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, 2001
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[X] 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
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NORTHLAND CABLE TELEVISION, INC.
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(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1311836
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
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(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1638891
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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
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Securities registered pursuant to including Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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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 _____.
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 36 cable
television systems serving small cities, towns, and rural communities in
California, Georgia, South Carolina, North 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. NCV's minority member is an LLC
principally owned executives of the Company.
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, 2001, the total number of
basic subscribers served by the Systems was 113,938, and the Company's
penetration rate (basic subscribers as a percentage of homes passed) was
approximately 59%.
The Company has 91 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, 2001.
AVERAGE
MONTHLY
PERCENT OF REVENUE
BASIC BASIC PREMIUM PER EBITDA
HOMES SUBSCRIBERS BASIC SUBSCRIBERS SERVICE PREMIUM BASIC MARGIN
REGION PASSED(1) (2) PENETRATION (3) UNITS(4) PENETRATION SUBSCRIBER (5)
------ --------- ----------- ----------- ----------- -------- --------------- -------------- ---------
So.Carolina/No.
Carolina/Georgia. 99,030 60,519 61.1% 53.1% 27,842 46.0% $ 44.69 44.1%
Washington...... 25,775 16,341 63.4% 14.3% 4,940 30.2% $ 42.16 41.9%
Texas........... 47,950 25,641 53.5% 22.5% 9,281 36.2% $ 41.12 43.8%
California...... 19,090 11,437 59.9% 10.0% 5,457 47.7% $ 39.46 40.3%
------- ------- ---- ----- ------ ---- ------- ----
Total Systems... 191,845 113,938 59.4% 100.0% 47,520 41.7% $ 42.92 43.3%
(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.
The South Carolina/North Carolina/Georgia Region. The South Carolina/North
Carolina/Georgia Region consists of eight headends serving 60,519 subscribers.
Four headends, located in Aiken, Greenwood and Clemson, South Carolina and
Statesboro, Georgia, serve 55,795 subscribers or 92.2% of the total subscribers
in the region. The region is currently operated from five primary local offices
located in Aiken, Greenwood, Clemson, Statesboro and Highlands, North Carolina.
Clemson, South Carolina. The Clemson area systems serve 14,095 subscribers
from two headends. The Clemson system, which is home to Clemson
University, is the largest system, serving 13,866 subscribers.
Approximately 98.4% of the subscribers are served by plant with 450 MHz or
better 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 18,418 subscribers
from three headends. The Aiken headend serves 89.5% of the subscribers,
has a 550 MHz channel capacity and is addressable. The Company began
offering digital television service in the Aiken system during 2001. 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 system serves 16,844 subscribers
from a single headend and has a minimum of 450 MHz channel capacity. The
Company began the upgrade of the Greenwood system to 550 MHz channel
capacity in 2000, with approximately 64% of the subscribers being served
by plant with 550 MHz channel capacity by year-end 2001. 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 Company began offering digital television service in
the Greenwood system during 2001. 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 its office and headend site.
Statesboro, Georgia. The Statesboro system serves 8,594 subscribers from a
single headend with approximately 95% 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.
Highlands, North Carolina. The Highlands system serves 2,568 subscribers
from a single headend with approximately 85% of the subscribers served by
330 MHz channel capacity and 15% served by 450 MHz capacity. Highlands is
located on a plateau of the Blue Ridge Mountains where Georgia, North
Carolina and South Carolina meet. The Highlands area has long been a
vacation destination for affluent families from many Southern cities. The
area is encircled by 200,000 acres of the End National Forest. One of the
main attractions of Highlands is the area's exclusive golf clubs. The
system experiences seasonality in its subscriber base, the area's low
season (winter) and high season (summer) fluctuate by approximately 700
basic subscribers.
The Washington Region. The Washington Region serves 16,341 subscribers
from four headends and is operated from two offices located in Port Angeles and
Moses Lake, Washington. The two largest headends serve 12,380 subscribers, or
75.8% of the Company's total subscribers in the region.
Port Angeles, Washington. The Port Angeles system serves 6,014 subscribers
from one headend. The system utilizes a fiber optic backbone designed to
support a 750 MHz capacity with 65% of the subscribers served by at least
330 MHz capacity plant and 35% served by 550 MHz capacity plant. An
ongoing upgrade of the Port Angeles system to 550 MHz channel capacity
began in late 2001. 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.
Moses Lake, Washington. The Moses Lake area systems serve 10,328
subscribers from three headends. The Moses Lake headend serves 61.6% 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 began offering digital television
service in the Moses Lake system during 1999. 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 currently being to be upgraded to 550 MHz
capacity with completion projected by early 2003.
The Texas Region. The Texas Region is characterized by smaller systems,
with 17 headends serving 25,641 subscribers. Eight headends currently serve
82.9% 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 5,778 subscribers
from a cluster of four headends. Stephenville is home to Tarleton State
College, an affiliate of Texas A&M University. All of the subscribers are
currently served by plant with 400 MHz or better channel capacity. The
Company began offering digital television service in the Stephenville
system during 2001. The office and three of the headend sites are owned by
the Company.
Mexia, Texas. The Mexia area systems serve 7,850 subscribers from a
cluster of seven headends, with the two largest headends, Mexia and
Fairfield/Teague, serving 71.5% of the subscribers. Approximately 87.7% of
subscribers currently are serviced by plant with 400 MHz capacity, with
the Mexia headend utilizing a fiber optic backbone. The Company began
4
offering digital television service in the Mexia system during 2001. The
Mexia area has a diversified economy with Nucor Steel, Inc. as a major
employer.
Marble Falls, Texas. The Marble Falls area systems serve 7,258 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 80.1% 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 two to four years
the remaining systems in the Marble Falls area are scheduled to be
upgraded to 400 MHz or 550 MHz capacity. The Company began offering
digital television service in the Marble Falls system during 2001. The
Marble Falls region is a popular outdoor recreation and retirement area
for families from nearby Austin and San Antonio.
The remaining three headends in the Texas region serve 4,755 subscribers,
with all of the subscribers served by plant with 400 MHz capacity or
better.
The California Region. The California Region serves 11,437 subscribers
from seven headends, which are operated from three offices located in Yreka,
Oakhurst and Mount Shasta, California. Three headends serve 9,956 subscribers or
87.1% 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 4,154
subscribers from a cluster of five headends. The Oakhurst headend serves
64.4% of the subscribers in the area. An upgrade of the Oakhurst system to
450 MHz capacity with approximately 90.0% of the system's subscribers
served was recently completed. The Company began offering digital
television service in the Oakhurst system during 2001. The current upgrade
plan includes the construction of a fiber optic backbone, with the
interconnect and subsequent elimination of one headend.
Yreka, California. The Yreka, California system, located near Mt. Shasta
National Park, serves 2,970 subscribers from a single headend. Yreka is
the county seat of Siskiyou County. The Yreka system currently has a plant
capacity of 50% 450 MHz, 25% 400 MHz and 25% 330 MHz. An ongoing upgrade
of the system to 450 MHz capacity is in process with completion projected
by year-end 2003. The Company began offering digital television service in
the Yreka system during 2001. 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 550 MHz. The completion of an upgrade to 550 MHz is
planned. 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.
As of December 31, 2001, the Company had approximately 179 full-time
employees and 10 part-time employees. Nine 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
5
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.
