Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the quarterly period endedJune 30, 2002 |
or
| [ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the transition period from to |
Commission file number333-43157
NORTHLAND CABLE TELEVISION, INC.
| STATE OF WASHINGTON | 91-1311836 | |
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
| STATE OF WASHINGTON | 91-1638891 | |
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | |
| 1201 THIRD AVENUE, SUITE 3600 SEATTLE, WASHINGTON | 98101 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (206) 621-1351
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 [ ]
| This filing contains 19 pages. Exhibits index appears on page 18. |
Table of Contents
PART 1 — FINANCIAL INFORMATION
ITEM 1. Financial Statements
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS — (UNAUDITED)
| June 30, | December 31, | |||||||||
| 2002 | 2001 | |||||||||
| (restated) | ||||||||||
| ASSETS | ||||||||||
| Current Assets: | ||||||||||
| Cash | $ | 3,010,596 | $ | 2,724,099 | ||||||
| Due from affiliates | 311,438 | 295,650 | ||||||||
| Accounts receivable | 2,421,436 | 3,437,560 | ||||||||
| Prepaid expenses | 389,757 | 547,480 | ||||||||
| Total current assets | 6,133,227 | 7,004,789 | ||||||||
| Investment in Cable Television Properties: | ||||||||||
| Property and equipment, net of accumulated depreciation of $58,516,969 and $53,518,610, respectively | 55,722,822 | 57,237,151 | ||||||||
| Franchise agreements and acquisition costs, net of accumulated amortization of $48,279,931 | 53,387,986 | 53,384,986 | ||||||||
| Goodwill, net of accumulated amortization of $2,407,104 | 3,937,329 | 3,937,329 | ||||||||
| Other intangible assets, net of accumulated amortization of $5,897,861 and $5,372,238, respectively | 3,842,739 | 4,361,939 | ||||||||
| Total investment in cable television properties | 116,890,876 | 118,921,405 | ||||||||
| Total assets | $ | 123,024,103 | $ | 125,926,194 | ||||||
| LIABILITIES AND SHAREHOLDER’S DEFICIT | ||||||||||
| Current Liabilities: | ||||||||||
| Accounts payable | $ | 154,613 | $ | 1,103,869 | ||||||
| Accrued expenses | 5,665,778 | 6,395,484 | ||||||||
| Converter deposits | 152,181 | 157,534 | ||||||||
| Subscriber prepayments | 1,928,354 | 1,898,112 | ||||||||
| Due to affiliates | 616,529 | 242,741 | ||||||||
| Interest rate swap agreements | 747,931 | 1,919,587 | ||||||||
| Total current liabilities | 9,265,386 | 11,717,327 | ||||||||
| Notes payable | 170,031,182 | 171,031,182 | ||||||||
| Total liabilities | 179,296,568 | 182,748,509 | ||||||||
| 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 | 12,359,377 | 12,359,377 | ||||||||
| Accumulated other comprehensive income | 59,000 | 268,000 | ||||||||
| Accumulated deficit | (68,690,842 | ) | (69,449,692 | ) | ||||||
| Total shareholder’s deficit | (56,272,465 | ) | (56,822,315 | ) | ||||||
| Total liabilities and shareholder’s deficit | $ | 123,024,103 | $ | 125,926,194 | ||||||
The accompanying notes are an integral part of these balance sheets.
Table of Contents
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) — (UNAUDITED)
| For the six months ended June 30, | |||||||||||
| 2002 | 2001 | ||||||||||
| (restated) | |||||||||||
| Service revenues | $ | 30,697,069 | $ | 30,930,182 | |||||||
| Expenses: | |||||||||||
| Cable system operations (including $161,121 and $164,372, net paid to affiliates in 2002 and 2001, respectively), exclusive of depreciation and amortization shown below | 11,532,667 | 10,843,322 | |||||||||
| General and administrative (including $211,968 and $465,553 net paid to affiliates in 2002 and 2001, respectively) | 4,519,364 | 4,908,848 | |||||||||
| Management fees paid to parent | 1,534,853 | 1,546,509 | |||||||||
| Depreciation and amortization | 5,298,394 | 10,199,118 | |||||||||
| Total operating expenses | 22,885,278 | 27,497,797 | |||||||||
| Income from operations | 7,811,791 | 3,432,385 | |||||||||
| Other income (expense): | |||||||||||
| Interest expense | (8,441,966 | ) | (9,281,286 | ) | |||||||
| Interest income and other, net | 24,244 | 64,837 | |||||||||
| Unrealized gain (loss) on interest rate swap agreements | 1,380,657 | (2,163,529 | ) | ||||||||
| Loss on disposal of assets | (15,876 | ) | (15,383 | ) | |||||||
| (7,052,941 | ) | (11,395,361 | ) | ||||||||
| Net income (loss) | 758,850 | (7,962,976 | ) | ||||||||
| Cumulative effect of change in accounting principle | — | 689,000 | |||||||||
| Reclassification of accumulated other comprehensive income to unrealized gain on interest rate swaps | (209,000 | ) | (209,000 | ) | |||||||
| Other comprehensive income | (209,000 | ) | 480,000 | ||||||||
| Total comprehensive income (loss) | $ | 549,850 | $ | (7,482,976 | ) | ||||||
The accompanying notes are an integral part of these statements.
