
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Additional competition is provided by private cable television systems,
known as satellite master antenna television, 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 these private complexes. Operators of private cable,
which do not cross public rights of way, are free from the federal, state and
local regulatory requirements imposed on franchised cable television operators.
MULTICHANNEL MULTIPOINT DISTRIBUTION SERVICE SYSTEMS
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service systems, commonly
called wireless cable, which are licensed to serve specific areas. Multichannel,
multipoint distribution service systems use low-power microwave frequencies to
transmit television programming over-the-air to paying subscribers. This
industry is less capital intensive than the cable television industry, and it is
therefore more practical to construct systems using this technology in areas of
lower subscriber penetration.
REGULATION AND LEGISLATION
SUMMARY
The following summary addresses the key regulatory developments and
legislation affecting 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 Partnership 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.
The operation of a cable system is extensively regulated at the federal,
local, and, in some instances, state levels. The Cable Communications Policy Act
of 1984, the Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), and the 1996 Telecommunications Act (the "1996 Telecom
Act", and, collectively, the "Cable Act") establish a national policy to guide
the development and regulation of cable television systems. The Federal
Communications Commission ("FCC") has principal responsibility for implementing
the policies of the Cable Act. Many aspects of such regulation are currently the
subject of judicial proceedings and administrative or legislative proposals.
Legislation and regulations continue to change, and the Company cannot predict
the impact of future developments on the cable television industry. Future
regulatory and legislative changes could adversely affect the Company's
operations.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry, which limited the ability of cable companies to
increase subscriber fees. Under that regime, all cable systems were 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 requiring satisfaction of conditions rarely
satisfied in the current marketplace.
Although the FCC established the underlying regulatory scheme, local
government units, commonly referred to as local franchising authorities, are
primarily responsible for administering the regulation of the lowest level of
cable service called the basic service tier. The basic service tier typically
contains local broadcast stations and public, educational, and government access
channels. Local franchising authorities 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. Before a local franchising authority begins basic
service rate regulation, it must certify to the FCC that it will follow
applicable federal rules. Many local franchising authorities have voluntarily
declined to exercise their authority to regulate basic service rates.
As of December 31, 2000, approximately 13% of the Company's local
franchising authorities were certified to regulate basic tier rates. The 1992
Cable Act permits communities to certify and regulate rates at any time, so that
it is possible that additional localities served by the systems may choose to
certify and regulate rates in the future.
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The FCC itself historically administered rate regulation of cable
programming service tiers, which represent the expanded level of non "basic" and
non-"premium", programming services. The 1996 Telecom Act, however, provided
special rate relief for small cable operators offering cable programming service
tiers. The elimination of cable programming service tier regulation afforded the
Company substantially greater pricing flexibility.
Under the rate regulations of the FCC, most cable systems were required
to reduce their basic service tier and cable programming service tier 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 to bypass this "benchmark" regulatory scheme
in favor of traditional "cost-of-service" regulation in cases where the latter
methodology appears favorable. Cost of service regulation is a traditional form
of rate regulation, under which a utility is allowed to recover its costs of
providing the regulated service, plus a reasonable profit.
In a particular effort to ease the regulatory burden on small cable
systems, the FCC created special rate rules applicable for systems with fewer
than 15,000 subscribers owned by an operator with fewer than 400,000
subscribers. The special rate rules allow for a simplified cost-of-service
showing. With the exception of the Greenwood, South Carolina System, all of the
Company's systems are eligible for these simplified cost-of-service rules, and
have calculated rates generally in accordance with those rules.
Under the FCC's rate rules, 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. However,
federal law requires that the basic service tier be offered to all cable
subscribers and limits the ability of operators to require purchase of any cable
programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis, subject to a technology exception
which sunsets in 2002. 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.
Regulation by the FCC of cable programming service tier rates for all
systems, regardless of size, sunset pursuant to the 1996 Telecom Act on March
31, 1999. Certain legislators, however, have called for new rate regulations.
Should this occur, all rate deregulation, including that applicable to small
operators like the Company, could be jeopardized.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom Act creates a more favorable environment for the Company
to provide telecommunications services beyond traditional video delivery. It
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. A cable operator is authorized under the 1996
Telecom Act to provide telecommunications services without obtaining a separate
local franchise. States are authorized, however, to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality, and consumer protection. State and local governments also
retain their authority to manage the public rights-of-way and may require
reasonable, competitively neutral compensation for management of the public
rights-of-way when cable operators provide telecommunications service.
The 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. The FCC recently clarified that a cable
operator's favorable pole rates are not endangered by the provision of Internet
services, but the U.S. Court of Appeals for the 11th Circuit recently ruled in
Gulf Power Co. v. FCC, 208F.3d 1263 (11th Cir. 2000) ("Gulf Power") that the FCC
has no authority to regulate pole rents for cable systems providing Internet
services (because, the court ruled, Internet services are not telecommunications
services or cable services). The court subsequently stayed the issuance of the
mandate in Gulf Power pending the filing of and final action on a petition for
write of certiorari seeking review of the Gulf Power decision in the U.S.
Supreme Court. The stay allows for the orderly review of the decision in the
U.S. Supreme Court. In the interim, the FCC may continue to process pending pole
attachment complaints under its existing rules and procedures. If the 11th
Circuit decision goes into effect, it could significantly increase pole
attachment rates and adversely impact cable operators.
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
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(including cable operators) is the interconnection obligation imposed on all
telecommunications carriers. The Supreme Court effectively upheld most of the
FCC interconnection regulations, but recently the 8th Circuit Court of Appeals
vacated other portions of the FCC's rules on slightly different grounds. More
recently, the 9th Circuit Court of Appeals ruled in the FCC's favor on these
same rules, creating a split in authority that may be resolved by the Supreme
Court. Although these regulations should enable new telecommunications entrants
to reach viable interconnection agreements with incumbent carriers, many issues,
including which specific network elements the FCC can mandate that incumbent
carriers make available to competitors, remain unresolved.
Similarly, if another FCC decision requiring that incumbent telephone
companies permit co-location of competitors' equipment on terms more favorable
to competitors is sustained on administrative and judicial appeal, this
decision, too, would make it easier for new entrants, including the Partnership,
to provide telecommunications service.
INTERNET SERVICE
There is at present no significant federal regulation of cable system
delivery of Internet services. Furthermore, the FCC recently issued several
reports finding no immediate need to impose this type of regulation. However,
this situation may change as cable systems expand their broadband delivery of
Internet services. In particular, proposals have been advanced at the federal
level that would require cable operators to provide access to unaffiliated
Internet-service providers and online service providers. In one instance, the
Federal Trade Commission is considering whether and to what extent to impose, as
a condition of Time Warner's merger with America Online, certain "open access"
requirements on Time Warner's cable systems, thereby allowing unaffiliated
Internet-service providers access to Time Warner's broadband distribution
infrastructure.