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 the viewer's 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 licensees 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
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 17 million customers nationwide. Companies offering direct broadcast
satellite service use video compression technology to increase channel capacity
of their systems to more than 200 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
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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 availability of DBS equipment at reasonable prices (often free with
promotions), and the relative attractiveness of the programming options offered
by the cable television industry and direct broadcast satellite competitors will
impact the ability of providers of DBS service to compete successfully with the
cable television industry. Recently, the two leading DBS providers announced
their intent to merge into one DBS provider, which, according to the companies'
FCC filings, would enable the merged company to offer services such as local
broadcast programming in all U.S. markets and high-speed Internet access
nationwide; if this merger is approved by both the FCC and Department of
Justice, DBS may become a stronger competitor to the cable television industry.
PRIVATE CABLE
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 Company can be predicted at
this time.
The Company expects to adapt its business to adjust to the changes that
may be required under any scenario of regulation. At this time, the Company
cannot assess the effects, if any, that present regulation may have on the
Company's operations and potential appreciation of its Systems. There can be no
assurance that the final form of regulation will not have a material adverse
impact on the Company's operations.
The operation of a cable system is extensively regulated by the FCC, some
state governments and most local governments. The 1996 Telecommunications Act
has altered the regulatory structure governing the nation's communications
providers. It removes barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduces the
scope of cable rate regulation and encourages additional competition in the
video programming industry by allowing local telephone companies to provide
video programming in their own telephone service areas.
7
The 1996 Telecommunications Act requires the FCC to undertake a host of
implementing rulemakings. Moreover, Congress and the FCC have frequently
revisited the subject of cable regulation. Future legislative and regulatory
changes could adversely affect the Company's operations.
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 this may change in light of
emerging DBS competition.
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. 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. 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.
As of December 31, 2001, approximately 10% 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.
The FCC itself historically administered rate regulation of cable
programming service tiers, which represent the expanded level of packaged,
non-"premium", programming services typically containing satellite-delivered
programming. The FCC's authority, however, with respect to smaller operators
like the Company ended in 1996.
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. All of the Company's systems are
eligible for these simplified cost-of-service rules (two pursuant to waivers
granted by the FCC), and have calculated rates generally in accordance with
those rules. To the extent the Company's systems remain rate regulated on the
basic service tier, this regulatory option affords the Company significant
regulatory options.
The FCC and Congress have provided various forms of rate relief for
smaller cable systems owned by smaller operators. 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
8
purchase premium services offered on a per-channel or per-program basis, subject
to a technology exception which sunsets in October 2002.
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 if
unregulated cost rates increase dramatically. Should this occur, all rate
deregulation including that applicable to small operators like the Company could
be jeopardized. The 1996 Telecom Act also relaxes existing "uniform rate"
requirements by specifying that uniform rate requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing still may
be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom Act creates a more favorable environment for us 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.
INTERNET SERVICE
There is at present no significant federal regulation of cable system
delivery of Internet services. So far, cable operators are experiencing many
victories where regulation is attempted. For example, many local franchising
authorities were unsuccessful in their attempts to impose mandatory Internet
access requirements as part of cable franchise renewals or transfers. A federal
district court in Portland, Oregon upheld the legal ability of local franchising
authority to impose these types of conditions, but such ruling was reversed by
the Ninth Circuit Court of Appeals. Additionally, In March 2002, the FCC adopted
a Declaratory Ruling, concluding that cable modem service is properly classified
as an interstate information service and is therefore subject to FCC
jurisdiction. For now, this leaves cable modem service exempt from open access
requirements. However, the FCC simultaneously adopted a Notice of Proposed
Rulemaking to determine whether, in light of marketplace developments, it is
necessary or appropriate at this time to require access over cable systems by
multiple Internet service providers, and whether (and to what extent) cable
modem service should be regulated by state and local franchising authorities.
Any increased regulation could burden the capacity of cable systems and
complicate any plans the Company may have or develop for providing Internet
service.
Many utilities were unsuccessful in attempting to impose unduly burdensome
pole attachment rental fees for cable operator's provision of Internet access
services when the U.S. Supreme Court recently ruled that cable television
systems may deliver high-speed Internet access and remain within the protections
of Section 703 of the Telecommunications Act of 1996 (the "Pole Attachment
Act"). National Cable & Telecommunications Assoc. v. Gulf Power Co., Nos. 00-832
and 00-843, 534 U.S. ___ (January 16, 2002). The U.S. Supreme Court reversed the
Eleventh Circuit's decision to the contrary and sustained the FCC decision that
applied the Pole Attachment Act's rate formula and other regulatory protections
to cable television systems' attachments over which commingled cable television
and cable modem services are provided.
9
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 or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband 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 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 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. Co-located cable
systems are cable systems serving an overlapping territory. Cable operator
buyouts of co-located 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. However, in February 2002, the
U.S. Court of Appeals for the D.C. Circuit found such local cross-ownership rule
to be unlawful and vacated such rule. The 1996 Telecommunications Act also
eliminates the three year holding period required under the 1992 Cable Act's
"anti-trafficking" provision. The 1996 Cable Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
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.
10
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national video program services. Although the 1992 Cable
Act also precluded any cable operator from serving more than 30% of all U.S.
domestic cable subscribers, this provision was stayed pending further judicial
review and FCC rulemaking. In May 2000, the U.S. Court of Appeals for the D.C.
Circuit struck down both of these provisions. The FCC is now considering whether
it can fashion new such laws to withstand judicial review.
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; the
next such three-year period commencing January 1, 2003 and ending December 31,
2005. 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. More popular stations,
such as those affiliated with a national network, typically elect retransmission
consent, which is the broadcast signal carriage requirement that allows local
commercial television broadcast stations to negotiate for payments for granting
permission to the cable operator to carry the stations. 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. Retransmission consent demands may require substantial payments or other
concessions. Either option has a potentially adverse effect on the Company's
business.
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 implementation of digital
broadcasts, channel capacity and similar matters when these arrangements are
renegotiated.
The burden associated with must carry may increase substantially if
broadcasters proceed with 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 FCC
initially ruled against the imposition of dual digital and analog "must carry"
rules, but is conducting a further factual inquiry into whether such rules
should be promulgated.
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. We believe that requests for commercial
leased access carriages have been relatively limited.
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. This prohibition is scheduled to sunset in
October 2002,
11
subject to FCC review. 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 to all of the existing
program access requirements, and subjecting terrestrially delivered programming
to the program access requirements. Terrestrially delivered programming is
programming delivered other than by satellite. These changes should not have a
dramatic impact on the Company, but would limit potential competitive advantages
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, but allowing such contracts when held by new entrants.
In another proceeding, the FCC has preempted restrictions on the deployment of
private antenna on rental property within the exclusive use of a tenant, such as
balconies and patios. This ruling by the FCC may limit the extent to which we
along with multiple dwelling unit owners may enforce certain aspects of multiple
dwelling unit agreements which otherwise prohibit, for example, placement of
digital broadcast satellite receiver antennae in multiple dwelling unit areas
under the exclusive occupancy of a renter. These developments may make it even
more difficult for us to provide service in multiple dwelling unit complexes.
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,
12
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
- lockbox availability,
- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
- technical standards,
- consumer electronics equipment compatibility, and
- emergency alert systems.
