<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1998
REGISTRATION NO. 333-43157
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NORTHLAND CABLE TELEVISION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
WASHINGTON 91-1311836
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
WASHINGTON 91-1638891
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
4841
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
<TABLE>
<S> <C>
1201 THIRD AVE., SUITE 3600 JAMES A. PENNEY
SEATTLE, WA 98101 VICE PRESIDENT AND SECRETARY
(206) 621-1351 NORTHLAND CABLE TELEVISION, INC.
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE 1201 THIRD AVE., SUITE 3600
NUMBER, SEATTLE, WA 98101
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL (206) 621-1351
EXECUTIVE OFFICE) (NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
COPIES TO:
SCOTT T. BELL
JOHN P. STOKKE
CAIRNCROSS & HEMPELMANN P.S.
701 FIFTH AVE., SUITE 7000
SEATTLE, WA 98104
(206) 587-0700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. [X]
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF AMOUNT TO AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
Senior Subordinated Notes................................. $100,000,000 $29,500.00
==============================================================================================
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
- ----------------
NORTHLAND CABLE TELEVISION, INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS
10 1/4% SENIOR SUBORDINATED NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
EACH $1,000 IN PRINCIPAL AMOUNT OF ITS OUTSTANDING
10 1/4% SENIOR SUBORDINATED NOTES DUE 2007
------------------------
Northland Cable Television, Inc., a Washington corporation (the "Company"),
hereby offers to exchange (the "Exchange Offer") up to $100,000,000 in aggregate
principal amount of its 10 1/4% Senior Subordinated Notes due 2007 (the
"Exchange Notes") for up to $100,000,000 in aggregate principal amount of their
outstanding 10 1/4% Senior Subordinated Notes due 2007 (the "Original Notes"
and, together with the Exchange Notes, the "Notes") that were issued and sold in
a transaction exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"). As used herein, the "Company" refers to
Northland Cable Television, Inc. and its wholly-owned subsidiary, Northland
Cable News, Inc., unless the context otherwise indicates. There will be no cash
proceeds to the Company from the Exchange Offer.
The terms of the Exchange Notes are substantially identical (including
principal amount, interest rate, maturity, security and ranking) to the terms of
the Original Notes for which they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Notes (i) are freely transferable by holders
thereof (except as provided below) and (ii) are not entitled to certain
registration rights and certain additional interest provisions which are
applicable to the Original Notes under the Registration Rights Agreement (as
defined). The Exchange Notes will be issued under the indenture governing the
Original Notes. For a complete description of the terms of the Exchange Notes,
see "Description of the Notes."
The Original Notes are, and upon issuance the Exchange Notes will be,
general unsecured obligations of the Company, subordinated in right of payment
to all present and future Senior Debt (as defined) of the Company, including the
Company's obligations under the Senior Credit Facility (as defined). The
Original Notes are, and upon issuance the Exchange Notes will be, fully and
unconditionally, jointly and severally guaranteed on a senior subordinated basis
(the "Subsidiary Guarantees") by the Company's subsidiary, as Guarantor, and
each of the Company's future subsidiaries (the "Guarantors"). Each Subsidiary
Guarantee is a general unsecured obligation of such Guarantor, subordinated in
right of payment to all present and future senior indebtedness of such
Guarantor. As of January 31, 1998, in addition to the Original Notes, the
Company had approximately $76.0 million of indebtedness outstanding, all of
which was Senior Debt. As of December 31, 1997 the Guarantor had no debt
outstanding. See "Description of the Notes -- Subordination," "-- Subsidiary
Guarantees" and "Description of the Senior Credit Facility."
The Original Notes were originally issued and sold (the "Offering") on
November 12, 1997 in a transaction not registered under the Securities Act, in
reliance upon the exemption provided in Section 4(2) of the Securities Act and
Rule 144A promulgated under the Securities Act. Accordingly, the Original Notes
may not be reoffered, resold or otherwise pledged, hypothecated or transferred
in the United States unless so registered or unless an applicable exemption from
the registration requirements of the Securities Act is available. Based upon its
view of interpretations provided to third parties by the Staff (the "Staff") of
the Securities and Exchange Commission (the "Commission"), the Company believes
that the Exchange Notes issued pursuant to the Exchange Offer in exchange for
the Original Notes may be offered for resale, resold and otherwise transferred
by holders thereof (other than any holder which is (i) an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act (an
"Affiliate"), (ii) a broker-dealer who acquired Original Notes directly from the
Company or (iii) a broker-dealer who acquired Original Notes as a result of
market making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders are not engaged in, and do not intend to engage in,
and have no arrangement or understanding with any person to participate in, a
distribution of such Exchange Notes. Each broker-dealer that receives Exchange
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of Exchange Notes.
The Letter of Transmittal that is filed as an exhibit to the Registration
Statement of which this Prospectus is a part (the "Letter of Transmittal")
states that by so
(Cover continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS TO CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1997.
LOGO
<PAGE> 3
(Continued from cover page)
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Broker-dealers who acquired Original Notes as a result of market making or other
trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Company has agreed that, for
a period of 180 days after the Registration Statement of which this Prospectus
is a part is declared effective by the Commission, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. Any
holder who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes and any other holder that cannot rely upon
interpretations must comply with the registration and prospectus requirements of
the Securities Act in connection with a secondary resale transaction.