Some local franchising authorities unsuccessfully tried to impose
mandatory Internet access or "open access" requirements as part of cable
franchise renewals or transfers. In AT&T Corp v. City of Portland, No. 99-35609
(9th Cir., June 22, 2000), the federal Court of Appeals for the Ninth Circuit
overturned a federal district court in Portland, Oregon's ruling that local
franchising authorities have the lawful authority to impose these type of
conditions. The lower court had ruled that the City of Portland had inherent
authority to require, as a condition of the City's consent to the transfer of
TCI's cable franchise to AT&T, that AT&T provide "open access" to the "cable
modem platform" of the Excite@Home Internet service. On appeal, the Court of
Appeals rejected the City's attempt to impose "open access" conditions on AT&T
delivery of Internet service over the cable system because that service,
according to the Court, is not a cable service, but a "telecommunications
service." The potential regulatory state and federal implications of this
rationale are unclear, given the various regulatory requirements for the
provision of telecommunications services. There have been at least two
additional court rulings that have rejected local imposition of "open access"
conditions on cable-provided Internet access, but those ruling have employed
very different legal reasoning. A federal court in Virginia found that Internet
service was a cable service, but as such was exempt from local "open access"
regulation. Another federal court in Florida even more recently ruled that "open
access" could not be imposed on local operators because doing so would violate
the First Amendment. Other local authorities have imposed or may impose
mandatory Internet access requirements on cable operators. These developments
could, if they become widespread, burden the capacity of cable systems and
complicate any plans the Company may have to develop for providing Internet
service.
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, including the regional telephone
companies, can now compete with cable operators both inside and outside their
telephone service areas with certain regulatory safeguards. Because of their
resources, local exchange carriers could be formidable competitors to
traditional cable operators. Various local exchange carriers currently are
providing video programming services within their telephone service areas
through a variety of distribution methods, including both the deployment of
broadband wire facilities and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers providing video
programming should be regulated as a traditional cable operator, subject to
local franchising and federal regulatory requirements, unless the local exchange
carrier elects to deploy its plant as an open video system. To qualify for
favorable open video system status, the competitor must reserve two-thirds of
the system's activated channels for unaffiliated entities. The Fifth Circuit
Court of Appeals reversed certain of the FCC's open video system rules,
including its preemption of local franchising. The FCC recently revised its OVS
rules to eliminate this general preemption, thereby leaving franchising
discretion to local and state authorities. It is unclear what effect this ruling
will have on the entities pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Cable operator
buyouts of co-located
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local exchange carrier systems, and joint ventures between cable operators and
local exchange carriers in the same market also are prohibited. 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.
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 Utility Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several of these utilities have been granted broad authority by the FCC to
engage in activities which could include the provision of video programming.
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 Cable Act leaves in
place existing restrictions on cable cross-ownership with satellite master
antenna television and multichannel multipoint distribution service facilities,
but lifts those restrictions where the cable operator is subject to effective
competition. FCC regulations permit cable operators to own and operate satellite
master antenna television systems within their franchise area, provided that
their operation is consistent with local cable franchise requirements.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements.
Broadcast signal carriage is the transmission of broadcast television signals
over a cable system to cable customers. These requirements, among other things,
allow local commercial television broadcast stations to elect once every three
years between a "must carry" status or a "retransmission consent" status. Less
popular stations typically elect must carry, which is the broadcast signal
carriage requirement that allows local commercial television broadcast stations
to require a cable system to carry the station. Must carry requests can dilute
the appeal of a cable system's programming offerings because a cable system with
limited channel capacity may be required to forego carriage of popular channels
in favor of less popular broadcast stations electing must carry. More popular
stations, such as those affiliated with a national network, typically elect
retransmission consent, which is the broadcast signal carriage rule that allows
local commercial television broadcast stations to negotiate terms (such as
mandating carriage of an affiliated cable network) for granting permission to
the cable operator to carry the stations. Retransmission consent demands may
require substantial payments or other concessions.
The Company has been able to reach agreements with all of the
broadcasters who elected retransmission consent. To date, compliance with the
"retransmission consent" and "must carry" provisions of the 1992 Cable Act has
not had a material effect on the Company, although these provisions may affect
the operations of the Company in the future, depending on factors as market
conditions, the introduction of digital broadcasts, channel capacity and similar
matters when these arrangements are negotiated or renegotiated.
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 broadcasts in
their entirety. This burden would reduce capacity available for more popular
video programming and new Internet and telecommunication offerings. The
broadcast industry continues to press the FCC on the issue of digital must
carry. A rulemaking regarding must carry obligations during the transition from
analog to digital broadcasting remains pending at the FCC. It remains unclear
when a final decision will be released.
ACCESS CHANNELS
Local franchising authorities 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 commercial leased access use. The Company believes that requests for
commercial leased access carriages have been relatively limited.
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ACCESS TO PROGRAMMING
To spur the 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 their cable operators
over new competitors and requires these 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 also has been interest expressed in
further restricting the marketing practices of cable programmers, including
subjecting programmers who are not affiliated with cable operators or
programmers who deliver their service by terrestrial means (rather than by
satellite) to the program access requirements. These changes should not have a
dramatic impact on the Company, but would limit potential competitive advances
the Company enjoys.
INSIDE WIRING; SUBSCRIBER ACCESS
In an order issued in 1997, the FCC established rules that require an
incumbent cable operator upon expiration of a multiple dwelling unit service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a multiple dwelling unit building. These inside wiring rules
are expected to assist building owners in their attempts to replace existing
cable operators with new programming providers who are willing to pay the
building owner a higher fee, where this fee is permissible. The FCC has also
proposed abrogating all exclusive multiple dwelling unit service agreements held
by incumbent operators.
With limited exceptions, existing FCC regulations prohibit any state or
local law or regulations, or private covenant, private contract, lease
provision, homeowners' association rule or similar restriction, impairing the
installation, maintenance or use of certain video reception antennas on property
within the exclusive control of a tenant or property owner.
OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION
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 cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
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- 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 ruled that cable customers must be allowed to purchase
cable converters from third parties and established a multi-year phase-in during
which security functions, which would remain in the operator's exclusive
control, would be unbundled from basic converter functions, which could then be
satisfied by third party vendors.
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, cable operators can obtain blanket permission to
retransmit copyrighted material included in broadcast signals. Effective July 1,
2000, the federal Copyright Office increased the cable compulsory license rates
used to calculate cable systems' copyright payments under the cable compulsory
license. 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. The
outcome of this legislative activity cannot be predicted. Copyright clearances
for nonbroadcast programming services are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers (ASCAP)
and BroadcastMusic, Inc. (BMI). The cable industry has had a long series of
negotiations and adjudications with both organizations. A prior voluntarily
negotiated settlement with BMI has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for ASCAP music based on the previously negotiated BMI
rate. Although the Company cannot predict the ultimate outcome of these industry
proceedings or the amount of any license fees that they may be required to pay
for past and future use of association-controlled music, the Company does not
believe these license fees will be significant to their business and operations.