The FCC recently 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. 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. We cannot predict the outcome
of this legislative activity. Copyright clearances for nonbroadcast programming
services are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by major music performing rights organizations, such
as Broadcast Music, Inc. (BMI). The cable industry has had a long series of
negotiations and adjudications with certain of such organizations. The Company
recently entered into an agreement with BMI setting forth, among other things,
an agreed upon rate through 2004. Although we cannot predict the ultimate
outcome of other industry proceedings or the amount of any license fees the
Company may be required to pay for past and future use of association-controlled
music, we do not believe these license fees will be significant to the Company's
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
13
cases include monetary penalties for non-compliance and may be terminable if the
franchisee failed 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,
including Connecticut, 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-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.
Historically, most franchises have been renewed for and consents granted to
cable operators that have provided satisfactory services and have complied with
the terms of their franchise.
Under the 1996 Telecom Act, cable operators are not required to obtain
franchises for the provision of telecommunications services, and local
franchising authorities are prohibited from limiting, restricting, or
conditioning the provision of these services. In addition, local franchising
authorities may not require a cable operator to provide any telecommunications
service or facilities, other than institutional networks under certain
circumstances, as a condition of an initial franchise grant, a franchise
renewal, or a 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 a cable operator derives from providing new
telecommunications services.
14
ITEM 2. PROPERTIES
The Company's cable television systems are located in and around
Stephenville, Marble Falls, Crockett, Mexia and Navasota, Texas; Moses Lake and
Port Angeles, Washington; Clemson, Aiken and Greenwood, South Carolina;
Highlands, North 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.
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.
15
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, 2001.
(c) During 2001, 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,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
SUMMARY OF OPERATIONS:
Revenue $ 62,067,659 $ 60,507,984 $ 58,848,415 $ 56,002,667 $ 39,517,808
Operating income 6,141,037 6,376,758 6,561,172 4,655,761 4,588,563
Net loss (1,596,718) (14,268,443) (11,776,281) (7,758,291) (5,550,635)
DECEMBER 31,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Total assets $125,926,192 $135,997,674 $141,985,167 $156,586,254 $ 92,421,978
Notes payable 171,031,182 182,540,000 175,090,000 177,340,000 107,962,513
Total liabilities 182,748,508 192,022,121 183,741,171 186,565,977 114,643,410
Shareholder's deficit (56,822,316) (56,024,447) (41,756,004) (29,979,723)
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.
QUARTERS ENDED
-------------------------------------------------------------------------------------------------
DECEMBER SEPTEMBER JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
31, 2001 30, 2001 2001 2001 2000 2000
------------- ------------- ------------- ------------- ------------- -------------
Revenue $ 15,683,176 $ 15,454,301 $ 15,524,527 $ 15,405,655 $ 15,280,646 $ 15,231,471
Operating income 1,206,240 1,502,413 1,710,917 1,721,467 1,667,157 1,668,039
Gain (loss) on sale
of assets 12,731,008 43,704 (12,194) (3,189) (443,263) (94,425)
Net income (loss) $ 9,294,234 $ (3,344,976) $ (3,108,921) $ (4,437,055) $ (3,476,943) $ (4,975,331)
Investment in
cable television
properties $ 118,921,405 $ 127,818,946 $ 126,589,660 $ 128,447,399 $ 129,527,197 $ 131,909,666
JUNE 30, MARCH 31,
2000 2000
------------- -------------
Revenue $ 15,155,858 $ 14,840,009
Operating income 1,635,233 1,406,329
Gain (loss) on sale
of assets (57,834) 5,366
Net income (loss) $ (2,856,204) $ (2,959,965)
Investment in
cable television
properties $ 134,727,459 $ 136,665,399
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The Company has three critical accounting policies, which have been chosen among
alternatives that require a more significant amount of management judgment than
other accounting policies the Company employs. They are described below.
16
REVENUE RECOGNITION
Cable television service revenue, including service 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 $2,744,460, $2,770,571 and $2,425,747 in 2001,
2000 and 1999, respectively.
ALLOCATION OF COST OF PURCHASED CABLE TELEVISION SYSTEMS
The Company allocated the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to noncompetition agreements, franchise agreements and
other intangibles; then the excess is allocated to goodwill.
CAPITALIZATION OF OPERATING COSTS
The Company capitalizes certain operating and administrative costs to the
systems. These costs consist primarily of salaries, travel and other operating
and administrative costs, and are allocated based on management's estimate of
time spent related to ongoing capital projects.
RESULTS OF OPERATIONS
2001 AND 2000
Basic subscribers decreased 10,356 or 8.3%, from 124,294 at December 31,
2000 to 113,938 at December 31, 2001. On a pro forma basis, excluding the
effects of system sales and acquisitions, basic subscribers decreased 4.8%, from
119,721 at December 31, 2000 to 113,938 at December 31, 2001.
Revenues increased $1.6 million or 2.6%, from $60.5 million to $62.1
million in 2001. Average monthly revenue per basic subscriber increased $2.64 or
6.6%, from $40.28 to $42.92 for the year ended December 31, 2001. 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) the Highlands, North Carolina acquisition which
accounted for approximately $321,000 of the 2001 revenue increase. On a pro
forma basis, adjusting for the acquisition of the Highlands, NC System and the
disposition of the Bainbridge, WA system: (i) revenues would have increased $1.1
million or 1.9%, from $58.5 million to $59.6 million; and (ii) revenue per
average basic subscriber would have increased $2.65 or 6.6%, from $39.94 to
$42.59.
Operating expenses, which include costs related to programming, technical
personnel, repairs and maintenance and advertising sales, increased
approximately $1.1 million or 5.2%, from $21.0 million to $22.1 million for the
year ended December 31, 2001. Operating expenses as a percentage of revenues
increased from 34.7% to 35.6% for the year ended December 31, 2001. 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; and (iii) expenses associated with the Highlands system acquisition. On
a pro forma basis, operating expenses would have increased $1.0 million or 5.0%,
from $20.1 million to $21.1 million and operating expenses as a percentage of
revenue would have increased from 34.4% to 35.4%.
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 $300,000 or 2.9%, from $10.3
million to $10.0 million for the year ended December 31, 2001. The results are
due to decreases in expenses associated with accounting, legal and
administrative services off-set by increased expenses associated with the
Highlands system acquisition. On a pro forma basis, general and administrative
expenses would have decreased $400,000 or 4.0%, from $10 million to $9.6
million.
Management fees increased $100,000 or 3.3%, from $3.0 million to $3.1
million for the year ended December 31, 2001. 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 $900,000 or
4.5%, from $19.8 million to $20.7 million for the year ended December 31, 2001.
Such increase is attributable to depreciation of recent equipment purchases in
upgrading plant and equipment.
17
Interest expense increased approximately $100,000 or .5%, from $18.4
million to $18.5 million for the year ended December 31, 2001. The Company's
weighted average outstanding indebtedness increased from approximately $178.9
million in 2000 to $184.6 million in 2001. In addition, the Company's weighted
average interest rate decreased from approximately 9.93% in 2000 to 9.49% in
2001.
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 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.
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, 1999 and 2000 and
2001, the Company's net cash provided from operations was $8.1 million, $8.8
million, $10.1 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, 2002 are
expected to be $15.9 million. The Company anticipates that cash flow from
operations will be sufficient to service its debt through December 31, 2002. The
Company's debt service obligations for the year ended December 31, 2003 are
anticipated
18
to be $18.9 million. The Company believes that cash flow from operations will be
adequate to meet the Company's long-term liquidity requirements, excluding
acquisitions, prior to the maturity of its long-term indebtedness, although no
assurance can be given in this regard.