Table of Contents
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) — (UNAUDITED)
| For the three months ended June 30, | |||||||||||
| 2002 | 2001 | ||||||||||
| (restated) | |||||||||||
| Service revenues | $ | 15,482,261 | $ | 15,524,527 | |||||||
| Expenses: | |||||||||||
| Cable system operations (including $88,958 and $79,357, net paid to affiliates in 2002 and 2001, respectively), exclusive of depreciation and amortization shown below | 5,787,827 | 5,348,464 | |||||||||
| General and administrative (including $266,086 and $339,210, net paid to affiliates in 2002 and 2001, respectively) | 2,389,240 | 2,552,640 | |||||||||
| Management fees paid to parent | 774,182 | 776,860 | |||||||||
| Depreciation and amortization | 2,661,639 | 5,135,646 | |||||||||
| Total operating expenses | 11,612,888 | 13,813,610 | |||||||||
| Income from operations | 3,869,373 | 1,710,917 | |||||||||
| Other income (expense): | |||||||||||
| Interest expense | (4,021,660 | ) | (4,638,672 | ) | |||||||
| Interest income and other, net | 19,418 | 28,711 | |||||||||
| Unrealized gain (loss) on interest rate swap agreements | 412,482 | (92,683 | ) | ||||||||
| Loss on disposal of assets | (10,052 | ) | (12,194 | ) | |||||||
| (3,599,812 | ) | (4,714,838 | ) | ||||||||
| Net income (loss) | 269,561 | (3,003,921 | ) | ||||||||
| Reclassification of accumulated other comprehensive income to unrealized gain on interest rate swaps | (105,000 | ) | (105,000 | ) | |||||||
| Other comprehensive income | (105,000 | ) | (105,000 | ) | |||||||
| Total comprehensive income (loss) | $ | 164,561 | $ | (3,108,921 | ) | ||||||
The accompanying notes are an integral part of these statements.
Table of Contents
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED)
| For the six months ended June 30, | ||||||||||
| 2002 | 2001 | |||||||||
| (restated) | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
| Net income (loss) | $ | 758,850 | $ | (7,962,976 | ) | |||||
| Adjustments to reconcile net income (loss) to cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 5,298,394 | 10,199,118 | ||||||||
| Unrealized (loss) gain on interest rate swap agreements | (1,380,657 | ) | 2,163,529 | |||||||
| Amortization of loan costs | 335,991 | 335,991 | ||||||||
| Loss on disposal of assets | 15,876 | 15,383 | ||||||||
| (Increase) decrease in operating assets: | ||||||||||
| Accounts receivable | (209,964 | ) | (106,187 | ) | ||||||
| Prepaid expenses | 157,723 | (17,663 | ) | |||||||
| Due from affiliates | (15,788 | ) | (154,636 | ) | ||||||
| Increase (decrease) in operating liabilities | (1,678,962 | ) | (1,267,805 | ) | ||||||
| Accounts payable and accrued expenses | (1,678,962 | ) | (1,267,805 | ) | ||||||
| Due to affiliates | 373,788 | 614,068 | ||||||||
| Converter deposits | (5,353 | ) | 3,670 | |||||||
| Subscriber prepayments | 30,242 | 330,474 | ||||||||
| Net cash provided by operating activities | 3,680,140 | 4,152,966 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | �� | |||||||||
| Investment in cable television properties | (3,623,858 | ) | (7,560,286 | ) | ||||||
| Proceeds from disposition of cable system | 1,226,088 | — | ||||||||
| Proceeds from disposal of assets | 13,550 | 14,420 | ||||||||
| Franchises and other intangibles | (9,423 | ) | (67,089 | ) | ||||||
| Net cash used in investing activities | (2,393,643 | ) | (7,612,955 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
| Proceeds from notes payable | — | 3,000,000 | ||||||||
| Principal payments on borrowings | (1,000,000 | ) | — | |||||||
| Net cash (used in) provided by financing activities | (1,000,000 | ) | 3,000,000 | |||||||
| INCREASE (DECREASE) IN CASH | 286,497 | (459,989 | ) | |||||||
| CASH, beginning of period | 2,724,099 | 2,551,425 | ||||||||
| CASH, end of period | $ | 3,010,596 | $ | 2,091,436 | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||
| Cash paid during the period for interest | $ | 8,268,429 | $ | 9,029,838 | ||||||
| Cash paid during the period for state income taxes | $ | 4,881 | $ | 12,604 | ||||||
The accompanying notes are an integral part of these statements.