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 local
franchising 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 specific terms and
conditions of franchises vary materially between jurisdictions. Each franchise
generally contains provisions governing cable operations, service rates,
franchising 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 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 local
franchising authorities have considerable discretion in establishing franchise
terms, there are certain federal limitations. For example, local franchising
authorities cannot insist on franchise fees exceeding 5% of the system's gross
cable-
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related revenues, cannot dictate the particular technology used by the system,
and cannot specify video programming other than identifying broad categories of
programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, the local franchising authority may attempt to impose more burdensome
or onerous franchise requirements in connection with a request for consent. The
Cable Act requires franchising authorities to act on any franchise transfer
request within 120 days after receipt by the franchising authority of all
information required by FCC regulations. Approval is deemed to be granted if the
franchising authority fails to act within such 120-day period. Historically,
most of the Company's franchises have been renewed and transfer consents
granted.
Under the 1996 Telecom Act, local franchising authorities are prohibited
from limiting, restricting, or conditioning the provision of competitive
telecommunications services except for certain "competitively neutral"
requirements necessary to manage public rights of way. In addition, local
franchising authorities may not require the Company to provide any
telecommunications service or facilities, other than institutional networks
under certain circumstances, as a condition of an initial cable franchise grant,
franchise renewal, or franchise transfer. The 1996 Telecom Act also provides
that franchising fees are limited to an operator's cable-related revenues and do
not apply to revenues that the Company derives from providing new
telecommunications services.
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.
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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, 2000.
(c) During 2000, the Company did not pay cash dividends and has no
intentions of paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
SUMMARY OF OPERATIONS:
Revenue $ 60,507,984 $ 58,848,415 $ 56,002,667 $ 39,517,808 $ 33,180,477
Operating income 6,376,758 6,561,172 4,655,761 4,588,563 4,373,211
Net loss (14,268,443) (11,776,281) (7,758,291) (5,550,635) (4,229,028)
DECEMBER 31,
---------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA:
Total assets $ 135,997,674 $ 141,985,167 $ 156,586,254 $ 92,421,978 $ 91,599,263
Notes payable 182,540,000 175,090,000 177,340,000 107,962,513 102,154,732
Total liabilities 192,022,121 183,741,171 186,565,977 114,643,410 117,608,253
Shareholder's deficit (56,024,447) (41,756,004) (29,979,723) (22,221,432) (26,008,990)
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
2000 AND 1999
Basic subscribers decreased 2,228 or 1.8%, from 126,522 to 124,294 for
the year ended December 31, 2000.
Revenues increased $1.7 million or 2.9%, from $58.8 million to $60.5
million in 2000. Average monthly revenue per basic subscriber increased $1.82 or
4.7%, from $38.46 to $40.28 for the year ended December 31, 2000. Such increase
was attributable to: (i) rate increases implemented in a majority of the
Company's systems during the year; (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 $1.56 or 5.6%, from $27.84 to $29.40 for the
year ended December 31, 2000. On a pro forma basis, adjusting for the 2000
acquisition of the Kingston System: (i) revenues would have increased $1.2
million or 2.0%, from $59.5 million to $60.7 million; and (ii) revenue per
average basic subscriber would have increased $1.30 or 4.6%, from $28.20 to
$29.50.
Operating expenses, which include costs related to programming, technical
personnel, repairs and maintenance and advertising sales, increased
approximately $1.7 million or 8.8%, from $19.3 million to $21.0 million for the
year ended
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December 31, 2000. Operating expenses as a percentage of revenues increased from
32.8% to 34.7% for the year ended December 31, 2000. Such increase is primarily
attributable to: (i) annual wage and benefit increases; (ii) higher programming
costs resulting from rate increases by certain programming vendors and the
launch of new programming services in various systems; (iii) higher advertising
sales commissions and agency fees resulting from increases in advertising
revenues; and (iv) expenses associated with the Kingston system acquisition.
General and administrative expenses, which include on-site office and
customer service personnel costs, customer billing, postage and marketing
expenses and franchise fees decreased approximately $400,000 or 3.7%, from $10.7
million to $10.3 million for the year ended December 31, 2000. The results are
due to decreases in expenses associated with accounting, legal and
administrative services.
Management fees increased $100,000 or 3.4%, from $2.9 million to $3.0
million for the year ended December 31, 2000. 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 approximately $500,000 or
2.6%, from $19.3 million to $19.8 million for the year ended December 31, 2000.
Such increase is attributable to depreciation of recent equipment purchases in
upgrading plant and equipment.
Interest expense increased approximately $600,000 or 3.4%, from $17.8
million to $18.4 million for the year ended December 31, 2000. The Company's
weighted average outstanding indebtedness increased from approximately $176.5
million in 1999 to $178.9 million in 2000. In addition, the Company's weighted
average interest rate increased from approximately 9.46% in 1999 to 9.93% in
2000.
1999 AND 1998
Basic subscribers decreased 2,425 or 1.9% from 128,947 to 126,522 for the
year ended December 31, 1999.
Revenues increased $2.8 million or 5.0% from $56.0 million to $58.8
million in 1999. The increase was primarily attributable to the Mount Shasta
acquisition, which accounted for approximately $1.9 million of the 1999 revenue
increase. Average monthly revenue per basic subscriber increased $1.65 or 4.5%
from $36.81 to $38.46 for the year ended December 31, 1999. Such increase was
attributable to: (i) rate increases implemented in a majority of the Company's
systems during the year; (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 $1.31 or 4.9% from $26.53 to $27.84 for the
year ended December 31, 1999. On a pro forma basis, adjusting for 1998
acquisitions and dispositions; (i) revenues would have increased $1.7 million or
3.0%, from $57.1 million to $58.8 million; and (ii) revenue per average basic
subscriber would have increased $1.81 or 4.9% from $36.65 to $38.46.
Operating expenses, which include costs related to programming, technical
personnel, repairs and maintenance and advertising sales, increased
approximately $700,000 or 3.8% from $18.6 million to $19.3 million for the year
ended December 31, 1999. Operating expenses as a percentage of revenues
decreased from 33.2% to 32.8% for the year ended December 31, 1999. The December
1998 acquisition of the Mount Shasta system increased operating expenses
approximately $700,000. On a pro forma basis, operating expenses would have
increased approximately $300,000 or 1.6% from $19.0 million to $19.3 million for
the year ended December 31, 1999. 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 $500,000 or 4.9% from $10.2
million to $10.7 million for the year ended December 31, 1999. The acquisition
of the Mount Shasta system increased general and administrative expenses
approximately $400,000. On a pro forma basis, general and administrative
expenses would have increased approximately $200,000 or 1.9% from $10.5 million
to $10.7 million for the year ended December 31, 1999. Such increase is due to:
(i) annual wage and benefit increases; and (ii) increases in revenue-based
expenses such as franchise fees.
Management fees increased $100,000 or 3.6%, from $2.8 million to $2.9
million for the year ended December 31, 1999. Such increase was directly
attributable to the revenue increases discussed above. Management fees are
5.0% of gross revenues.