Net cash provided by operating activities was $10.1 million for the year
ended December 31, 2001. Adjustments to the $1.6 million net loss for the period
to reconcile to net cash provided by operating activities consisted primarily of
$21.4 million of depreciation and amortization, off-set by the $12.8 million
gain on disposal of assets primarily due to the disposition of the Bainbridge,
Washington system and other changes in operating balance sheet accounts.
Net cash provided in investing activities was $1.6 million for the year
ended December 31, 2001, and consisted primarily of $13.1 million in capital
expenditures and $3.9 million for the Highlands, North Carolina acquisition
off-set by $18.6 in proceeds primarily from the Bainbridge, Washington
disposition.
Net cash used in financing activities was $11.6 million for the year ended
December 31, 2001. The Company had $6.8 million in additions to long-term debt
and made $18.3 million of principal payments on notes payable.
EBITDA increased approximately $700,000 or 2.7%, from $26.2 million to
$26.9 million for the year ended December 31, 2001. EBITDA margin was 43.3% for
the year ended December 31, 2001, remaining consistent with the prior year. The
aforementioned increases in revenues were off-set by increased operating
expenses resulting from rate increases by certain programming vendors and the
launch of new programming services. On a pro forma basis, adjusting for the 2001
acquisition of the Highlands system and disposition of the Bainbridge system,
EBITDA would have increased approximately $400,000 or 1.6% from $25.5 million to
$25.9 million and EBITDA margin would have decreased from 43.6% to 43.5% for the
year ended December 31, 2001.
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 the 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.
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
19
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 6.50 to 1. As of December 31,
2001, 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. During 2001 the Company
reduced the amount of unborrowed commitments under the Revised Senior Credit
Facility. At December 31, 2001 approximately $54 million was outstanding under
term loans, approximately $17 million was outstanding under the revolving credit
loan and $5.7 million was unborrowed. 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 (as defined) 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 (as defined) 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 (as defined) 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 (as defined) to Annualized Operating Cash Flow) of not more than
6.75 to 1.0 initially, 6.50 at December 31, 2001, decreasing over time to 4.5 to
1.0. 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, 2001, the outstanding balance under the Revised Senior
Credit Facility was $71,031,182. 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 20, 2002; $27,000,000 fixed at 5.918% under the terms of
an interest rate swap with the Company's lender expiring February 20, 2003;
$5,868,387 fixed at 9.62% under the terms of an interest rate swap with the
Company's lender expiring August 17, 2002; $16,970,000 at a LIBOR based rate of
4.66% expiring on May 20, 2002; $700,000 at a LIBOR based rate of 4.66% expiring
on March 28, 2002; $400,000 at a LIBOR based rate of 4.40% expiring on April 19,
2002; $70,000 at a LIBOR based rate of 4.41% expiring on April 22, 2002. The
balance of $22,795 bears interest at the prime rate plus 1.75% (currently
6.50%). 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.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. SFAS No. 133 also
established new accounting rules for hedging instruments which, depending on the
nature of the hedge, require that changes in the fair value of derivatives
either be offset against the change in fair value of the hedged assets or
liabilities through earnings, or be recognized in other comprehensive income
until the hedged item is recognized in earnings.
20
The Company has elected not to designate its derivatives as hedges under
SFAS No. 133. Accordingly, the Company has recorded a liability equal to the
fair value to settle the agreements and a corresponding charge in its statements
of operations.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. These notional amounts do
not represent amounts exchanged by the parties and, thus, are not a measure of
exposure to the Company through its use of derivatives. The exposure in a
derivative contract is the net difference between what each party is required to
pay based on the contractual terms against the notional amount of the contract,
which in the Company's case are interest rates.
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 $20,000,000,
$20,000,000, and $27,000,000 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 $670,000.
The Company does not use financial statements for trading or other
speculative purposes.
In addition to working capital needs for ongoing operations, the Company
has capital requirements for (i) annual maturities and interest payments related
to the term loan and (ii) required minimum operating lease payments. The
following table summarizes our contractual obligations as of December 31, 2001
and the anticipated effect of these obligations on our liquidity in future
years:
Expected Maturity Date
---------- ---------- ---------- ---------- ---------- ----------- -----------
2002 2003 2004 2005 2006 Thereafter Total
---------- ---------- ---------- ---------- ---------- ----------- -----------
Term Loan
Debt Maturity 0 3,500,000 10,500,000 14,000,000 22,819,784 120,211,398 171,031,182
Interest Payments 16,230,859 16,064,784 15,400,484 14,237,959 12,490,860 5,704,031 80,128,977
Current Weighted Average Interest Rate 9.49% 9.49% 9.49% 9.49% 9.49% 9.49% 9.49%
Minimum Operating Lease Payments 86,705 72,653 70,241 55,069 53,667 93,312 431,647
Total Contractual Cash Obligations (a) 16,317,564 19,637,437 25,970,725 28,293,028 35,364,311 126,008,741 251,591,806
(a) These contractual obligations do not include our accounts payable and
accrued liabilities (other than environmental liabilities) which we expect to be
paid in 2002, nor do they include other long-term liabilities which we generally
expect to be settled over the next several years.
CAPITAL EXPENDITURES
For the year ended December 31, 2001, the Company had capital expenditures
of approximately $13.1 million excluding acquisitions. 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, and (v) vehicle replacements.
The Company plans to invest approximately $9.0 million in capital expenditures
for 2002. 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. It is expected that cash flows from operations will be sufficient
to fund planned capital expenditures.
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.
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.
21
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. NTC has, from time to time, revised the
allocation used to determine the amount of operating costs charged to the
Company. Management believes that the methods used to allocate services to the
Company are reasonable. Amounts charged for these services were $310,931,
$1,258,412 and $2,121,890 for 2001, 2000 and 1999, respectively.
NCSC was formed to provide billing system support to cable systems owned and
managed by NCC and NTC. In addition, NCSC provides technical support associated
with the build out and upgrade of Northland affiliated cable systems. CAC
assists in the development of local advertising as well as billing for video
commercial advertisements to be cablecast on Northland affiliated cable systems.
In 2001, 2000, and 1999, the Company paid $781,497, $788,795, and $729,526 for
these services. Of this amount $222,846 and $143,901 were capitalized in 2001
and 2000, respectively, related to the build-out and upgrade of cable systems.
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
$90,098, $84,526 and $43,805, net, under the terms of these agreements during
2001, 2000 and 1999, respectively.
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.
ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS
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.
Of the total purchase price, North Star Cable, Inc. received approximately
$3,100,000 on March 31, 2000. The acquisition was financed through borrowings
under the Senior Credit Facility.
On September 18, 2001, The Company sold its cable system serving the areas
in and around McCormick, South Carolina, to Quarterlane Farms, LLC. The net
proceeds from the sale of the system were approximately $160,000. The McCormick
system served approximately 440 basic subscribers.
On September 28, 2001, The Company acquired the cable system serving the
areas in and around Highlands, North Carolina, approximately 3,200 basic
subscribers, from an affiliated limited partnership managed by NCC. The system
was acquired at a purchase price of $4,600,000 and was financed with
approximately $3,800,000 of cash on hand and an equity contribution from the
Company's parent of approximately $800,000.
On December 21, 2001, The Company sold its cable systems 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 purchase price of approximately $19,800,000. The
Company recognized a gain of approximately $12,700,000 related to the
transaction.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Company for the years ended
December 31, 2001, 2000 and 1999 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.