Table of Contents
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
(1) BASIS OF PRESENTATION:
Interim Financial Reporting
These unaudited financial statements are being filed in conformity with Rule 10-01 of Regulation S-X regarding interim financial statements and do not contain all of the necessary footnote disclosures required for a fair presentation of the consolidated balance sheets, statements of operations and statements of cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, this data includes all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s consolidated financial position at June 30, 2002, its consolidated statements of operations for the six and three months ended June 30, 2002 and 2001 and its consolidated statements of cash flows for the six months ended June 30, 2002 and 2001. Results of operations for these periods are not necessarily indicative of results to be expected for the full year. These financial statements and notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. Certain amounts have been restated as described below.
Restated Financial Statements
In July, management of Northland Cable Television, Inc. and Subsidiary (the “Company”) became aware of a misclassification in the Company’s financial statements as of, and for the year ended December 31, 2001, the quarterly periods within 2001 and for the quarter ended March 31, 2002. The misclassification relates to the implementation of Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activity”, on January 1, 2001 for those interest rate swap agreements that existed at implementation. Correction of this misclassification results in the reclassification of a non-cash item from the Company’s statement of operations to other comprehensive income in 2001, and included as accumulated other comprehensive income, a component of shareholder’s deficit. This correction has no impact on income from operations, earnings before interest, taxes, depreciation and amortization (EBITDA) or the Company’s calculations of or compliance with the restrictive covenants under the terms of its loan agreement for the periods affected, nor does it affect total shareholder’s deficit at any date.
As of January 1, 2001 the Company had two interest rate swap agreements that expire in August of 2002. Upon implementation of SFAS No. 133, the Company recognized $689,000 as a non-cash, cumulative effect of change in accounting principle in its statement of operations, which represented the fair market value of these interest rate swap agreements at January 1, 2001. This amount should have been classified as a component of accumulated other comprehensive income on the balance sheet upon implementation, and then be amortized into earnings over the remaining term of the swap agreements. Other than the impact of this misclassification in the initial implementation of SFAS No. 133 management believes its ongoing accounting for interest rate swap agreements has been proper.
Management and the Board of Directors of the Company concluded that it was in the best interest of the Company to reissue the financial statements for the periods affected by this misclassification.
Table of Contents
Upon completion of the audit of the restated 2001 financial statements, the company will be filing amendments to Form 10-K for the year ended December 31, 2001 and Form 10-Q for the quarterly periods ended March 31, 2001, June 30, 2001, September 30, 2001 and March 31, 2002. However, the financial statements presented in this filing as of December 31, 2001, and for the six and three months ended June 30, 2001 have been restated as follows to correct for this matter:
| As of December 31, 2001 | ||||||||
| As Reported | As Restated | |||||||
| (unaudited) | ||||||||
| Balance Sheet Data: | ||||||||
| Total assets | $ | 125,926,194 | $ | 125,926,194 | ||||
| Total Liabilities | 182,748,509 | 182,748,509 | ||||||
| Accumulated deficit | (69,181,692 | ) | (69,449,692 | ) | ||||
| Accumulated other comprehensive income | — | 268,000 | ||||||
| Shareholder’s deficit | (56,822,315 | ) | (56,822,315 | ) | ||||
| Six Months Ended June 30, 2001 | Three Months Ended June 30, 2001 | |||||||||||||||
| As Reported | As Restated | As Reported | As Restated | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Statements of Operations Data: | ||||||||||||||||
| Service revenues | $ | 30,930,182 | $ | 30,930,182 | $ | 15,524,527 | $ | 15,524,527 | ||||||||
| Income from operations | 3,432,385 | 3,432,385 | 1,710,917 | 1,710,917 | ||||||||||||
| Interest expense and other | (9,920,832 | ) | (9,231,832 | ) | (4,622,155 | ) | (4,622,155 | ) | ||||||||
| Unrealized gain (loss) on interest rate swap agreements | (1,683,529 | ) | (2,163,529 | ) | (197,683 | ) | (92,683 | ) | ||||||||