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Depreciation and amortization expense decreased approximately $500,000 or
2.5% from $19.8 million to $19.3 million for the year ended December 31, 1999.
Such decrease was the result of certain assets becoming fully depreciated offset
by depreciation and amortization of recent purchases of plant and equipment.
Interest expense increased approximately $200,000 or 1.1% from $17.6
million to $17.8 million for the year ended December 31, 1999. The Company's
weighted average outstanding indebtedness increased from approximately $171.7
million in 1998 to $176.5 million in 1999. In addition, the Company's weighted
average interest rate decreased from approximately 9.58% in 1998 to 9.46% in
1999.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business generally requires substantial capital for
the construction, expansion, improvement 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, 1998, 1999 and
2000, the Company's net cash provided from operations was $9.6 million, $8.1
million and $8.8 million, respectively, all of which were sufficient to meet the
Company's debt service obligations 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, 2001 are
expected to be $18.0 million. The Company anticipates that cash flow from
operations will be sufficient to service its debt through December 31, 2001. The
Company's debt service obligations for the year ended December 31, 2002 are
anticipated to be $17.4 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 $8.8 million for the year
ended December 31, 2000. Adjustments to the $14.3 million net loss for the
period to reconcile to net cash provided by operating activities consisted
primarily of $20.6 million of depreciation and amortization.
Net cash used in investing activities was $13.3 million for the year
ended December 31, 2000, and consisted primarily of $10.1 million in capital
expenditures and $3.1 million for the acquisition of the Kingston system.
Net cash provided by financing activities was $5.6 million for the year
ended December 31, 2000. The Company had $85.6 million in additions to long term
debt and made $78 million of principal payments on notes payable.
EBITDA increased approximately $300,000 or 1.2%, from $25.9 million to
$26.2 million for the year ended December 31, 2000. EBITDA margin decreased from
44.0% to 43.3% for the year ended December 31, 2000. These changes were
attributable primarily to the aforementioned increases in revenues. On a pro
forma basis, adjusting for 2000 acquisition of the Kingston system, EBITDA would
have increased approximately $200,000 or less than 1% from $26.1 million to
$26.3 million and EBITDA margin would have decreased from 43.9% to 43.3% for the
year ended December 31, 2000.
Net cash provided by operating activities was $8.1 million for the year
ended December 31, 1999. Adjustments to the $11.8 million net loss for the
period to reconcile to net cash provided by operating activities consisted
primarily of $20.3 million of depreciation and amortization.
Net cash used in investing activities was $7.2 million for the year ended
December 31, 1999, and consisted primarily of $7.1 million in capital
expenditures.
Net cash used in financing activities was $2.4 million for the year ended
December 31, 1999. The Company made $2.3 million of principal payments on notes
payable.
EBITDA increased approximately $1.5 million or 6.1%, from $24.4 million
to $25.9 million for the year ended December 31, 1999. These changes were
attributable primarily to the revenue increases in 1999. On a pro forma basis,
adjusting for 1998 acquisitions and dispositions, EBITDA would have increased
approximately $1.1 million or 4.4% from $24.8 million to $25.9 million and
EBITDA margin would have increased from 43.4% to 44.0% for the year ended
December 31, 1999.
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
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depreciation and amortization, off-set by the $5.1 million gain on disposal of
assets primarily due to 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, 1999, and consisted 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 approximately $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 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.
In November, 1997 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. Additionally, the Company has agreed to
restrictive covenants which require the maintenance of certain ratios, including
a debt to cash ratio of 6.75 to 1, amongst others. As of December 31, 2000, the
Company was in compliance with the terms of the Notes.
On August 14, 2000, the Company refinanced its existing senior bank
indebtedness (the "Revised Senior Credit Facility"). The Revised Senior Credit
Facility establishes a 364-day revolving credit loan with a term-out option in
the aggregate principal amount of $35 million, a seven-year revolving credit
loan in the aggregate principal amount of $40 million and a seven-year term loan
in the aggregate principal amount of $35 million. Amounts outstanding under the
Revised Senior Credit Facility mature on June 30, 2007. The Revised Senior
Credit Facility is collateralized by a first lien position on all present and
future assets and stock of the Company.
At the Company's election, the interest rate per annum applicable to the
Revised 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 the managing agent bank (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 the managing
agent bank, plus a borrowing margin. The applicable borrowing margins vary,
based upon the Company's leverage ratio, from 1.00% to 2.75% for LIBOR loans and
from 0.00% to 1.75% for Base Rate loans.
The Revised 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 to interest expense) of at least 1.4 to 1.0 initially, increasing
over time to 2.0 to 1.0; (B) a fixed charge coverage ratio (the rate of the
Company's Annual Operating Cash Flow to capital expenditures and principal and
interest payments) of at least 1.05 to 1.0 commencing January 1, 2003; (C) a
pro forma debt service ratio (the ratio of the Company's current Operating Cash
Flow to the Company's debt service obligations for the following twelve months)
of 1.25 to 1.0; and (D) a leverage ratio (the ratio of total Debt to Annualized
Operating Cash Flow) of not more than 6.75 to 1.0 initially, decreasing over
time to 4.5 to 1.0, amongst others. The Company expects that cash provided from
operations will be sufficient to cover its future debt service obligations and
debt covenant requirements.
At December 31, 2000, the outstanding balance under the Revised Senior
Credit Facility was $82,540,000. As of the date of this filing, interest rates
on the Revised Senior Credit Facility were as follows: $20,000,000 fixed at
9.54% under the terms of an interest rate swap agreement with the Company's
lender expiring August 30, 2002; $20,000,000 fixed at 9.62% under the terms of
an interest rate swap with the Company's lender expiring August 17, 2002; and
$42,540,000 fixed at 7.92% under the terms of
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an interest rate swap with the Company's lender expiring February 20, 2002. 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.
As of January 1, 2001, the Company implemented SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." As a result, the Company
recorded the fair value of all swap agreements on its balance sheet, based on
fair value estimates received from its financial institution. Each quarter the
change in the market value of the Company's derivatives will be recorded as
other income or expense.
Expected Maturity Date
2001 2002 2003 2004 2005 Thereafter Total
---- ---- ---- ---- ---- ----------- -----
Liabilities
Debt Maturity 0 0 5,500,000 16,500,000 15,540,000 145,000,000 182,540,000
Debt Interest Payments 18,126,222 18,126,222 17,853,147 16,760,847 15,170,061 7,199,250 93,235,749
Average Interest Rate 9.93% 9.93% 9.93% 9.93% 9.93% 9.93% 9.93%
Interest Rate Swaps
Variable to Fixed
Notional Amount 20,000,000 -- -- -- -- -- 20,000,000
Average Pay Rate* 6.87% -- -- -- -- -- 6.87%
Average Receive Rate* 6.76% -- -- -- -- -- 6.76%
Notional Amount 20,000,000 -- -- -- -- -- 20,000,000
Average Pay Rate* 6.79% -- -- -- -- -- 6.79%
Average Receive Rate* 6.76% -- -- -- -- -- 6.76%
Notional Amount 42,540,000 42,540,000
Average Pay Rate * 5.17% 5.17%
Average Receive Rate * 5.41% 5.41%
*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. The acquisition was
financed through borrowings under the senior credit facility.