Original Notes initially purchased by qualified institutional buyers were
initially represented by a single, global Note in registered form, registered in
the name of a nominee of the Depository Trust Company ("DTC"), as depository.
The Exchange Notes exchanged for Original Notes represented by the global Note
will be represented by one or more global Exchange Notes in registered form,
registered in the name of the nominee of DTC. See "Description of the
Notes -- Book-Entry; Delivery and Form." Exchange Notes issued to non-qualified
institutional buyers in exchange for Original Notes held by such investors will
be issued only in certificated, fully registered, definitive form. Except as
described herein, Exchange Notes in definitive certificated form will not be
issued in exchange for the global Note(s) or interests therein.
The Exchange Notes constitute new issues of securities with no established
public trading market. The Original Notes, however, have traded on the National
Association of Securities Dealers, Inc.'s PORTAL market. Any Original Notes not
tendered and accepted in the Exchange Offer will remain outstanding. To the
extent that Original Notes are not tendered or are tendered but not accepted in
the Exchange Offer, a holder's ability to sell such Original Notes could be
adversely affected. Following consummation of the Exchange Offer, the holders of
any remaining Original Notes will continue to be subject to the existing
restrictions on transfer thereof and the Company will have no further obligation
to such holders to provide for the registration under the Securities Act of the
Original Notes except under certain limited circumstances. See "Original Notes
Registration Rights." No assurance can be given as to the liquidity of the
trading market for either the Original Notes or the Exchange Notes. The Original
Notes are not listed on any securities exchange and the Company does not intend
to apply for a listing of the Exchange Notes on a Securities Exchange.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered or accepted for exchange. The Exchange
Offer will expire at 5:00 p.m., New York City time, on , 1998, unless
extended (the "Expiration Date"). The date of acceptance for exchange of the
Original Notes (the "Exchange Date") will be the first business day following
the Expiration Date, upon surrender of the Original Notes. Original Notes
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date; otherwise such tenders are irrevocable.
<PAGE> 4
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement") under the Securities Act with respect to the Exchange Notes being
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are omitted as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company, the Guarantor and the Exchange Notes, reference is hereby made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and,
where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions in
such exhibit, to which reference is hereby made.
The Company is not currently subject to the informational requirements of
the Exchange Act. Upon the effectiveness of the Registration Statement or, if
earlier, the Shelf Registration Statement (as defined herein), the Company will
become subject to the informational requirements of the Exchange Act and, in
accordance therewith, will file all reports and other information required by
the Commission. The Registration Statement, as well as periodic reports, proxy
statements and other information filed by the Company with the Commission, may
be inspected at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W, Washington, D.C. 20549, or at its regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can be obtained from the Company upon
request. Any such request should be addressed to the Company's principal offices
at 1201 Third Ave., Suite 3600, Seattle, WA 98101 (telephone number (206)
674-3900). The Commission maintains a Web site that contains reports, proxy and
information statements and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval System. This Web
site can be accessed at http://www.sec.gov.
The Company's obligation to file periodic reports with the Commission
pursuant to the Exchange Act may be suspended if the Notes are held of record by
fewer than 300 holders at the beginning of any fiscal year of the Company, other
than the fiscal year in which the Registration Statement or the Shelf
Registration Statement becomes effective. However, the Company has agreed,
pursuant to the indenture dated as of November 12, 1997 (the "Indenture")
governing the Notes, that, whether or not it is then subject to Section 13 or
15(d) of the Exchange Act, it will file with the Commission and furnish to the
holders of the Notes and the Trustee (and, if filing such documents with the
Commission is prohibited, to prospective holders of the Notes upon request)
copies of the annual reports, quarterly reports and other periodic reports which
the Company would have been required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act if the Company were subject to such
Sections. In addition, the Company will furnish, upon the request of any holder
of a Note, such information as is specified in paragraph (d)(4) of Rule 144A, to
such holder or to a prospective purchaser of such Note which such holder
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A, in order to permit compliance by such holder with Rule 144A in
connection with the resale of such Note by such holder unless, at the time of
such request, the Company are subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act.
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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<PAGE> 5
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS (THE "PROSPECTUS") DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY NOTES BY
ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE
SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------------
The Northland Cable Television, Inc. logo and the Northland Cable News name
and logo are registered trademarks of Northland Telecommunications Corporation.
All other product and service names referenced herein are the trademarks or
registered trademarks of their respective owners.
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<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements and pro forma financial information (including the notes thereto)
appearing elsewhere in this Prospectus. On January 2, 1998 the Company
consummated the acquisition of six cable television systems in South Carolina
from InterMedia Partners of Carolina, L.P. and Robin Cable Systems, L.P. (the
"Acquisition"). Unless otherwise indicated: (i) all references in this
Prospectus to the Company's business on a pro forma basis give effect to the
offering of the Original Notes (the "Offering"), the application of the net
proceeds therefrom, and the Acquisition; and (ii) all references herein to the
"Company" refer to Northland Cable Television, Inc. and its consolidated
subsidiary, Northland Cable News, Inc.