| Net loss before cumulative effect of change in accounting principle | (8,171,976 | ) | (7,962,976 | ) | (3,108,921 | ) | (3,003,921 | ) | ||||||||
| Cumulative effect of change in accounting principle | 689,000 | — | — | — | ||||||||||||
| Net loss | (7,482,976 | ) | (7,962,976 | ) | (3,108,921 | ) | (3,003,921 | ) | ||||||||
| Cumulative effect of change in accounting principle | — | 689,000 | — | — | ||||||||||||
| Reclassification of other comprehensive income to unrealized gain (loss) on interest rate swap agreements | — | (209,000 | ) | — | (105,000 | ) | ||||||||||
| Other comprehensive income (loss) | — | 480,000 | — | (105,000 | ) | |||||||||||
| Total comprehensive loss | (7,482,976 | ) | (7,482,976 | ) | (3,108,921 | ) | (3,108,921 | ) | ||||||||
(2) ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS
On September 30, 2001 the Company acquired a cable system serving the areas in and around Highlands, North Carolina, serving approximately 3,200 basic subscribers, from an affiliated Limited Partnership. The system was acquired at a price of approximately $4,600,000 and was
Table of Contents
financed with approximately $3,800,000 of cash on hand and an in-kind equity contribution from the Company’s parent of $798,850.
On December 21, 2001, the Company sold its cable system serving the areas of Bainbridge Island, Kingston and Hansville, Washington, which represented approximately 6,450 basic subscribers, to TCI Cable Partners’ of St. Louis, L.P. The systems were sold at a price of approximately $19,800,000. The Company recognized a gain of approximately $12,700,000 related to the transaction.
Pro forma operating results of the Company for 2001, assuming the acquisition and dispositions described above had been made at the beginning of 2001, follow:
| Six Months Ended | Three Months Ended | |||||||
| June 30, 2001 | June 30, 2001 | |||||||
| (unaudited) | ||||||||
| Service Revenues | $ | 29,800,000 | $ | 15,000,000 | ||||
| Net Loss | $ | (7,500,000 | ) | $ | (2,800,000 | ) | ||
(3) INTANGIBLE ASSETS — SFAS NO. 142
Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that the Company cease amortization of goodwill and other intangible assets determined to have indefinite lives, and establishes a new method of testing these assets for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value or if the fair values of intangible assets with indefinite lives falls below their carrying value on an annual basis. The amortization of existing goodwill ceased on December 31, 2001. The Company determined that its franchises met the definition of indefinite lived assets. Accordingly, amortization on these assets also ceased on December 31, 2001. The Company tested these intangibles for impairment upon adoption of the new standard and determined that the fair value of the assets exceeded their carrying value. The Company will continue to test these assets for impairment annually, or more frequently as warranted by events or changes in circumstances. The book value of the Company’s intangible assets is presented in the following table:
| June 30, 2002 | December 31, 2001 | ||||||||||||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||||||||||
| Gross | Net | Gross | Net | ||||||||||||||||||||||
| Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||
| Franchises | $ | 101,667,917 | $ | (48,279,931 | ) | $ | 53,387,986 | $ | 101,664,917 | $ | (48,279,931 | ) | $ | 53,384,986 | |||||||||||
| Goodwill | 6,344,433 | (2,407,104 | ) | 3,937,329 | 6,344,433 | (2,407,104 | ) | 3,937,329 | |||||||||||||||||
| 108,012,350 | (50,687,035 | ) | 57,325,315 | 108,009,350 | (50,687,035 | ) | 57,322,315 | ||||||||||||||||||
| Definite-lived intangible assets: | |||||||||||||||||||||||||
| Loan fees and other intangible assets | 9,740,600 | (5,897,861 | ) | 3,842,739 | 9,734,177 | (5,372,238 | ) | 4,361,939 | |||||||||||||||||
| $ | 117,752,950 | $ | (56,584,896 | ) | $ | 61,168,054 | $ | 117,743,527 | $ | (56,059,273 | ) | $ | 61,684,254 | ||||||||||||
As required by SFAS No. 142, the statement has not been retroactively applied to the results for periods prior to adoption. A reconciliation of net income (loss) for the six and three months ended June 30, 2002, and for the twelve months ended December 31, 2001, 2000 and 1999, as if amortization of goodwill and franchises had not been recorded is presented below:
Table of Contents
| Six Months Ended | Three Months Ended | Twelve Months Ended December 31, | ||||||||||||||||||
| June 30, 2001 | June 30, 2001 | 2001 | 2000 | 1999 | ||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||
| NET LOSS: | ||||||||||||||||||||