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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. The acquisition
was financed through borrowings under the Senior Credit Facility.
On March 31, 2000, The Company acquired the operating assets and
franchise rights to cable systems serving approximately 1,600 basic subscribers
in the communities of Kingston and Hansville, Washington, located in Kitsap
County, from North Star Cable, Inc.. The systems were acquired at a purchase
price of $3,100,000 adjusted at closing for proration of certain revenues and
expenses. The acquisition was financed through borrowings under the Senior
Credit Facility.
CAPITAL EXPENDITURES
For the year ended December 31, 2000, the Company had capital
expenditures of $13.3 million. Capital expenditures included: (i) expansion and
improvements of cable properties including new product digital launches; (ii)
additions to plant and equipment; (iii) maintenance of existing equipment; (iv)
cable line drops and extensions and installations of cable plant facilities; (v)
vehicle replacements; and (vi) the acquisition of the Kingston system.
The Company plans to invest approximately $9.6 million and $10.3 million in
capital expenditures for 2001 and 2002, respectively. This represents
anticipated expenditures for upgrading and rebuilding certain distribution
facilities, new product digital launches, extensions of distribution facilities
to add new subscribers, vehicle replacements and general maintenance. To fund
planned 2001 capital expenditures the Company plans to utilize approximately
$5.3 million of cash flow from operations, borrow approximately $3.0 million
from it's Senior Credit Facility and defer approximately $1.3 million in
management fees payable to its parent.
YEAR 2000 READINESS DISCLOSURE
The efficient operation of the Company's business is dependent in part on
its computer software programs and operating systems. These programs 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. We experienced no material
issues or problems arising out of the Year 2000 issues, either in connection
with our internal operations, third-party relationships or software products. We
will continue to monitor our software products to ensure no problems arise
either with regard to leap year or Year 2000 issues. We anticipate no material
additional costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Company for the years ended
December 31, 2000, 1999 and 1998 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 all but one 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............ 59 Director, Chairman of the Board and President
Richard I. Clark............ 43 Director, Vice President, Treasurer and Assistant Secretary
Gary S. Jones............... 43 Vice President and Chief Financial Officer
Richard J. Dyste............ 55 Vice President, Technical Services
R. Gregory Ferrer........... 45 Vice President and Assistant Treasurer
H. Lee Johnson.............. 57 Divisional Vice President
John E. Iverson............. 64 Director and Secretary
Matthew J. Cryan 36 Vice President, Budgets and Planning
JOHN S. WHETZELL (AGE 59). Mr. Whetzell is the founder of Northland
Communications Corporation and has been President since its inception and a
Director since March 1982. Mr. Whetzell became Chairman of the Board of
Directors in December 1984. He also serves as President and Chairman of the
Board of Northland Telecommunications Corporation and each of its subsidiaries.
He has been involved with the cable television industry for over 26 years.
Between March 1979 and February 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 Federal Communications Commission (FCC)
from May 1974 to February 1979. He provided economic studies to support the
deregulation of cable television both in federal and state arenas. He
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.
JOHN E. IVERSON (AGE 64). Mr. Iverson is the Secretary of Northland
Communications Corporation and has served on the Board of Directors since
December 1984. He also is the Secretary and serves on the Board of Directors of
Northland Telecommunications Corporation and each of its subsidiaries. He is
currently a member in 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 38 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.
RICHARD I. CLARK (AGE 43). Mr. Clark is an original incorporator of
Northland Communications Corporation and serves as Vice President, Assistant
Secretary and Assistant Treasurer of Northland Communications Corporation. He
also serves as Vice President, Assistant Secretary and Treasurer of Northland
Telecommunications Corporation. Mr. Clark has served on the Board of Directors
of both Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. In addition to his other responsibilities, Mr.
Clark is responsible for the administration and investor relations activities of
Northland, including financial planning and corporate development. From July
1979 to February 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 22 years. 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 he has
prepared documents for major cable television companies in franchising and
budgeting projects through the application of these programs. In 1979, Mr. Clark
graduated cum laude from Pacific Lutheran University with a Bachelor of Arts
degree in accounting.
GARY S. JONES (AGE 43). Mr. Jones is Vice President and Chief Financial
Officer for Northland. Mr. Jones joined Northland in March 1986 as Controller
and has been Vice President of Northland Telecommunications Corporation and each
of its subsidiaries since October 1986. Mr. Jones is responsible for cash
management, financial reporting and banking relations for Northland and is
involved in the acquisition and financing of new cable systems. Prior to joining
Northland, Mr. Jones was employed as a Certified Public Accountant with
Laventhol & Horwath from 1980 to 1986. Mr. Jones received his Bachelor of Arts
degree in Business Administration with a major in accounting from the University
of Washington in 1979.
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RICHARD J. DYSTE (AGE 55). Mr. Dyste has served as Vice
President-Technical Services of Northland Telecommunications Corporation and
each of its subsidiaries since April 1987. Mr. Dyste is responsible for planning
and advising all Northland cable systems with regard to technical performance as
well as system upgrades and rebuilds. He is a past president and current member
of the Mount Rainier Chapter of the Society of Cable Television Engineers, Inc.
Mr. Dyste joined Northland in 1986 as an engineer and served as Operations
Consultant to Northland Communications Corporation from August 1986 until April
1987. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is
a graduate of Washington Technology Institute.
H. LEE JOHNSON (AGE 57). Mr. Johnson has served as Divisional Vice
President for Northland since March 1994. He is responsible for the management
of systems serving subscribers in Alabama, Georgia, Mississippi, North Carolina
and South Carolina. Prior to his association with Northland he 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
when Northland purchased the system in 1986. Mr. Johnson has been involved in
the cable television industry for over 32 years and is a current member of the
Society of Cable Television Engineers. He is a graduate of Swainsboro Technical
Institute and has attended numerous training seminars, including courses
sponsored by Jerrold Electronics, Scientific Atlanta, The Society of Cable
Television Engineers and CATA.
R. GREGORY FERRER (AGE 45). Mr. Ferrer joined Northland in March 1984 as
Assistant Controller and currently serves as Vice President and Treasurer of
Northland Communications Corporation. Mr. Ferrer also serves as Vice President
and Assistant Treasurer of Northland Telecommunications Corporation. Mr. Ferrer
is responsible for coordinating all of Northland's property tax filing,
insurance requirements and system programming contracts as well as interest rate
management and other treasury functions. Prior to joining Northland, he was a
Certified Public Accountant at Benson & McLaughlin, a local public accounting
firm, from 1981 to 1984. Mr. Ferrer received his Bachelor of Arts in Business
Administration from Washington State University with majors in marketing in 1978
and accounting and finance in 1981.