THE COMPANY
OVERVIEW
Northland Cable Television, Inc. owns and operates 41 cable television
systems serving small cities, towns and rural communities (i.e., non-urban
markets) in California, Georgia, Oregon, South Carolina, Texas and Washington
(the "Existing 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. As of September 30, 1997, without
giving effect to the Acquisition, NTC and its affiliates operated a total of 99
cable television systems serving approximately 215,115 subscribers in 245
communities in 10 states. See "Certain Transactions."
Since closing its initial acquisition in 1986, Northland Cable Television,
Inc. has continued to target, negotiate and complete acquisitions of cable
systems and integrate the operation of such systems. The Company believes it has
created a loyal relationship with the communities it serves by maintaining local
offices, hiring staff predominantly from these communities and providing high
quality customer service. In many communities, the Company offers its exclusive
local news and information programming, produced by the Company's wholly owned
subsidiary, Northland Cable News, Inc. The Company has increased its basic and
premium subscribers through strategic acquisitions, selective system upgrades
and extensions of its cable systems. Additionally, the Company believes its
subscriber growth and revenue per subscriber have been enhanced by consistent
economic growth and favorable demographics in its markets. As a result of these
factors, from December 31, 1992 through September 30, 1997, the Company
experienced compound annual growth in basic subscribers and EBITDA (as defined)
on an annualized basis of 21.2% and 22.8%, respectively. As of September 30,
1997, the Existing Systems passed approximately 135,180 homes and served 92,800
basic subscribers, representing a basic penetration rate of 68.6%. The Existing
Systems achieved average monthly revenue per basic subscriber of $34.63 for the
nine months ended September 30, 1997.
On January 2, 1998 the Company acquired six cable television systems in
South Carolina (the "Acquisition Systems") from InterMedia Partners of Carolina,
L.P. and Robin Cable Systems, L.P. (collectively, the "Sellers"). The
Acquisition Systems are clustered in close proximity to several of the Existing
Systems in South Carolina, which the Company believes will allow it to achieve
certain economies of scale and operating efficiencies. As of September 30, 1997,
the Acquisition Systems passed an estimated 59,260 homes and served
approximately 35,705 basic subscribers, representing a basic penetration rate of
60.3%. The Acquisition Systems achieved average monthly revenue per basic
subscriber of $34.43 for the nine months ended September 30, 1997. Other than
the Acquisition Systems, the Company has not acquired any systems since
September 30, 1997 and, while the Company continually evaluates acquisition
opportunities, it has no current plans to make any material acquisitions.
The Company seeks to quickly assimilate acquired systems into its existing
operations. Management's strategy to integrate acquired systems enhance the
financial performance of the Company's systems includes: (i) customizing
programming services to the local market;
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(ii) upgrading its cable systems to increase signal quality, improve technical
reliability and expand channel capacity; (iii) offering more diversified
packages of programming services and pricing; and (iv) leveraging its local
presence for both marketing and community-focused customer service. As of
September 30, 1997, after giving pro forma effect to the Acquisition, the
Company's systems passed an estimated 194,440 homes and served approximately
128,505 basic subscribers, for a basic penetration rate of 66.1%. For the nine
months ended September 30, 1997 and the year ended December 31, 1996, on a pro
forma basis, the Company had revenues of approximately $40.2 million and $50.0
million, respectively, and EBITDA of approximately $17.8 million and $22.3
million, respectively.
The Company believes it is well positioned to capitalize on favorable
competitive and economic characteristics associated with owning and operating
cable television systems in non-urban markets. These attractive characteristics
as compared to urban and suburban markets, include: (i) lower population
densities which lead to a higher likelihood of only one cable television
provider; (ii) lower churn rates; (iii) greater subscriber penetration rates;
(iv) limited reception of over-the-air television stations; and (v) fewer
alternative entertainment sources.
By clustering systems, the Company is able to take advantage of certain
economies of scale, such as reduced payroll, billing and technical costs on a
per subscriber basis, and consolidated regional advertising. The Company intends
to continue to pursue its clustering strategy through the acquisition of
additional systems in or near its current operating regions.
John S. Whetzell is the founder, Chairman of the Board and President of NTC
and the Company. Mr. Whetzell has assembled a senior management team of six
individuals who have an average of approximately 21 years of experience in the
cable industry to execute the Company's business strategy. The Company's senior
management team has been in place for over 10 years. The Company believes that
the depth and experience of its senior management, together with their history
of managing the Company as a team, is a key asset which significantly enhances
the Company's operating performance. See "Management."
BUSINESS STRATEGY
The Company's objective is to capitalize on its experience and expertise in
acquiring and operating cable television systems. Elements of the Company's
business strategy are discussed below.
Target Non-Urban Markets. The Company operates clusters of cable television
systems serving non-urban markets. The Company believes non-urban markets
provide attractive and stable subscriber demographics and opportunities for
clustering systems. As a result of the Company's experience in operating cable
systems in non-urban markets, management believes it can continue to increase
subscriber penetration in its Existing Systems while pursuing strategic
acquisitions which complement the Company's Existing Systems.