| Reported Net Loss | $ | (7,962,976 | ) | $ | (3,003,921 | ) | $ | (1,864,718 | ) | $ | (14,268,443 | ) | $ | (11,776,281 | ) | |||||
| Add back: amortization of indefinite-lived franchises | 5,141,220 | 2,570,611 | 10,343,687 | 10,351,363 | 10,137,025 | |||||||||||||||
| Add back: amortization of goodwill | 86,555 | 43,278 | 171,903 | 173,111 | 173,111 | |||||||||||||||
| Adjusted net loss | $ | (2,735,201 | ) | $ | (390,032 | ) | $ | 8,650,872 | $ | (3,743,969 | ) | $ | (1,466,145 | ) | ||||||
Amortization expense for each of the next five years is expected to be approximately as follows:
| 2003 | $ | 746,000 | ||
| 2004 | 706,000 | |||
| 2005 | 706,000 | |||
| 2006 | 700,000 | |||
| 2007 | 466,000 | |||
| $ | 3,324,000 | |||
(4) NOTES PAYABLE
In August of 2000, the Company refinanced its existing senior bank indebtedness. The original indebtedness was repaid with borrowings under the Revised Senior Credit Facility. The Revised Senior Credit Facility established a $35 million 364-day revolving credit loan. In August of 2001, the revolver converted to a term loan due on June 30, 2007. The other two components consisted originally of a seven-year revolving term loan in the aggregate principal amount of $40 million and a seven-year term loan in the aggregate principal amount of $35 million. The allowable borrowings on the $40 million revolver were reduced by approximately $17.3 million during 2001. 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 8.776% (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 June 30, 2002, approximately $4,695,000 was available to borrow by the Company under the revolving credit facility.
Under the revolving credit and term loan agreement, the Company has agreed to restrictive covenants which require the maintenance of certain ratios, including a Pro Forma Debt Service ratio not less than 1.25 to 1.0 and a Leverage Ratio of no greater than 6.50 to 1.0, among other restrictions. The Company submits quarterly debt compliance reports to its creditor under this arrangement. As of June 30, 2002, the Company was in compliance with the terms of the loan agreements.
As of June 30, 2002, the outstanding balance under the Revised Senior Credit Facility was approximately $70 million. As of the date of this filing, interest rates on the Revised Senior
Table of Contents
Credit Facility were as follows: $20 million fixed at 9.29% under the terms of an interest rate swap agreement with the Company’s lender expiring August 20, 2002; $27 million fixed at 5.668% under the terms of an interest rate swap agreement with the Company’s lender expiring February 20, 2003; $5.5 million fixed at 9.37% under the terms of an interest rate swap agreement with the Company’s lender expiring August 17, 2002; $17 million fixed at LIBOR based rate of 4.38% expiring September 19, 2002; $600,000 fixed at a LIBOR based rate of 4.38% expiring September 19, 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.
Table of Contents
PART I (continued)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
As of June 30, 2002, the Company’s systems served approximately 111,905 basic subscribers, 50,477 premium subscribers, 31,212 digital subscribers, and passed an estimated 192,000 homes.
Revenues totaled $30.7 million for the six months ended June 30, 2002. Of these revenues, $20.7 million (67%) was derived from basic services, $2.3 million (8%) from premium services, $4.1 million (13%) from expanded basic services, $600,000 (2%) from digital services, $316,000 (1%) from service maintenance contracts, $1.5 million (5%) from advertising and $1.2 million (4%) from other sources.
Average monthly revenue per subscriber increased $3.34 or 7.9% from $42.16 to $45.50 for the six months ended June 30, 2002. The December 2001 disposition of cable television systems serving approximately 6,450 basic subscribers in and around Bainbridge Island, Washington (the “Bainbridge Systems”) decreased revenues approximately $1.8 million or 5.8%. The September 2001 acquisition of a cable system serving approximately 3,200 basic subscribers in and around Highlands, North Carolina (the “Highlands System”) increased revenues approximately $632,000 or 2.0%. On a pro forma basis, effecting for the sale of the Bainbridge Systems and the Highlands System acquisition: (i) revenues would have increased approximately $901,000 or 3.0%; and (ii) average monthly revenue per average basic subscriber would have increased $3.56 or 8.5%, from $41.94 to $45.50 for the six months ended June 30, 2002. This increase is primarily attributable to rate increases implemented during the first quarter of 2002, increased revenue from higher penetration of new product tiers and a 27% increase in advertising revenue per basic subscriber.