MATTHEW J. CRYAN (AGE 36). Mr. Cryan is Vice President - Budgets and
Planning and has been with Northland since September 1990. Mr. Cryan is
responsible for the development of current and long-term operating budgets for
all Northland entities. Additional responsibilities include the development of
financial models used in support of acquisition financing, analytical support
for system and regional managers, financial performance monitoring and reporting
and programming analysis. Prior to joining Northland, Mr. Cryan was employed as
an analyst with NKV Corp., a securities litigation support firm located in
Redmond, Washington. Mr. Cryan graduated from the University of Montana in 1988
with honors and holds a Bachelor of Arts in Business Administration with a major
in finance.
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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23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 2000 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.................................. 1,011,732 22.6%
Adele P. Butler................................... 530,000 11.8%
Pamela B. McCabe.................................. 510,144 11.4%
Robert M. Arnold.................................. 384,000 8.6%
Richard I. Clark.................................. 311,893 7.0%
Robert A. Mandich................................. 278,400 6.2%
James E. Hanlon................................... 59,661 1.4%
John E. Iverson................................... 50,000 1.1%
Gary S. Jones..................................... 51,650 1.2%
James A. Penney................................... 51,183 1.1%
Richard J. Dyste.................................. 47,058 1.0%
H. Lee Johnson.................................... 23,134 *
R. Gregory Ferrer................................. 10,700 *
Matthew J. Cryan 5,000 *
All executive officers and directors as a group
(eight persons)................................... 1,572,175 33.7%
- ----------
* 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 majority
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
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24
NTC currently supervises all aspects of the business and operations of
the Company pursuant to an Operating Management Agreement between the Company
and NTC dated August 23, 1994 (the "Management Agreement"). The Management
Agreement continues in effect until terminated by either party on 30-days'
written notice.
The Management Agreement provides that NTC shall render or cause to be
rendered supervisory services to the Company, including, among other things
supervising and monitoring: (i) the affairs, management and operations of the
Company and its systems; (ii) the accounting and other financial books and
records of the Company and its systems; (iii) the hiring, training and
supervision of the Company's employees; and (iv) the Company's fulfillment of
its contractual obligations in connection with its systems. In return for its
management services, NTC receives a management fee, payable monthly, equal to
5.0% of the Company's gross revenues (the "Management Fee"). For the years ended
December 31, 1998, 1999 and 2000, the Company paid a Management Fee of $2.8
million, $2.9 million and $3.0 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, 1998, 1999 and
2000, the Company reimbursed Northland Communications Corporation approximately
$2.6 million, $2.1 million and $1.3 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-7,
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, 1998, 1999 and 2000, were $676,790,
$631,865 and $363,475, 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, 1998, 1999 and 2000,
were $250,637, $267,809 and $294,215, 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, 1998, 1999 and 2000, were $332,690, $330,476 and
$350,680, 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, 1998, 1999 and 2000, the Company paid (received) affiliates an
aggregate of $(41,954), $43,805 and $84,526, respectively, for performing such
services for affiliates.
CAPITAL CONTRIBUTION
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Effective June 30, 1997, the Company received a non-cash capital
contribution of approximately $9.3 million which replaced, in its entirety, the
then outstanding net unsecured advances that had previously been owed to NTC and
other affiliates of the Company other than amounts due for normal operations,
management fees paid to NCC and for services provided by affiliated entities as
discussed above. As of December 31, 2000, 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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26
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, 2000 and 1999................................. ____
Consolidated Statements of Operations for the years
ended December 31, 2000, 1999 and 1998.................................................. ____
Consolidated Statements of Changes in Shareholder's Capital (Deficit) for
the years ended December 31, 2000, 1999 and 1998........................................ ____
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998.................................................. ____
Notes to Financial Statements--December 31, 2000........................................ ____
(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, 2000.
26
27
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: 3/30/01
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 3/30/01
- -------------------------------------------- President -------
John S. Whetzell
/s/ Richard I. Clark Director, Vice President, Treasurer and 3/30/01
- -------------------------------------------- Assistant Secretary -------
Richard I. Clark
/s/ Gary S. Jones Vice President and Chief Financial Officer 3/30/01
- -------------------------------------------- -------
Gary S. Jones
/s/ John E. Iverson Director and Secretary 3/30/01
- -------------------------------------------- -------
John E. Iverson
27
28
EXHIBITS INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
28
29
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland
Telecommunications Corporation)
Consolidated Financial Statements
As of December 31, 2000 and 1999
Together with Report of Independent Public Accountants
30
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, 2000
and 1999, 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, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
------------------------
Seattle, Washington
February 23, 2001
31
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
---------------------------------
2000 1999
------------- -------------
CURRENT ASSETS:
Cash $ 2,551,425 $ 1,366,050
Due from affiliates 1,160,446 127,790
Accounts receivable 2,187,586 2,226,257
Prepaid expenses 571,020 514,883
------------- -------------
Total current assets 6,470,477 4,234,980
------------- -------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 104,237,615 95,320,711
Less -- Accumulated depreciation (48,199,085) (40,226,261)
------------- -------------
56,038,530 55,094,450
Franchise agreements (net of accumulated amortization
of $40,107,541 and $29,899,513, respectively) 63,283,045 70,564,567
Goodwill (net of accumulated amortization of $2,393,494
and $2,220,383, respectively) 4,530,939 4,704,050
Loan fees (net of accumulated amortization of $1,296,338
and $2,760,880, respectively) 4,491,590 5,557,194
Other intangible assets (net of accumulated amortization
of $3,526,515 and $2,945,369, respectively 1,183,093 1,829,926
------------- -------------
129,527,197 137,750,187
------------- -------------
Total assets $ 135,997,674 $ 141,985,167
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Accounts payable $ 754,908 $ 620,403
Subscriber prepayments 1,549,945 1,830,231
Accrued expenses 6,951,496 6,040,163
Converter deposits 122,674 111,703
Due to affiliates 103,098 48,671
Current portion of notes payable -- 3,000,000
------------- -------------
Total current liabilities 9,482,121 11,651,171
NOTES PAYABLE 182,540,000 172,090,000
------------- -------------
Total liabilities 192,022,121 183,741,171
------------- -------------
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 (67,584,974) (53,316,531)
------------- -------------
Total shareholder's deficit (56,024,447) (41,756,004)
------------- -------------
Total liabilities and shareholder's deficit $ 135,997,674 $ 141,985,167
============= =============
The accompanying notes are an integral part of these
consolidated balance sheets.