Pursue Strategic Acquisitions. The Company actively considers opportunities
to acquire additional cable systems in non-urban markets and generally targets
markets with limited off-air broadcast signal reception, few entertainment
alternatives and strong community identity. In general, the Company seeks to
acquire stand-alone systems, or groups of systems, with an emphasis on those in
close proximity to its Existing Systems. In addition, the Company considers
acquisitions in other geographic areas where the Company believes it can
leverage its experience in operating cable systems in non-urban markets. From
time to time the Company may divest itself, through asset exchanges or outright
sales, of cable systems that do not readily lend themselves to the Company's
philosophy of clustering systems or for other reasons. Among the factors the
Company considers in evaluating the desirability of a potential acquisition or
asset exchange opportunity are price and terms, subscriber densities, plant
quality, availability of off-air broadcast signals, growth potential (in terms
of homes passed, revenues and EBITDA) and whether the target system can be
readily integrated into the Company's operations.
Strategically Upgrade Systems. The Company strategically upgrades its cable
systems as part of its goal to satisfy current and future customer demand and
maximize return on investment. The
5
<PAGE> 8
centerpiece of this strategy is the systematic deployment of fiber optic
technology. The Company believes that construction of fiber optic backbones
significantly enhances picture quality and system reliability and expands
channel capacity, such that the Company is able to offer a product that is
competitive or superior to other potential video providers competing in the same
markets. Typically, the Company utilizes a 550 MHz system architecture for new
trunk and feeder lines, with the flexibility to upgrade to 750 MHz capacity in
those specific districts of a service area where future demand for such capacity
may develop. The Company believes this strategy enables it to be more
responsive, in a cost-efficient manner, to fast changing technologies and local
demand for new services, such as data transfer services and digital tiers. As of
September 30, 1997, on a pro forma basis, 65.9% of the Company's subscribers
were served by systems with fiber optic backbones. The Company plans to invest
approximately $14.1 million in system upgrades prior to December 31, 1999, at
which time, on a pro forma basis, the Company anticipates that over 70% of the
Company's subscribers will be served by systems with fiber optic backbones.
Pursue New Business Opportunities. The Company has identified several
business opportunities which complement its core video delivery operations. In
many systems, the Company has begun utilizing its own advertising sales force to
market spot advertising availabilities and production to area merchants.
Advertising revenue has grown rapidly and constituted 5.5% of the Company's
revenues for the year ended December 31, 1996. In addition, the Company is
seeking to construct fiber optic wide area networks in certain communities to be
leased to local governments, schools and businesses for various
telecommunications applications, such as remote classrooms, voice networks and
data transfer. The Company is also exploring the launch of enhanced digital
video, such as Headend In the Sky(R) ("HITS"), a digital video compression
service. Digital video services such as HITS will enable the Company to
significantly expand its program offering by more efficiently utilizing current
analog channel capacity. The Company also believes that high speed data services
delivered via a hybrid fiber and coaxial plant may provide the Company with
opportunities for new revenue sources, such as Internet access, in selected
communities.
Focus on the Community. A significant component of the Company's business
strategy is to bring all aspects of its programming and operations to a local
focus in order to increase revenues, EBITDA and subscriber loyalty and to
provide key competitive advantages in the markets it serves.
Customize Programming and Expand Service Offerings. The Company
believes that a system-by-system, decentralized approach to
programming is required as each area served has unique demographic and
economic characteristics. A primary focus of the Company's programming
strategy is the offering of specialty tiers of service which typically
contain eight to ten channels of programming such as family, sports,
or movie channels that target particular niches of subscribers. The
Company's tier subscribers have grown at a compound annual growth rate
of 27.2% from December 31, 1992 through September 30, 1997. The
Company intends to implement a similar strategy in the Acquisition
Systems.
Provide Local News. The Company, through its wholly owned subsidiary,
Northland Cable News, Inc., provides local news, sports and
information to several of the Company's cable systems, serving 42.2%
of the Company's current subscribers. This news service, Northland
Cable News(R), is available exclusively to systems owned by the
Company and its affiliates, and serves to differentiate the Company's
programming from any potential competitors.
Maintain Local Offices and Personnel. Because the Company specializes
in operating cable systems in small cities and towns, the Company
emphasizes locally focused customer service. Key aspects of the
Company's customer service commitment include local offices and a
decentralized management structure. Conveniently accessible offices in
or near each of the communities served by the Company are staffed
predominantly by locally hired employees who are generally familiar
with the community's customer base.
6
<PAGE> 9
THE ACQUISITION
The Acquisition is part of a transaction among the Company and certain
affiliates of the Company and the Sellers and an affiliate of the Sellers,
whereby 12 cable television systems serving approximately 54,400 subscribers
were purchased by the Company and certain Company affiliates on January 2, 1998
for approximately $101.8 million. Allocation of the systems among the Company
and its affiliates was based on NTC's analysis of geographic concentration, ease
of technical and administrative integration and the financial and local
management capacities of the Company and its affiliates. The approximately $70.0
million purchase price paid by the Company for the Acquisition Systems was
arrived at by negotiations between the Company and the Sellers, independent of
the negotiations of the purchase price for the other systems. See "Risk
Factors -- Conflicts of Interest; Transactions with Affiliates."