22
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............ 60 Director, Chairman of the Board and Chief Executive Officer
Richard I. Clark............ 44 Director, Executive Vice President, Treasurer and Assistant
Secretary
Gary S. Jones............... 44 President
Richard J. Dyste............ 56 Senior Vice President, Technical Services
R. Gregory Ferrer........... 46 Vice President and Assistant Treasurer
H. Lee Johnson.............. 58 Divisional Vice President
John E. Iverson............. 65 Director and Secretary
Matthew J. Cryan............ 37 Vice President, Budgets and Planning
Laura N. Williams........... 35 Vice President, Senior Counsel
Rick J. McElwee............. 40 Vice President, Controller
JOHN S. WHETZELL (AGE 60). Mr. Whetzell is the founder of Northland
Communications Corporation, Its Chief Executive Officer and has been a Director
since March 1982. Mr. Whetzell became Chairman of the Board of Directors in
December 1984. He also serves as Chief Executive Officer 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 27 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 65). 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 44). Mr. Clark is an original incorporator of
Northland Communications Corporation and serves as Executive Vice President,
Assistant Secretary and Assistant Treasurer of Northland Communications
Corporation. He also serves as Executive 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 23
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 44). Mr. Jones is President of Northland
Telecommunications Corporation and each of its subsidiaries. Mr. Jones joined
Northland in March 1986 as Controller and had previously served as Vice
President and chief Financial Officer for Northland. Mr. Jones is responsible
for cash management, financial reporting and banking relations for
23
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.
RICHARD J. DYSTE (AGE 56). Mr. Dyste has served as Senior Vice
President-Technical Services of Northland Telecommunications Corporation and
each of its subsidiaries. He joined Northland in 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 58). 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 33 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 46). 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 37). 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.
LAURA N. WILLIAMS (age 35). Ms Williams is Vice President and Senior
Counsel for Northland and has served in this role since August 2000. Prior to
this time, she served as Associate Counsel for each of the Northland entities
from August 1995. She is a member of the Washington State Bar Association,
American Bar Association and Women in Telecommunications. Ms. Williams received
her Bachelor of Science in Business Administration with a major in finance and
an MBA degree from California State University, Long Beach, and has a Juris
Doctor degree from Seattle University School of Law.
RICK J. MCELWEE (AGE 40). Mr McElwee is Vice President and Controller for
Northland. He joined Northland in May 1987 as System Accountant and was promoted
to Assistant Controller of Northland Cable Television, Inc. in 1993. Mr. McElwee
became Divisional Controller of Northland Telecommunications Corporation in 1997
and in January 2001, he was promoted to Vice President and Controller of
Northland Telecommunications Corporation. Mr. McElwee is responsible for
managing all facets of the accounting and financial reporting process for
Northland. Prior to joining Northland, he was employed as an accountant with Pay
n' Save Stores, Inc., a regional drugstore chain. Mr. McElwee graduated from
Central Washington University in 1985 and holds a Bachelor of Science in
Business Administration with a major in accounting.
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
24
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 2001 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 ........................................ 1,013,624 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 ........................................ 312,995 7.0%
Robert A. Mandich ....................................... 278,400 6.2%
James E. Hanlon ......................................... 61,322 1.4%
Gary S. Jones ........................................... 52,797 1.2%
John E. Iverson ......................................... 50,000 1.1%
Richard J. Dyste ........................................ 47,748 1.1%
H. Lee Johnson .......................................... 23,731 *
R. Gregory Ferrer ....................................... 11,079 *
Matthew J. Cryan ........................................ 5,391 *
Laura N. Williams ....................................... 5,000 *
Rick J. McElwee ......................................... 4,000 *
All executive officers and directors as a group
(ten persons) ........................................... 1,526,365 34.0%
- ---------
* 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 Revised 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 Seven Limited
Partnership ("NCP-7") and Northland Cable Properties Eight Limited Partnership
("NCP-8"). NCC is also the managing member of Northland Cable Networks, LLC
("NCN LLC"). In addition, NCPI is the majority member and manager of Northland
Cable
25
Ventures, LLC ("NCV"), NCSC is the sole shareholder of Cable Ad-Concepts, Inc.
("CAC") and NMI is the sole shareholder of Statesboro Media, Inc. and Corsicana
Media, Inc. Each of the Company's directors is also a director of NTC and each
of its wholly-owned direct subsidiaries and certain other NTC Affiliates and the
Company's officers are also officers of certain of the NTC Affiliates.
MANAGEMENT AGREEMENT WITH NTC
NTC currently supervises all aspects of the business and operations of the
Company pursuant to an Operating Management Agreement between the Company and
NTC dated August 23, 1994 (the "Management Agreement"). The Management Agreement
continues in effect until terminated by either party on 30-days' written notice.
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, 1999, 2000 and 2001, the Company paid a Management Fee of $2.9
million, $3.0 million and $3.1 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, 1999, 2000 and
2001, the Company reimbursed Northland Communications Corporation approximately
$2.1 million, $1.3 million and $300,000, 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, 1999 and 2000, were $631,865 and
$363,475, respectively. As of January 2001 the Company ceased operations of NCN.
ARRANGEMENTS WITH NORTHLAND CABLE SERVICES CORPORATION AND CABLE AD-CONCEPTS,
INC.
Northland Cable Services Corporation ("NCSC") is a wholly owned direct
subsidiary of NTC fromed to provide billing system support to cable systems
owned and managed by NCC and NTC. In addition, NCSC provides technical support
associated with the build out and upgrade of Northland affiliated cable systems.
Cable Ad-Concepts, Inc. (`CAC") assists in the development of local advertising
as well as billing for video commercial advertisements to be telecast on
Northland affiliated cable systems. For the years ended December 31, 1999, 2000
and 2001, the Company paid $729,526 $788,795 and $781,497, for these services.
Of this amount $143,901 and $222,846 were capitalized in 2000 and 2001,
respectively, related to the build-out and upgrade of cable systems.
OPERATING AGREEMENTS WITH AFFILIATES
The Company has operating management agreements with affiliated entities
pursuant to which, in certain instances, the Company serves as the local
managing agent for certain systems and, in other instances, an affiliate 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, 1999, 2000 and 2001, the
Company paid affiliates an aggregate of $43,805, $84,526 and $90,098,
respectively, for performing such services for affiliates.
26
(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.
27
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, 2001 And 2000................................. ____
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and 1999.................................................. ____
Consolidated Statements of Changes in Shareholder's Capital (Deficit) for
the years ended December 31, 2001, 2000 and 1999........................................ ____
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999.................................................. ____
Notes to Financial Statements--December 31, 2001........................................ ____
(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)
10.2 Representation of Arthur Anderson, LLP dated April 1, 2002.
- ------------
(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, 2001.