Cable system operation expenses, which include costs related to programming, technical personnel, repairs and maintenance and advertising sales, increased approximately $700,000 or 6.5% from $10.8 million to $11.5 million for the six months ended June 30, 2002. On a pro forma basis, excluding the impact of the sale of the Bainbridge Systems and the Highlands System acquisition, operating expenses would have increased approximately $1.1 million or 10.6%. Programming costs increased $1.1 million on a pro forma basis resulting from rate increases by certain programming vendors, the launch of new programming services in various systems and the launch of digital programming services.
General and administrative expenses, which include on-site office and customer service personnel costs, corporate overhead, customer billing, postage, marketing expenses and franchise fees, decreased approximately $400,000 or 8.2% from $4.9 million to $4.5 million for the six months ended June 30, 2002. On a pro forma basis, excluding the impact of the sale of the Bainbridge Systems and the Highlands System acquisition, general and administrative expenses would have decreased approximately $200,000 or 4.3%. The decrease is primarily attributable to
Table of Contents
reductions in corporate overhead and property taxes, offset by a 60% increase in marketing expense.
Management fees for the six months ended June 30, 2002 were consistent with the same period in the previous year. Management fees are calculated at 5.0% of gross revenues.
Depreciation and amortization expenses decreased approximately $4.9 million or 48.0% from $10.2 million to $5.3 million for the six months ended June 31, 2002. Such decrease is primarily attributable to the Company’s implementation of SFAS No. 142. As of December 31, 2001, the Company discontinued amortizing its franchises and goodwill in accordance with SFAS No. 142 resulting in a decrease of approximately $5.2 million in amortization expense for the six months ended June 30, 2002.
Interest expense decreased approximately $900,000 or 9.7%, from $9.3 million to $8.4 million for the six months ended June 30, 2002. Average outstanding indebtedness decreased $13.0 million from $184 million to $171 million for the six months ended June 30, 2001 and 2002, respectively. This is primarily attributable to the fact that approximately $19.3 million of the proceeds from the sale of the Bainbridge Systems were used to pay down amounts outstanding under the Company’s revised Senior Credit Facility offset by approximately $6.8 million in borrowings during 2001 to replenish working capital.
The Company has elected not to designate its interest rate swap agreements as hedges under SFAS No. 133. Accordingly, the Company has recorded a liability equal to the fair market value to settle the agreements and a corresponding debit in its statement of operations. Each quarter, the change in the market value of the Company’s swap agreements is recorded as other income or expense. The market value adjustment for the six months ended June 30, 2002 was a credit of approximately $1.2 million. In addition, the Company recorded $209,000 of income for the six months ended June 30, 2002 resulting from the reclassification to earnings of accumulated other comprehensive income to earnings recorded upon implementation of SFAS No. 133 on January 1, 2001.
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
Revenues totaled $15.5 million for the three months ended June 30, 2002 remaining constant with the same period in 2001. Of these revenues, $10.4 million (67%) was derived from basic services, $1.2 million (7%) from premium services, $2.1 million (14%) from expanded basic services, $300,000 (2%) from digital services, $100,000 (1%) from service maintenance contracts, $800,000 (5%) from advertising and $600,000 (4%) from other sources.
Average monthly revenue per subscriber increased $3.41 or 8.0% from $42.72 to $46.13 for the three months ended June 30, 2002. The December 2001 disposition of the Bainbridge Systems serving approximately 6,450 basic subscribers decreased revenues approximately $892,000 or 5.7%. The September 2001 acquisition of the Highlands System serving approximately 3,200 basic subscribers increased revenues approximately $360,000 or 2.3%. On a pro forma basis, effecting for the sale of the Bainbridge Systems and the Highlands System acquisition: (i) revenues would have increased approximately $490,000 or 3.3%; and (ii) average monthly revenue per average basic subscriber would have increased $3.59 or 8.4%, from $42.54 to $46.13 for the three months ended June 30, 2002. This increase is primarily attributable to rate increases implemented during the first quarter of 2002, increased revenue from higher penetration of new product tiers and a 32% increase in advertising revenue per basic subscriber.
Table of Contents
Cable system operation expenses increased approximately $500,000 or 9.4% from $5.3 million to $5.8 million for the three months ended June 30, 2002. On a pro forma basis, excluding the impact of the sale of the Bainbridge Systems and the Highlands System acquisition, operating expenses would have increased approximately $700,000 or 13.7%. Programming costs increased $610,000 on a pro forma basis resulting from rate increases by certain programming vendors as well as the launch of new analog programming services and the launch of digital programming services.