------------------------------
The Company is a Washington corporation with its principal executive
offices located at 1201 Third Avenue, Suite 3600, Seattle, Washington 98101, and
its telephone number is (206) 621-1351.
THE EXCHANGE OFFER
The Exchange Offer......... The Company is offering to exchange (the "Exchange
Offer") up to $100,000,000 aggregate principal
amount of its 10 1/4% Senior Subordinated Notes due
2007 (the "Exchange Notes") for up to $100,000,000
aggregate principal amount of its outstanding
10 1/4% Senior Subordinated Notes due 2007 that
were issued and sold in a transaction exempt from
registration under the Securities Act ((the
"Original Notes") and, together with the Exchange
Notes, the "Notes"). The form and terms of the
Exchange Notes are substantially identical
(including principal amount, interest rate,
maturity, security and ranking) to the form and
terms of the Original Notes for which they may be
exchanged pursuant to the Exchange Offer, except
that the Exchange Notes are freely transferable by
holders thereof except as provided herein (see "The
Exchange Offer -- Terms of the Exchange" and
"-- Terms and Conditions of the Letter of
Transmittal") and are not entitled to certain
registration rights and certain additional interest
provisions which are applicable to the Original
Notes under a registration rights agreement dated
as of November 12, 1997 (the "Registration Rights
Agreement") among the Company, the Guarantor and
BancAmerica Robertson Stephens and First Chicago
Capital Markets, Inc. as initial purchasers
(collectively, the "Initial Purchasers"). Exchange
Notes issued pursuant to the Exchange Offer in
exchange for the Original Notes may be offered for
resale, resold and otherwise transferred by holders
thereof (other than any holder which is (i) an
Affiliate of the Company, (ii) a broker-dealer who
acquired Original Notes directly from the Company
or (iii) a broker-dealer who acquired Original
Notes as a result of market-making or other trading
activities), without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange
Notes are acquired in the ordinary course of such
holders' business and such holders are not engaged
in, and do not intend to engage in, and have no
arrangement or understanding with any person to
participate in, a distribution of such Exchange
Notes.
7
<PAGE> 10
Minimum Condition.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original
Notes being tendered or accepted for exchange.
Expiration Date............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, unless
extended (the "Expiration Date").
Exchange Date.............. The first date of acceptance for exchange for the
Original Notes will be the first business day
following the Expiration Date.
Conditions to the Exchange
Offer.................... The obligation of the Company to consummate the
Exchange Offer is subject to certain conditions.
See "The Exchange Offer -- Conditions to the
Exchange Offer." The Company reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such condition.
Withdrawal Rights.......... Tenders of Original Notes pursuant to the Exchange
Offer may be withdrawn at any time prior to the
Expiration Date. Any Original Notes not accepted
for any reason will be returned without expense to
the tendering holders thereof as promptly as
practicable after the expiration or termination of
the Exchange Offer.
Procedures for Tendering
Original Notes........... See "The Exchange Offer -- How to Tender."
Federal Income Tax
Consequences............. The exchange of Original Notes for Exchange Notes
by tendering holders will not be a taxable exchange
for federal income tax purposes, and such holders
should not recognize any taxable gain or loss as a
result of such exchange. See "The Exchange Offer --
Federal Income Tax Consequences."
Use of Proceeds............ There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
Effects on Holders of
Original Notes............. As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered Original Notes pursuant to the terms of
this Exchange Offer, the Company will have
fulfilled a covenant contained in the terms of the
Original Notes and the Registration Rights
Agreement, and, accordingly, the holders of the
Original Notes will have no further registration or
other rights under the Registration Rights
Agreement, except under certain limited
circumstances. See "Original Notes Registration
Rights." Holders of the Original Notes who do not
tender their Original Notes in the Exchange Offer
will continue to hold such Original Notes and will
be entitled to all the rights and limitations
applicable thereto under the Indenture. All
untendered, and tendered but unaccepted, Original
Notes will continue to be subject to the
restrictions on transfer provided for in the
Original Notes and the Indenture. To the extent
that Original Notes are tendered and accepted in
the Exchange Offer, the trading market, if any, for
the Original Notes not so tendered could be
adversely affected. See "Risk
Factors -- Consequences of Failure to Exchange
Original Notes."
8
<PAGE> 11
TERMS OF THE EXCHANGE NOTES
The Exchange Offer applies to $100,000,000 aggregate principal amount of
Original Notes. The form and terms of the Exchange Notes are substantially
identical to the form and terms of the Original Notes, except that the Exchange
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof. The Exchange Notes will evidence
the same debt as the Original Notes and will be entitled to the benefits of the
Indenture. Unless the context otherwise requires, all references to the "Notes"
shall include the Original Notes and the Exchange Notes. See "Description of the
Notes."
Issuer..................... Northland Cable Television, Inc.
Securities Offered......... $100,000,000 aggregate principal amount of 10 1/4%
Senior Subordinated Notes due 2007.
Maturity Date.............. November 15, 2007.
Interest Payment Dates..... The Exchange Notes will bear interest from and
including their respective dates of issuance.