28
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, Chief Executive Officer
Date: 4/1/02
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 4/1/02
- ---------------------------- Chief Executive Officer
John S. Whetzell
/s/ Richard I. Clark Director, Executive Vice President, Treasurer 4/1/02
- ---------------------------- and Assistant Secretary
Richard I. Clark
/s/ Gary S. Jones President 4/1/02
- ----------------------------
Gary S. Jones
/s/ John E. Iverson Director and Secretary 4/1/02
- ----------------------------
John E. Iverson
29
EXHIBITS INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
10.2 Representation Letter 1
30
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland
Telecommunications Corporation)
Consolidated Financial Statements
As of December 31, 2001 and 2000
Together with Report of Independent Public Accountants
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, 2001
and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 7 to the financial statements, effective January 1, 2001,
the Company changed its method of accounting for interest rate swap agreements.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
March 1, 2002
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
Consolidated Balance Sheets - December 31, 2001 and 2000
ASSETS
December 31,
---------------------------------
2001 2000
------------- -------------
CURRENT ASSETS:
Cash $ 2,724,099 $ 2,551,425
Due from affiliates 295,650 1,160,446
Accounts receivable 3,437,560 2,187,586
Prepaid expenses 547,480 571,020
------------- -------------
Total current assets 7,004,789 6,470,477
------------- -------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 110,755,761 104,448,059
Less -- Accumulated depreciation (53,518,610) (48,315,474)
------------- -------------
57,237,151 56,132,585
Franchise agreements (net of accumulated amortization of $47,705,273 and
$40,107,541, respectively) 53,229,933 63,283,045
Goodwill (net of accumulated amortization of $2,407,104 and $2,393,494,
respectively) 3,937,329 4,530,939
Loan fees (net of accumulated amortization of $1,970,213 and $1,296,338,
respectively) 3,861,735 4,491,590
Other intangible assets (net of accumulated amortization of $3,976,683 and
$3,410,126, respectively) 655,257 1,089,038
------------- -------------
118,921,405 129,527,197
------------- -------------
Total assets $ 125,926,194 $ 135,997,674
============= =============
(Continued)
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
Consolidated Balance Sheets - December 31, 2001 and 2000 (Continued)
LIABILITIES AND SHAREHOLDER'S DEFICIT
December 31,
---------------------------------
2001 2000
------------- -------------
CURRENT LIABILITIES:
Accounts payable $ 1,103,869 $ 754,908
Subscriber prepayments 1,898,112 1,549,945
Accrued expenses 6,395,484 6,951,496
Converter deposits 157,534 122,674
Due to affiliates 242,741 103,098
------------- -------------
Total current liabilities 9,797,740 9,482,121
INTEREST RATE DERIVATIVE 1,919,587 --
NOTES PAYABLE 171,031,182 182,540,000
------------- -------------
Total liabilities 182,748,509 192,022,121
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 10)
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 11,560,527
Accumulated deficit (69,181,692) (67,584,974)
------------- -------------
Total shareholder's deficit (56,822,315) (56,024,447)
------------- -------------
Total liabilities and shareholder's deficit $ 125,926,194 $ 135,997,674
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
Consolidated Statements of Operations
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
REVENUES:
Service revenues $ 62,067,659 $ 60,144,509 $ 58,216,550
Programming and production revenues from affiliates -- 363,475 631,865
------------ ------------ ------------
Total revenues 62,067,659 60,507,984 58,848,415
------------ ------------ ------------
OPERATING EXPENSES:
Cable system operations (including $221,840, $305,673 and $236,867,
net, paid to affiliates) 22,119,572 20,950,091 19,326,047
General and administrative (including $737,840, $1,682,160 and
$2,584,442, net, paid to affiliates) 9,966,491 10,348,509 10,724,647
Management fees paid to parent 3,103,383 3,002,889 2,896,228
Depreciation and amortization 20,737,176 19,829,737 19,340,321
------------ ------------ ------------
Total operating expenses 55,926,622 54,131,226 52,287,243
------------ ------------ ------------
Income from operations 6,141,037 6,376,758 6,561,172
OTHER INCOME (EXPENSE):
Interest expense and amortization of loan fees (18,522,714) (18,364,730) (17,842,346)
Interest rate derivative (2,608,587) -- --
Gain (loss) on sale 12,759,329 (590,156) (671,398)
Other, net (Note 8) (54,783) 402,628 176,291
------------ ------------ ------------
Net loss before cumulative effect of change in accounting principle
and extraordinary item (2,285,718) (12,175,500) (11,776,281)
Cumulative effect of change in accounting principle 689,000 -- --
------------ ------------ ------------
Net loss before extraordinary item (1,596,718) (12,175,500) (11,776,281)
EXTRAORDINARY ITEM:
Loss on extinguishment of debt -- (2,092,943) --
------------ ------------ ------------
NET LOSS $ (1,596,718) $(14,268,443) $(11,776,281)
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
Consolidated Statements of Changes in Shareholder's Deficit
For the Years Ended December 31, 2001, 2000 and 1999
Common Stock and
Additional
Paid-In Capital
------------ ------------ Accumulated
Shares Amount Deficit Total
------------ ------------ ------------ ------------
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)
Equity contribution in-kind from Parent -- 798,850 -- 798,850
Net loss -- -- (1,596,718) (1,596,718)
------------ ------------ ------------ ------------
BALANCE, December 31, 2001 10,000 $ 12,359,377 $(69,181,692) $(56,822,315)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
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, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,596,718) $(14,268,443) $(11,776,281)
Adjustments to reconcile net loss to net cash provided by operating
activities-
Depreciation and amortization 20,737,176 19,829,737 19,340,321
Amortization of loan costs 673,875 818,867 914,554
Loss on extinguishment of debt -- 2,092,943 --
(Gain) loss on disposal of assets (12,759,329) 590,156 671,398
Change in accounting principle (689,000) -- --
Interest rate derivative 2,608,587 -- --
Changes in certain assets and liabilities, net of acquisition
Due to/from affiliates 1,053,288 (978,229) (218,909)
Accounts receivable (19,146) 38,671 (189,897)
Prepaid expenses 31,593 (56,137) (229,292)
Accounts payable 412,588 (171,026) (152,830)
Subscriber prepayments 159,036 (280,286) (13,739)
Other current liabilities, net (532,603) 922,304 (210,664)
------------ ------------ ------------
Net cash provided by operating activities 10,079,347 8,538,557 8,134,661
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems (3,855,373) (3,100,000) --
Investment in property and equipment (13,103,679) (9,816,559) (7,061,920)
Proceeds from disposition of cable systems 18,526,332 -- --
Insurance proceeds and other 78,885 98,007 26,235
Franchise fees and other intangibles -- (138,426) (133,898)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,646,165 (12,956,978) (7,169,583)
------------ ------------ ------------
(Continued)
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, 2001, 2000 and 1999 (Continued)
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable $ 6,800,000 $ 85,640,000 $ --
Principal payments on notes payable, net (18,308,818) (77,955,103) (2,250,000)
Loan fees (44,020) (2,081,101) (100,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities (11,552,838) 5,603,796 (2,350,000)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH 172,674 1,185,375 (1,384,922)
CASH, beginning of year 2,551,425 1,366,050 2,750,972
------------ ------------ ------------
CASH, end of year $ 2,724,099 $ 2,551,425 $ 1,366,050
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 17,678,819 $ 16,515,395 $ 16,901,071
============ ============ ============
Cash paid for state income taxes $ 3,192 $ 25,136 $ 28,746
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
In association with the acquisition of the cable television systems, the Company
assumed certain working capital balances related to the accounts receivable,
prepaid expenses, accrued liabilities, deposits, and subscriber prepayments. The
Company also received an in-kind distribution from its parent in the amount of
$798,850.
A hold back note of approximately $1,000,000 will be held in escrow until June
of 2002 related to the sale of the Bainbridge Island system.
The accompanying notes are an integral part of these consolidated statements.
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
Notes to Consolidated Financial Statements
For the year ended December 31, 2001
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, 2001, NCTV had 91
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. NCN ceased its operations as of
January 1, 2001. NCTV and NCN are collectively referred to as the Company.