General and administrative expenses decreased approximately $200,000 or 7.7% from $2.6 million to $2.4 million for the three months ended June 30, 2002. On a pro forma basis, excluding the impact of the sale of the Bainbridge Systems and the Highlands System acquisition, general and administrative expenses would have decreased approximately $100,000 or 4.0%. The decrease is attributable to reductions in corporate overhead and property, offset by a 71% increase in marketing expense.
Management fees for the three months ended June 30, 2002 were consistent with the same period in the previous year. Management fees are calculated at 5.0% of gross revenues.
Depreciation and amortization expenses decreased approximately $2.6 million or 51.0% from $5.1 million to $2.7 million for the three months ended June 30, 2002. Such decrease is primarily attributable to the Company’s implementation of SFAS No. 142. As of December 31, 2001, the Company discontinued amortizing its franchises and goodwill accordance with SFAS No. 142 resulting in a decrease of approximately $2.6 million in amortization expense for the three months ended June 30, 2002.
Interest expense decreased approximately $600,000 or 13.0%, from $4.6 million to $4.0 million for the three months ended June 30, 2002. Average outstanding indebtedness decreased $14 million from $185 million to $171 million for the three months ended June 30, 2001 and 2002, respectively. This is primarily attributable to the fact that approximately $19.3 million in proceeds from the sale of the Bainbridge Systems were used to pay down amounts outstanding under the Company’s revised Senior Credit Facility offset by approximately $6.8 million in borrowings to replenish working capital.
The Company has elected not to designate its interest rate swap agreements as hedges under SFAS No. 133. Accordingly, the Company has recorded a liability equal to the fair market value to settle the agreements. Each quarter, the change in the market value of the Company’s swap agreements is recorded as other income or expense. The market value adjustment for the three months ended June 30, 2002 was a credit of approximately $307,000. In addition, the Company recorded $105,000 of income for the three months ended June 30, 2002 resulting from the reclassification to earnings of accumulated other comprehensive income to earnings recorded upon implementation of SFAS No. 133 on January 1, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business generally requires substantial capital for the construction, expansion and maintenance of the signal distribution system. In addition, the Company has pursued a business strategy, which includes selective acquisitions. The Company has financed these expenditures through a combination of cash flow from operations, borrowings under the
Table of Contents
revolving credit and term loan facility provided by a variety of banks and the issuance of senior subordinated notes. The Company’s debt service obligations for the remainder of 2002 are expected to be approximately $7.3 million. The Company anticipates that cash flow from operations will be sufficient to service its debt through December 31, 2002. The Company believes that cash flow from operations will be adequate to meet the Company’s long-term liquidity requirements 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 $3.7 million for the six months ended June 30, 2002. Adjustments to the $760,000 net income for the period to reconcile to net cash provided by operating activities consisted primarily of $5.6 million of depreciation and amortization, offset by $1.4 relating to interest rate swap agreements and decreases in operating assets of approximately $1.2 million.
Net cash used in investing activities was $2.4 million for the six months ended June 30, 2002, and substantially consisted of $3.6 million in capital expenditures offset by the receipt of $1.2 million from a hold back note related to the sale of the Bainbridge Systems.
Net cash used in financing activities consisted of $1.0 million in principal prepayments on the Senior Credit Facility.
Net cash provided by operating activities was $4.2 million for the six months ended June 30, 2001. Adjustments to the $8.0 million net loss for the period to reconcile to net cash provided by operating activities consisted primarily of $10.5 million of depreciation and amortization, $2.2 million related to interest rate swap agreements, decreases in operating liabilities of approximately $300,000 and increases in operating assets of approximately $300,000.
Net cash used in investing activities was $7.6 million for the six months ended June 30, 2001 and consisted of $7.6 million in capital expenditures and additions of intangible assets.
Net cash provided by financing activities was $3.0 million for the six months ended June 30, 2001. The Company had $3.0 million in borrowings of long term debt to finance planned capital expenditures.