Holders whose Original Notes are accepted for
exchange will receive accrued interest thereon to,
but not including, the date of issuance of the
Exchange Notes, such interest to be payable with
the first interest payment on the Exchange Notes,
but will not receive any payment in respect of
interest on the Original Notes accrued after the
issuance of the Exchange Notes. Interest on the
Notes will be payable in cash semi-annually in
arrears on May 15 and November 15 of each year,
commencing May 15, 1998.
Mandatory Sinking Fund or
Redemption............... None.
Optional Redemption........ The Notes may be redeemed, in whole or in part, at
any time on or after November 15, 2002 at the
option of the Company, at the redemption prices set
forth herein, plus, in each case, accrued and
unpaid interest, if any, to the date of redemption.
In addition, at any time prior to November 15,
2000, the Company may, at its option, redeem up to
30% of the aggregate principal amount of the Notes
issued under the Indenture at a redemption price of
110.25% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
redemption, with the Net Cash Proceeds of one or
more Public Equity Offerings, provided that at
least 70% of the Notes remains outstanding
immediately after the occurrence of such
redemption.
Change of Control.......... In the event of a Change of Control, each Holder
will have the right to require the Company to make
an offer to repurchase such Holder's 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. There
can be no assurance that the Company will have
sufficient funds to make any required purchases of
Notes upon a Change of Control. Furthermore, prior
to commencing such a repurchase offer, the Company
would be required to repay in full all Senior Debt
or obtain waivers from the holder(s) of such debt
to permit the repurchase. If the Company had
insufficient funds to consummate the repurchase,
such failure would constitute an Event of Default
under the Indenture.
Special Repurchase Offer... In the event the Acquisition was not consummated
prior to March 1, 1998, the Notes were subject to a
special repurchase
9
<PAGE> 12
offer (the "Special Repurchase Offer") at an offer
price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest,
to the date of repurchase. The Acquisition was
consummated on January 2, 1998 and the Special
Repurchase Offer terminated on that date.
Ranking.................... The Notes will be general unsecured obligations of
the Company, subordinated in right of payment to
all present and future Senior Debt of the Company,
including the Company's obligations under the
Senior Credit Facility. The Notes will rank pari
passu with any future senior subordinated
indebtedness of the Company and will rank senior to
any other subordinated indebtedness of the Company.
As of January 31, 1998 the Company had
approximately $176.0 million of outstanding
indebtedness, of which $100 million represents
indebtedness under the Original Notes and the
remaining $76.0 million of which constituted Senior
Debt. September 30, 1997, on a pro forma basis, the
Company would have had approximately $77.3 million
of Senior Debt outstanding.
Subsidiary Guarantees...... The Notes will be fully and unconditionally,
jointly and severally guaranteed on a senior
subordinated basis as to the payment of principal
and interest, if any, by the Company's existing
subsidiary, Northland Cable News, Inc., and each of
the Company's future subsidiaries. Each Subsidiary
Guarantee will be a general unsecured obligation of
such Guarantor, subordinated in right of payment to
all present and future senior indebtedness of such
Guarantor.
Certain Covenants.......... The Indenture pursuant to which the Notes will be
issued will, among other things, limit the ability
of the Company and its Subsidiaries to: (i) incur
additional indebtedness or issue preferred stock;
(ii) make certain Restricted Payments; (iii) grant
Liens on assets; (iv) merge, consolidate or
transfer substantially all of their assets; (v)
enter into transactions with Related Persons; (vi)
make certain payments affecting Subsidiaries; (vii)
sell assets; and (viii) issue capital stock of
Subsidiaries.
Original Notes;
Registration Rights........ The Company and the Guarantor have agreed to file
on or prior to January 26, 1998 and to use their
respective best efforts to cause to become
effective on or prior to April 11, 1998 a
registration statement under the Securities Act
with respect to an offer to Holders to exchange the
Original Notes (and the related guarantees) for the
Exchange Notes (and the related guarantees). In the
event that the Exchange Offer is not consummated on
or before May 11, 1998, or, under certain
circumstances, if the Initial Purchasers so
request, the Company will file and use its best
efforts to cause to become effective under the
Securities Act a Shelf Registration Statement on or
before May 11, 1998 with respect to the resale of
the Notes and keep such Shelf Registration
Statement effective generally until two years after
the effective date thereof. In the event any of the
registration requirements are not met, a
Registration Default shall be deemed to have
occurred and Additional Interest will accrue on the
Original Notes over and above the accrued interest
at a rate of 0.50% per annum during the 90-day
period immediately following the occurrence of any
10
<PAGE> 13
Registration Default and shall increase by 0.25%
per annum at the end of each subsequent 90-day
period until such Registration Default has been
cured, but in no event shall such rate exceed 2.00%
per annum.
Use of Proceeds............ There will be no cash proceeds. See "Use of
Proceeds" and "Capitalization."
PORTAL Listing............. The Notes are eligible for trading in the PORTAL
Market.
Risk Factors............... See "Risk Factors" for a discussion of certain
factors that should be considered in connection
with The Exchange Notes, including factors
affecting forward-looking statements.
A description of the terms of the Notes, including definitions of terms
which are capitalized above, is set forth herein under "Description of the
Notes."