The Company is subject to certain risks as a cable television operator. These
include competition from alternative technologies (e.g., satellite),
requirements to renew its franchises, availability of capital and note payable
covenants.
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 two limited partnerships, and is the managing member of
Northland Cable Networks, LLC (the LLC), all of 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 and technical support to
cable systems owned by the limited partnerships and the LLC, which are managed
by 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.
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, 2001, 2000 and 1999, the Company was
charged $18,728, $76,244 and $76,338, respectively, by the fund. As of December
31, 2001, the fund had a balance of $614,057.
24
2. 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.
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 1-20 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, 2001, there has been no indication of such impairment.
INTANGIBLE ASSETS
Costs assigned to franchise agreements, loan fees and other intangibles are
being amortized using the straight-line method. Loan fees are deferred and
amortized on a straight line basis, which approximates the effective interest
rate method, over the life of the loan. Useful lives for these intangible assets
are as follows (current weighted average useful life of 11.38 years):
Franchise agreements (current weighted average useful life of
10.01 years) 9-20
years Other intangible assets (current weighted average useful
life of 7.17 years) 5-10
years Goodwill 40 years
The Company recorded amortization expense of $11,136,346, $11,170,890 and
$11,152,280, in 2001, 2000 and 1999, respectively. Amortization expense for each
of the next five years is expected to be approximately as follows:
2002 $ 11,400,000
2003 11,000,000
2004 10,700,000
2005 9,200,000
2006 8,200,000
--------------
$ 50,500,000
==============
2
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 $2,744,460, $2,770,571 and $2,425,747,
respectively, in 2001, 2000 and 1999. License fee revenue is recognized in the
period service is provided.
DERIVATIVES
The Company has only limited involvement with derivative 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.
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, as the Company currently deals
only with its bank. The exposure in a derivative contract is the net difference
between what each party is required to pay based on the contractual terms
against the notional amount of the contract, which in the Company's case, are
interest rates.
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at fair value. SFAS No. 133 also established
new accounting rules for hedging instruments which, depending on the nature of
the hedge, require that changes in the fair value of derivatives either be
offset against the change in fair value of the hedged assets or liabilities
through earnings, or be recognized in other comprehensive income until the
hedged item is recognized in earnings.
The Company has elected not to designate its derivatives as hedges under SFAS
No. 133. Accordingly, the Company has recorded any change in the fair value of
these agreements in its statements of operations and the corresponding
asset/liability on the balance sheet.
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 No. 141 and 142 - In June 2001, the
Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 142 establishes a
new method of testing goodwill 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. The
amortization of existing goodwill will cease on December 31, 2001. Any goodwill
resulting from acquisitions completed after June 30, 2001 will not be amortized.
SFAS No. 141 is not expected to have a material impact on the Company's
financial position, results of operations or cash flows. The adoption of SFAS
No. 142 will result in the Company's discontinuation of amortization of its
goodwill, approximately $170,000 a year. The Company will be required to test
its goodwill for impairment under the new standard beginning in the first
quarter of 2002, which could have an adverse effect on the Company's future
results of operations if an impairment occurs. The net book value of the
goodwill remaining at December 31, 2001 was $3,937,329.
3
The cable television industry is assessing whether franchises qualify as
indefinite useful life assets. In addition, the Emerging Issues Task Force is
currently assessing the appropriate methodologies to measure the impairment of
indefinite life assets.
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
of SFAS No. 143 on its financial position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 144 - In August 2001, the FASB
issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets." Statement No. 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of.
Statement No. 144 supercedes Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and
supercedes the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for segments of a business to
be disposed of. Implementation of Statement No. 144, which is effective January
1, 2002, is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
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.
3. 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.
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. NTC has, from time to time, revised the
allocation used to determine the amount of operating costs charged to the
Company. Management believes that the methods used to allocate services to the
Company are reasonable. Amounts charged for these services were $310,931,
$1,258,412 and $2,121,890 for 2001, 2000 and 1999, respectively.
4
NCSC was formed to provide billing system support to cable systems owned and
managed by NCC and NTC. In addition, NCSC provides technical support associated
with the build out and upgrade of Northland affiliated cable systems. CAC
assists in the development of local advertising as well as billing for video
commercial advertisements to be cablecast on Northland affiliated cable systems.
In 2001, 2000, and 1999, the Company paid $781,497, $788,795, and $729,526 for
these services. Of this amount $222,846 and $143,901 were capitalized in 2001
and 2000, respectively, related to the build-out and upgrade of cable systems.
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
$90,098, $84,526 and $43,805, net, under the terms of these agreements during
2001, 2000 and 1999, respectively.
4. 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 7 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, 2001 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 ceased the operations of NCN on January 1, 2001, and
does not believe that this has a material effect on the 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 Years Ended
December 31,
--------------------------------
2000 1999
------------ ------------
INCOME STATEMENT INFORMATION:
Revenues from affiliates $ 737,898 $ 1,352,276
Less: intercompany revenue (374,423) (720,411)
------------ ------------
Total revenues 363,475 631,865
Operating expenses (650,004) (1,008,165)
Other, net (19,923) (19,265)
------------ ------------
Net loss $ (306,452) $ (395,565)
============ ============
December 31,
-----------
2000
-----------
BALANCE SHEET INFORMATION:
Current assets $ 2,229,287
Less: intercompany elimination (2,018,237)
-----------
Total assets $ 211,050
===========
Total liabilities $ 70,188
===========
9
5. PROPERTY AND EQUIPMENT
December 31,
-----------------------------------
2001 2000
------------- -------------
Land and buildings $ 2,470,446 $ 2,343,644
Distribution plant 102,032,363 95,874,216
Other equipment 5,692,587 5,340,707
Leasehold improvements 32,033 32,033
Construction in progress 528,332 857,459
------------- -------------
110,755,761 104,448,059
Less - accumulated depreciation (53,518,610) (48,315,474)
------------- -------------
$ 57,237,151 $ 56,132,585
============= =============
6. ACCRUED EXPENSES
December 31,
-------------------------------
2001 2000
---------- ----------
Programmer license fees $1,708,679 $1,852,847
Franchise fees 1,189,739 1,177,191
Interest 2,008,405 2,178,426
Taxes 759,822 991,858
Other 728,839 751,174
---------- ----------
$6,395,484 $6,951,496
========== ==========
7. NOTES PAYABLE
December 31,
--------------------------------
2001 2000
------------ ------------
Senior subordinated notes $100,000,000 $100,000,000
Revised senior credit facility 71,031,182 82,540,000
------------ ------------
$171,031,182 $182,540,000
============ ============
6
REVOLVING CREDIT AND TERM LOAN
On August 14, 2000, the Company refinanced its existing senior bank indebtedness
resulting in the a charge to expense 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 established a $35 million 364-day revolving credit loan. In August
2001, the revolver converted to a term loan due on June 30, 2007. The other two
components consisted originally 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. The allowable borrowings on the $40
million revolver were reduced by approximately $17,300,000 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 8.43% (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, 2001, $5,660,000 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, as
defined in the credit agreement, including a Pro Forma Debt Service ratio not
less than 1.25 to 1 and a Leverage Ratio of no greater than 6.50 to 1, among
other restrictions. The Company submits quarterly debt compliance reports to its
creditor under this arrangement. As of December 31, 2001, 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, 2001, was approximately $77,000,000,
based on available market information.