Operating income before charges for interest, taxes, depreciation and amortization (“EBITDA”) decreased approximately $500,000 or 3.7%, from $13.6 million to $13.1 million for the six months ended June 30, 2002. EBITDA as a percentage of revenues (“EBITDA Margin”) decreased from 44.0% to 42.7% for the six months ended June 30, 2002. On a pro forma basis, excluding the impact of the sale of the Bainbridge Systems and the Highlands System acquisition, EBITDA would have remained relatively constant. The aforementioned increases in pro forma revenues were offset by higher programming costs resulting from rate increases by certain programming vendors as well as the launch of new programming services in various systems. Industry analysts generally consider EBITDA to be an appropriate measure of the performance of multi-channel television operations. EBITDA is not presented in accordance with accounting principles generally accepted in the United States of America and should not be considered an alternative to, or more meaningful than, operating income or operating cash flow as an indication of the Company’s operating performance.
Table of Contents
CAPITAL EXPENDITURES
For the six months ended June 30, 2002, the Company incurred capital expenditures of approximately $3.6 million. Capital expenditures included: (i) new product digital launches, (ii) expansion and improvements of cable properties; (iii) additions to plant and equipment; and (iv) line drops, extensions and installations of cable plant facilities.
The Company plans to invest approximately $5.0 million in capital expenditures for the remainder of 2002. This represents anticipated expenditures for upgrading and rebuilding certain distribution facilities, which will allow for the continued deployment of new products, such as digital and Internet services in selected markets. Furthermore, capital expenditures will involve extensions of distribution facilities to add new subscribers.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 143 — In June 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Statement No. 143 will be effective for the Company beginning January 1, 2003. The Company has not yet estimated the impact of implementation on its financial position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 145 — In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting for certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. SFAS No. 145 will be effective beginning January 1, 2003, except for the provisions relating to the amendment of SFAS No.13, which will be effective for transactions occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a material impact on the Company’s financial statements.
Statement of Financial Accounting Standards No. 146 — In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity is recognized at fair value when the liability is incurred and is effective for exit or disposal activities that are initiated after December 31, 2002. The Partnership has not yet estimated the impact of implementation on its financial position, results of operations or cash flows.
CRITICAL ACCOUNTING POLICIES
This discussion and analysis of our financial condition and results of operations is based on the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts 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. The following critical accounting
Table of Contents
policies, which have been chosen among alternatives, require a more significant amount of management judgment than other accounting policies the Company employs.
Revenue Recognition — Cable television service revenue is recognized in the month service is provided to the customer. 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.
Long-lived Assets — The Company periodically reviews the carrying value of its long-lived assets, including property and equipment and intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As of June 30, 2002, there has been no indication of such impairment.
On January 1, 2002, the Company adopted SFAS No. 142 “Goodwill and Other Intangibles.” Under this statement, goodwill and franchises are no longer being amortized, but are tested for impairment annually, or more frequently as warranted by events or changes in circumstances. As of June 30, 2002, there was no indication of such impairment.
Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risks arising from changes in interest rates. The Company’s primary interest rate exposure results from changes in LIBOR or the prime rate, which are used to determine the interest rate applicable to the Company’s debt facilities. As of the date of this filing, the Company had entered into three interest rate swap agreements for $27,000,000, $20,000,000, and $5,600,000 of these borrowings, to partially hedge interest rate exposure. Interest rate swaps have the effect of converting the applicable variable rate obligations to fixed or other variable rate obligations. Had the Company not entered into these fixed rate agreements, the potential loss over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate of the Company’s variable rate obligations would be approximately $526,000.
The Company does not use financial instruments for trading or other speculative purposes.
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.
Table of Contents
PART II — OTHER INFORMATION
ITEM 1 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 2 Changes in securities
None
ITEM 3 Defaults upon senior securities
None
ITEM 4 Submission of matters to a vote of security holders
None
ITEM 5 Other information
None
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibit Index
| 99(a). | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 99(b). | Certification of the President Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
| (i) | Form 8-K originally filed on July 15, 2002, and amended on July 19, 2002, announcing the dismissal of Arthur Andersen LLP as the Company’s independent auditors, and the appointment of KPMG LLP to serve as the Company’s independent auditors. | |||
| (ii) | Form 8-K filed July 18, 2002 reporting the misclassification in the financial statements as of, and for the year ended December 31, 2001, and for the quarter ended March 31, 2002, and management’s intentions to reissue the financial statements and audit report for those periods affected. |
Table of Contents
SIGNATURES
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.
Northland Cable Television, Inc. and Subsidiary
| SIGNATURES | CAPACITIES | DATE | ||||
| /s/ Richard I. Clark | Executive Vice President, Treasurer and Assistant Secretary | |||||
| Richard I. Clark | 8/14/02 | |||||
| /s/ Gary S. Jones | President | |||||
| Gary S. Jones | 8/14/02 | |||||