32
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
December 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
REVENUES:
Service revenues $ 60,144,509 $ 58,216,550 $ 55,325,877
Programming and production revenues
from affiliates 363,475 631,865 676,790
------------ ------------ ------------
Total revenues 60,507,984 58,848,415 56,002,667
------------ ------------ ------------
OPERATING EXPENSES:
Cable system operations (including $305,673,
$236,867 and $118,020, net, paid to
affiliates) 20,950,091 19,326,047 18,566,360
General and administrative (including $1,682,160,
$2,584,442 and $2,755,688, net, paid to
affiliates) 10,348,509 10,724,647 10,227,795
Management fees paid to parent 3,002,889 2,896,228 2,760,263
Depreciation and amortization 19,829,737 19,340,321 19,792,488
------------ ------------ ------------
Total operating expenses 54,131,226 52,287,243 51,346,906
------------ ------------ ------------
Income from operations 6,376,758 6,561,172 4,655,761
OTHER INCOME (EXPENSE):
Interest expense and amortization of loan fees (18,364,730) (17,842,346) (17,625,998)
Other, net (Note 7) (187,528) (495,107) 5,211,946
------------ ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM (12,175,500) (11,776,281) (7,758,291)
EXTRAORDINARY ITEM:
Loss on extinguishment of debt (2,092,943) -- --
------------ ------------ ------------
NET LOSS $(14,268,443) $(11,776,281) $ (7,758,291)
============ ============ ============
The accompanying notes are an integral part of these
consolidated statements.
33
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT
Common Stock and
Additional Paid-in
Capital
------------------------------ Accumulated
Shares Amount Deficit Total
------------ ------------ ------------ ------------
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)
Net loss -- -- (11,776,281) (11,776,281)
------------ ------------ ------------ ------------
BALANCE, December 31, 1999 10,000 11,560,527 (53,316,531) (41,756,004)
Net loss -- -- (14,268,443) (14,268,443)
------------ ------------ ------------ ------------
BALANCE, December 31, 2000 10,000 $ 11,560,527 $(67,584,974) $(56,024,447)
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated statements.
34
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,268,443) $(11,776,281) $ (7,758,291)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Depreciation and amortization 19,829,737 19,340,321 19,792,488
Amortization of loan costs 818,867 914,554 907,760
Loss on extinguishment of debt 2,092,943 -- --
Loss (gain) on disposal of assets 590,156 671,398 (5,093,997)
(Increase) decrease in operating assets:
Due from affiliates (1,032,656) (21,336) (85,909)
Accounts receivable 38,671 (189,897) (688,576)
Prepaid expenses (56,137) (229,292) 5,975
(Decrease) increase in operating liabilities:
Accounts payable 134,505 (152,830) 111,092
Subscriber prepayments (280,286) (13,739) 745,953
Due to affiliate 54,427 (197,573) 28,818
Other current liabilities 922,304 (210,664) 1,659,217
------------ ------------ ------------
Net cash provided by operating activities 8,844,088 8,134,661 9,624,530
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems (3,100,000) -- (77,711,038)
Investment in property and equipment (10,122,090) (7,061,920) (6,279,489)
Proceeds from disposition of cable systems -- -- 7,115,000
Insurance proceeds and other 98,007 26,235 24,327
Franchise fees and other intangibles (138,426) (133,898) (388,912)
------------ ------------ ------------
Net cash used in investing activities (13,262,509) (7,169,583) (77,240,112)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable $ 85,640,000 $ -- $ 77,991,779
Principal payments on notes payable, net (77,955,103) (2,250,000) (8,614,292)
Loan fees (2,081,101) (100,000) (249,514)
------------ ------------ ------------
Net cash provided by (used in) financing
activities 5,603,796 (2,350,000) 69,127,973
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 1,185,375 (1,384,922) 1,512,391
CASH, beginning of year 1,366,050 2,750,972 1,238,581
------------ ------------ ------------
CASH, end of year $ 2,551,425 $ 1,366,050 $ 2,750,972
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 16,515,395 $ 16,901,071 $ 16,753,345
============ ============ ============
Cash paid for state income taxes $ 25,136 $ 28,746 $ 17,946
============ ============ ============
The accompanying notes are an integral part of these
consolidated statements.
35
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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, 2000, NCTV had 90
nonexclusive franchises to operate cable television systems. These franchises
expire at various dates through 2022.
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 majority 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 and operate AM radio stations.
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 identifiable intangible costs.
Any excess is allocated to goodwill.
36
-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. As of
December 31, 2000, there has been no indication of such impairment.
Intangible Assets
Costs assigned to goodwill, franchise agreements, 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 including service and maintenance 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 $2,770,571, $2,425,747 and $2,223,165,
respectively, in 2000, 1999 and 1998. 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.
37
-3-
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.
Segment Information
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
Company manages its business under one reporting segment, telecommunications
services. As such, all operating decisions are based upon the company operating
under a single segment. Additionally, all of its activities take place in the
United States.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133 - In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) and in June 2000
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," an amendment of SFAS 133. These statements establish
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at its
fair value. These statements require that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB No. 133 -- an Amendment to
FASB Statement No. 133," the effective date of SFAS No. 133 has been deferred
until fiscal years beginning after January 15, 2000. 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, 1998
(and, at the Company's election, before January 1, 1999).
The Company's use of derivative instruments is limited to the fixed-to-floating
swap contract on its debt facilities. See Note 6 regarding implementation of
SFAS 133.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
38
-4-
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.
Program License and Production Fees
NCN receives monthly program license fees from affiliated entities for
programming produced by NCN.
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 $1,258,412, $2,121,890 and $2,622,489 for 2000, 1999 and 1998,
respectively.
In 2000, 1999 and 1998, the Company was charged software installation charges
and billing maintenance fees for billing system support by NCSC, amounting to
$350,680, $330,476 and $332,690, respectively. CAC billed the Company $294,215,
$267,809 and $250,637 for advertising services in 2000, 1999 and 1998,
respectively.
The Company has operating management agreements with affiliated entities managed
by NCC. Under the terms of these agreements, the Company or an affiliate serves
as the managing agent for certain cable television systems and is reimbursed for
certain operating, administrative and programming expenses. The Company paid
(received) $84,526, $43,805 and $(41,954), net, under the terms of these
agreements during 2000, 1999 and 1998, 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, 2000 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. Management has ceased the operations of NCN, and does not believe
that this has a material effect on the
39
-5-
Company's financial position, results of operations or financing agreements.