The Notes will be redeemable at the option of the Company, in whole or in part,
at any time on or after November 15, 2002 at the following prices (expressed as
percentages of principal amount) if redeemed during the 12-month period
beginning on November 15 of the years dated below, in each case together with
interest accrued to the redemption date:
Year Percentage
------------------------------------- ----------
2002 105.125%
2003 103.417%
2004 101.708%
2005 and thereafter 100.000%
The indenture pursuant to which the Notes were issued, among other things,
limits the ability of the Company and its subsidiaries to incur additional
indebtedness or issue preferred stock; make certain restricted payments; grant
liens on assets; merge, consolidate or transfer substantially all of their
assets; enter into certain transactions with related persons; make certain
payments affecting subsidiaries; sell assets; and issue capital stock of
subsidiaries. Additionally, the Company has agreed to restrictive covenants, as
defined in the indenture, which require the maintenance of certain ratios,
including a Debt to Cash Flow ratio of 6.50 to 1, among other restrictions. The
Company submits quarterly debt compliance reports to a trustee. As of December
31, 2001, 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.
7
PRINCIPAL PAYMENTS
Annual maturities of notes payable after December 31, 2001 based on amounts
outstanding at December 31, 2001 are as follows:
2002 $ --
2003 3,500,000
2004 10,500,000
2005 14,000,000
2006 22,819,784
Thereafter 120,211,398
-------------
$ 171,031,182
=============
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, 2001, the Company had
outstanding three interest rate swap agreements with its banks, having a
notional principal amount of $82,540,000. These agreements effectively change
the Company's interest rate exposure to fixed rate of 5.97% (weighted average),
plus an applicable margin based on certain financial covenants (the margin at
December 31, 2001 was 2.75%).
Maturity Date Fixed Rate Notional Amount
----------------- ---------- ---------------
February 20, 2002 5.17% $42,540,000
August 19, 2002 6.87% $20,000,000
August 20, 2002 6.79% $20,000,000
The Company has also entered into a forward swap of $27,000,000, which will
become effective on February 20, 2002. The swap has a fixed rate of 3.17%, and
matures February 20, 2003.
The Company has elected not to designate its derivatives as hedges under SFAS
133. Accordingly, upon adoption on January 1, 2002, the Company recorded an
asset equal to the fair market value of its derivatives, $689,000 in income
related to the cumulative effect of a change in accounting principle. Each
quarter the change in the fair market value of the Company's derivative
instruments have been recorded as interest rate derivative. At December 31,
2001, the Company would have paid approximately $1,920,000 to settle these
agreements based on fair value estimates received.
8. OTHER, NET
Other, net included as a component of other (expense) income in the consolidated
statements of operations consists of:
For the Year Ended December 31,
---------------------------------------------
2001 2000 1999
--------- -------- ---------
Interest income $ 122,705 $192,870 $ 205,038
Other (177,488) 209,758 (28,747)
--------- -------- ---------
$ (54,783) $402,628 $ 176,291
========= ======== =========
8
9. INCOME TAXES
The operations of the Company and its affiliates are included for federal income
tax purposes in a consolidated federal income tax return filed by NTC. For
financial reporting purposes, the provision for income taxes is computed as if
the Company filed a separate federal income tax return utilizing the tax rate
applicable to NTC on a consolidated basis.
Deferred income taxes are determined on the asset and liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." The asset and liability method requires the
recognition of deferred income taxes for the expected future tax consequences of
temporary differences between the carrying amounts on the financial statements
and the tax bases of assets and liabilities.
The primary components of deferred income taxes are as follows:
December 31,
--------------------------------
2001 2000
------------ ------------
DEFERRED TAX ASSETS:
Net operating loss carryforward $ 23,800,000 $ 23,800,000
Interest derivative 650,000 --
Valuation allowance (21,750,000) (20,900,000)
------------ ------------
2,700,000 2,900,000
DEFERRED TAX LIABILITIES:
Property and equipment 2,700,000 2,900,000
------------ ------------
$ -- $ --
============ ============
The federal income tax net operating loss carryforward of approximately
$69,000,000 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 $1,510,000, $4,820,000 and $4,078,000 for the years
ended December 31, 2001, 2000 and 1999, 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.
10. 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 $894,665, $1,055,907 and $915,912 in 2001, 2000 and
1999, respectively. Minimum lease payments to the end of the lease terms are as
follows:
2002 $ 86,705
2003 72,653
2004 70,241
2005 55,069
2006 53,667
Thereafter 93,312
-----------
$ 431,647
===========
9
EFFECTS OF REGULATION
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.
Cable Entry into Internet - The U.S. Supreme Court recently ruled that cable
television systems may deliver high-speed Internet access and remain within the
protections of Section 703 of the Telecommunications Act of 1996 (the "Pole
Attachment Act"). National Cable & Telecommunications Assoc. v. Gulf Power Co.,
Nos. 00-832 and 00-843, 534 U.S. (January 16, 2002). The Court reversed the
Eleventh Circuit's decision to the contrary and sustained the FCC decision that
applied the Pole Attachment Act's rate formula and other regulatory protections
to cable television systems' attachments over which commingled cable television
and cable modem services are provided. Cable Rate Regulation - Although the FCC
established the rate regulatory scheme pursuant to the 1992 Cable Act, local
municipalities, 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. 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.
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 for basic
service tier programming. All of Northland's systems are eligible for these
simplified cost-of-service rules, and have calculated rates in accordance with
those rules.
Electric Utility Entry into Telecommunications and 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 to engage in activities that could include the
provision of video programming.
Must Carry and 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 "must carry" status or
"retransmission consent" status. Less popular stations typically elect must
carry, which is the broadcast signal carriage rule 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 or a digital broadcast signal) for granting permission to the cable
operator to carry the stations. Retransmission consent demands may require
substantial payments or other concessions.
10
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.
Inside Wiring - 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 fee, where this fee is permissible.
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 or renew existing 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 among 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-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. Historically, most
franchises have been renewed and transfer consents granted to cable operators
that have provided satisfactory services and have complied with the terms of
their franchise.
11. ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS
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.
The allocation of purchase price for the Kingston and Hansville Systems, as
shown in the following table, reflects the estimated fair value of assets and
liabilities acquired by the Company and may be adjusted upon final determination
of such fair value.
Franchises and other intangible assets $ 2,931,000
Property and equipment 169,000
-------------
$ 3,100,000
=============
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 managed by NCC. The system
was acquired at a purchase price of approximately $4,600,000 and was financed
with approximately $3,800,000 of cash on hand and an in-kind equity contribution
from the Company's parent of $798,850.
11
The allocation of purchase price for the Highlands System, as shown in the
following table, reflects the estimated fair value of assets and liabilities
acquired by the Company and may be adjusted upon final determination of such
fair value.
Franchises and other intangible assets $ 2,959,733
Property and equipment 1,640,267
-------------
$ 4,600,000
=============
On December 21, 2001, the Company sold its cable system serving the areas of
Bainbridge Island, Kingston and Hansville, Washington, which represented
approximately 6450 basic subscribers, to TCI Cable Partners' of St. Louis, L.P.
The systems were sold at a purchase 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 and 2000, assuming the
acquisitions and disposition described above had been made at the beginning of
2000, follow:
For the Years Ended
December 31,
-------------------------------------
2001 2000
------------ ------------
(unaudited)
Service revenues $ 59,642,077 $ 58,655,144
============ ============
Net loss $(13,398,204) $(13,230,055)
============ ============
12