11
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain summary historical and pro forma
consolidated financial data for the Company for each of the years in the
three-year period ended December 31, 1996 and for the nine-month period ended
September 30, 1997. The summary historical consolidated financial data for the
years ended December 31, 1994, 1995 and 1996 have been derived from the
consolidated financial statements of the Company which have been audited by
Arthur Andersen LLP, independent public accountants. The pro forma financial
data for the year ended December 31, 1996 and as of and for the nine-month
period ended September 30, 1997 have also been adjusted for financial
information derived from the historical carve-out financial statements of Aiken
II Cable Systems (a component of Robin Cable Systems, L.P.) and Greenwood Cable
System (a component of InterMedia Partners of Carolina, L.P.), audited by Price
Waterhouse LLP, independent accountants. In the opinion of the Company, the
unaudited summary historical and pro forma consolidated financial data presented
as of and for the nine-month period ended September 30, 1997 reflect all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of such data. Actual and pro forma results for the nine-month
period ended September 30, 1997 are not necessarily indicative of the future
financial position or future results of operations of the Company for any other
interim period or the year as a whole.
The following information should be read in conjunction with, and is
qualified in its entirety by, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and accompanying notes of the Company and the Acquisition Systems and the Pro
Forma Unaudited Consolidated Combined Financial Statements and accompanying
discussion and notes included herein. The pro forma financial data is derived
from the Company's Pro Forma Unaudited Consolidated Combined Financial
Statements and the notes thereto contained elsewhere in this Offering Memorandum
which have not been audited by the independent auditors of the Company or the
Sellers. Such pro forma financial data are intended for informational purposes
only and are not necessarily indicative of the future financial position or
future results of operations of the combined Company or of the financial
position or the results of operations of the combined Company that would have
been realized had the Moses Lake Acquisition (as defined), the Offering, and the
application of the net proceeds therefrom, and the Acquisition occurred as of
the dates or for the periods presented.
12
<PAGE> 15
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
PRO FORMA(1) NINE MONTHS ENDED SEPTEMBER 30,
-------------------------- ---------------------------------------
FOR THE PRO FORMA(2)
FOR THE MOSES LAKE -------------------------
MOSES LAKE ACQUISITION, FOR THE
ACQUISITION THE OFFERING OFFERING
AND THE AND THE FOR THE AND THE
OFFERING ACQUISITION OFFERING ACQUISITION
1994 1995 1996 1996 1996 1997 1997 1997
---------- ----------- ----------- ----------- ------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues........... $ 15,687 $ 26,998 $ 33,181 $ 36,371 $ 49,990 $ 29,259 $ 29,259 $ 40,230
Operating expenses:
Operating......... 4,479 8,542 10,500 11,394 15,551 9,497 9,497 12,918
General and
administrative.. 2,782 4,710 5,955 6,598 9,653 5,332 5,332 7,492
Management fees... 332 1,320 1,625 1,785 2,466 1,433 1,433 1,982
Depreciation and
amortization.... 5,307 9,022 10,727 12,910 20,076 9,653 9,653 15,028
------- ------- ------- -------- -------- ------- -------- --------
Total operating
expenses...... 12,900 23,594 28,807 32,687 47,746 25,915 25,915 37,420
------- ------- ------- -------- -------- ------- -------- --------
Income from
operations........ 2,787 3,404 4,374 3,684 2,244 3,344 3,344 2,810
Interest
expense......... (3,226) (7,215) (8,263) (11,924) (17,986) (7,378) (8,853) (13,400)
Other income
(expense),
net............. 54 53 (340) (340) (342) 72 72 92
------- ------- ------- -------- -------- ------- -------- --------
Net loss........... $ (385) $ (3,758) $ (4,229) $ (8,580) $(16,084) $ (3,962) $ (5,437) $ (10,498)
======= ======= ======= ======== ======== ======= ======== ========
FINANCIAL RATIOS
AND OTHER DATA:
EBITDA(3).......... $ 8,094 $ 12,426 $ 15,101 $ 16,594 $ 22,320 $ 12,997 $ 12,997 $ 17,838
Annualized Operating
Cash Flow(4)........................................................................................ $ 17,656 $ 23,548
Capital
expenditures...... $ 1,825 $ 2,731 $ 2,843 $ 2,843 $ 4,581 $ 3,230 $ 3,230 $ 4,249
Ratio of pro forma total
debt to Annualized
Operating Cash Flow(4).............................................................................. 6.1x 7.5x
Ratio of pro forma
Annualized Operating Cash Flow to cash
interest expense(4)(5).............................................................................. 1.6x 1.4x
Deficiency of
earnings to fixed
charges(6)........ $ (385) $ (3,758) $ (4,229) $ (8,580) $(16,084) $ (3,962) $ (5,437) $ (10,498)
OPERATING
STATISTICAL DATA:
Homes passed....... 93,245 115,421 132,905 132,905 191,553 135,180 135,180 194,440
Basic
subscribers....... 64,130 79,848 90,327 90,327 125,442 92,800 92,800 128,505
Basic
penetration....... 68.8% 69.2% 68.0% 68.0% 65.5% 68.6% 68.6% 66.1%
Premium units...... 20,219 23,924 27,406 27,406 45,253 28,972 28,972 47,035
Premium
penetration....... 31.5% 30.0% 30.3% 30.3% 36.1% 31.2% 31.2% 36.6%
Average monthly
revenue per
subscriber(7)..... $ 29.59 $ 31.12 $ 33.22 $ 32.70 $ 32.59 $ 34.63 $ 34.63 $ 34.57
CASH FLOWS PROVIDED
BY (USED IN):
Operating
Activities...... 5,823 5,551 8,042 6,899
Investing
Activities...... (28,194) (24,480) (24,830) (10,051)
Financing
Activities...... 23,875 17,364 18,292 1,822