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,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
INCOME STATEMENT INFORMATION:
Revenues from affiliates $ 737,898 $ 1,352,276 $ 1,436,970
Less: intercompany revenue (374,423) (720,411) (760,180)
----------- ----------- -----------
Total revenues 363,475 631,865 676,790
Operating expenses (650,004) (1,008,165) (1,098,153)
Other, net (19,923) (19,265) (5,594)
----------- ----------- -----------
Net loss $ (306,452) $ (395,565) $ (426,957)
=========== =========== ===========
December 31,
-----------------------------
2000 1999
----------- -----------
BALANCE SHEET INFORMATION:
Current assets $ 2,229,287 $ 2,141,332
Less: intercompany elimination (2,018,237) (2,032,390)
----------- -----------
Total assets $ 211,050 $ 108,942
=========== ===========
Current and total liabilities $ 70,188 $ 50,204
=========== ===========
4. PROPERTY AND EQUIPMENT:
December 31,
------------------------------
2000 1999
------------ ------------
Land and buildings $ 2,343,644 $ 2,320,154
Distribution plant 95,874,216 87,938,686
Other equipment 5,130,263 4,680,900
Leasehold improvements 32,033 32,033
Construction in progress 857,459 348,938
------------ ------------
$104,237,615 $ 95,320,711
============ ============
40
-6-
5. ACCRUED EXPENSES:
December 31,
------------------------------
2000 1999
---------- ----------
Programmer license fees $1,852,847 $1,839,729
Franchise fees 1,177,191 1,220,708
Interest 2,178,426 1,382,853
Taxes 991,858 794,564
Other 751,174 802,309
---------- ----------
$6,951,496 $6,040,163
========== ==========
6. NOTES PAYABLE:
December 31,
----------------------------------
2000 1999
------------ ------------
Revolving credit and term loan $ -- $ 75,090,000
Senior subordinated notes 100,000,000 100,000,000
Revised senior credit facility 82,540,000 --
------------ ------------
182,540,000 175,090,000
Less-current portion -- 3,000,000
------------ ------------
$182,540,000 $172,090,000
============ ============
Revolving Credit and Term Loan
On August 14, 2000, the Company refinanced its existing senior bank indebtedness
resulting in the write off of approximately $2,350,000 in loan fees. This amount
was offset by a gain of approximately $250,000 on the termination of certain
interest rate swap agreements. The original indebtedness was repaid with
borrowings under the Revised Senior Credit Facility. The Revised Senior Credit
Facility establishes a $35 million 364-day revolving credit loan. At the end of
the 364-day period, the revolver converts to a term loan due on June 30, 2007.
The other two components consist of a seven-year revolving credit loan in the
aggregate principal amount of $40 million and a seven-year term loan in the
aggregate principal amount of $35 million. Amounts outstanding under the Revised
Senior Credit Facility mature on June 30, 2007. The Revised Senior Credit
Facility is collateralized by a first lien position on all present and future
assets and stock of the Company. Interest rates vary based on certain financial
covenants; currently 9.54% (weighted average). Graduated principal and interest
payments are due quarterly, beginning September 30, 2003, until maturity on June
30, 2007. 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, 2000, $27,460,000 was available to borrow by the
Company under the revolving credit facility.
41
-7-
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 not less than 1.25 to 1 and a Leverage Ratio of
no greater than 6.75 to 1, among other restrictions. The Company submits
quarterly debt compliance reports to its creditor under this arrangement. As of
December 31, 2000, the Company was in compliance with the terms of the loan
agreement.
Senior Subordinated Notes
In 1997, the Company issued $100,000,000 in principal amount of 10.25% Senior
Subordinated Notes (the Notes) due November 15, 2007. The estimated fair value
of the $100,000,000 Notes at December 31, 2000, was $71,320,000, 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 6.75 to 1, among other restrictions. The Company submits quarterly debt
compliance reports to a trustee. As of December 31, 2000, the Company was in
compliance with the terms of the Notes.
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, 2000 based on amounts
outstanding at December 31, 2000 are as follows:
2001 $ --
2002 --
2003 5,500,000
2004 16,500,000
2005 15,540,000
Thereafter 145,000,000
------------
$182,540,000
============
42
-8-
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, 2000, the Company had
outstanding two interest rate swap agreements with its bank, having a notional
principal amount of $40,000,000. These agreements effectively change the
Company's interest rate exposure to fixed rate of 6.83% (weighted average), plus
an applicable margin based on certain financial covenants (the margin at
December 31, 2000 was 2.75%).
Maturity Date Fixed Rate Notional Amount
------------- ---------- ---------------
August 2, 2002 6.79% $20,000,000
August 19, 2002 6.87% $20,000,000
At December 31, 2000, the Company would have received approximately $689,000 to
settle this agreement based on fair value estimate received from the financial
institution. The Company has elected not to designate its derivatives as hedges
under SFAS 133. Accordingly, the Company will record an asset of $689,000, and a
corresponding credit in its statement of operations related to the cumulative
effect of the implementation of SFAS 133 on January 1, 2001. Each quarter the
change in the market value of the Company's derivative will be recorded as other
income or expense.
7. OTHER, NET:
Other, net included as a component of other (expense) income in the consolidated
statements of operations consists of:
For the Years Ended
December 31,
-------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
(LOSS) GAIN ON DISPOSAL OF ASSETS $ (590,156) $ (671,398) $ 5,093,997
INTEREST INCOME 192,870 205,038 135,895
OTHER 209,758 (28,747) (17,946)
----------- ----------- -----------
$ (187,528) $ (495,107) $ 5,211,946
=========== =========== ===========
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.
43
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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,
----------------------------------
2000 1999
------------ ------------
DEFERRED TAX ASSETS:
Net operating loss carryforward $ 23,800,000 $ 19,380,000
Valuation allowance (20,900,000) (16,080,000)
------------ ------------
2,900,000 3,300,000
DEFERRED TAX LIABILITIES:
Property and equipment 2,900,000 3,300,000
------------ ------------
$ -- $ --
============ ============
The federal income tax net operating loss carryforward of approximately
$70,000,000 expires from 2003 through 2020. Management believes that the
available objective evidence creates sufficient uncertainty regarding the
realization of the net deferred tax assets due to the recurring operating losses
being incurred by the Company. Accordingly, a valuation allowance has been
provided for the net deferred tax assets of the Company. The change in the
valuation allowance was $4,820,000, $4,078,000 and $3,316,000 for the years
ended December 31, 2000, 1999 and 1998, 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 $1,055,907, $915,912 and $896,711 in 2000, 1999 and
1998, respectively. Minimum lease payments to the end of the lease terms are as
follows:
2001 $ 77,375
2002 69,740
2003 69,058
2004 67,449
2005 45,350
Thereafter 135,026
--------
$463,998
========
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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.
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.
45
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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, 2000, 1999 and 1998, the Company was
charged $76,244, $76,338 and $76,090, respectively, by the fund. As of December
31, 2000, the fund had a balance of $509,135.
10. ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS:
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, 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. 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. The acquisition was financed
through borrowings under the Senior Credit Facility.
46
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Pro forma operating results (unaudited) of the Company for 1998, assuming the
acquisitions and disposition described above had been made at the beginning of
1998, follow:
For the year ended
December 31,
1998
------------------
(unaudited)
Service revenues $ 57,191,047
============
Net loss $(14,054,680)
============
On March 31, 2000, the Company acquired the operating assets and franchise
rights to cable systems service approximately 1,600 basic subscribers in the
communities of Kingston and Hansville, Washington, located in Kitsap County,
from North Star Cable, Inc. The systems were acquired at a purchase price of
$3,100,000 adjusted at closing for the proration of certain revenues and
expenses. The acquisition was financed through borrowings under the Senior
Credit Facility.
Pro forma operating results of the Company for 2000 and 1999, assuming the
acquisition described above had been made at the beginning of 1999, follow:
For the year ended
December 31,
----------------------------------
2000 1999
------------ ------------
(unaudited)
Service revenues $ 60,662,115 $ 59,466,834
============ ============
Net loss $(14,328,118) $(12,017,424)
============ ============