EBITDA per
subscriber(8)..... $ 187.34 $ 175.80 $ 184.87 $ 182.11 $ 176.81 $ 191.75 $ 191.75 $ 184.70
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
---------------------------------------
PRO FORMA(2)
-------------------------
FOR THE
OFFERING
FOR THE AND THE
OFFERING ACQUISITION
1997 1997 1997
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................................................................... $ 89,118 $ 94,118 $ 163,747
Total debt............................................................................. 102,968 107,968 177,253
Shareholder's deficit.................................................................. (20,632) (20,632) (20,632)
</TABLE>
- ---------------
(1) The unaudited pro forma consolidated combined statement of operations data
for the year ended December 31, 1996 give effect to the acquisition of three
cable systems in Moses Lake, Ephrata and Othello, Washington on October 11,
1995 (the "Moses Lake Acquisition"), the Offering, and the application of
the net proceeds therefrom, and the Acquisition as if they had occurred on
the first day of such period. See "Pro Forma Unaudited Consolidated Combined
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) The unaudited pro forma consolidated combined statement of operations data
for the nine-month period ended September 30, 1997 give effect to the
Offering, and the application of the net proceeds therefrom, and the
Acquisition as if they had occurred on the first day of such period. The
unaudited pro forma consolidated combined balance sheet data as of September
30, 1997 give effect to the Offering, and the application of the net
proceeds therefrom, and the Acquisition as if they had occurred on September
30, 1997. See "Pro Forma Unaudited Consolidated Combined Financial
Statements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(3) EBITDA represents income 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 (loss)
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. Moreover, EBITDA is not a standardized
measure and may be calculated in a number of ways. Accordingly, the EBITDA
information provided may not be comparable to other similarly titled
measures provided by other companies. 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.
(4) Operating Cash Flow represents the sum of (a) pre-tax income or deficit,
excluding extraordinary gains and losses and gains and losses from sales of
assets, (b) interest expense, (c) depreciation and amortization, and (d)
deferred management fees. Annualized Operating Cash Flow represents the
product of Operating Cash Flow for the most recently ended fiscal quarter
multiplied by four. The ratios shown were calculated using Annualized
Operating Cash Flow for the quarter ended September 30, 1997. Both the
Company's Senior Credit Facility and the Indenture under which the Notes are
issued rely on such annualized measures in establishing compliance with
covenants with respect to the ratio of total debt to Annualized Operating
Cash Flow. Effective with the closing of the Senior Credit Facility and the
effective date of the Indenture, in each case November 12, 1997, the ratio
of total debt to Annualized Operating Cash Flow was required to be below
7.0. Since November 12, 1997 the Company has been in compliance with this
and all other covenants contained in the Senior Credit Facility and
Indenture.
(5) Cash interest expense represents total interest expense as reduced for
interest expense relating to the amortization of deferred financing costs.
(6) For purposes of this calculation, "earnings" is defined as earnings before
extraordinary items and accounting changes, interest expense, amortization
of deferred financing costs, taxes and the portion of rent expense under
operating leases representative of interest. Fixed charges consist of
interest expense, amortization of deferred financing costs and a portion of
rent expense under operating leases representative of interest.
(7) Reflects service revenues for the applicable period divided by the average
number of basic subscribers for the applicable period, divided by the number
of months in the applicable period.
(8) Reflects EBITDA for the applicable period divided by the average number of
basic subscribers for the applicable period. For purposes of this
calculation, EBITDA for the quarter ended September 30, 1997 was multiplied
by four.
14
<PAGE> 17
RISK FACTORS
In addition to the other information contained in this Prospectus, before
tendering their Original Notes for the Exchange Notes offered hereby, holders of
Original Notes should consider carefully the following factors, which (other
than "Consequences of Failure to Exchange Original Notes" and "Absence of Public
Market for the Exchange Notes") are generally applicable to the Original Notes
as well as to the Exchange Notes:
CONSEQUENCES OF FAILURE TO EXCHANGE ORIGINAL NOTES
Holders of Original Notes who do not exchange their Original Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Original Notes, as set forth in the legend
thereon, as a consequence of the issuance of the Original Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold, unless registered under
the Securities Act and applicable state securities laws, or pursuant to an
exemption therefrom. Except under certain limited circumstances, the Company
does not intend to register the Original Notes under the Securities Act. In
addition, any holder of Original Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the Exchange Notes may be deemed
to have received restricted securities and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. To the extent Original Notes are
tendered and accepted in the Exchange Offer, the trading market, if any, for the
Original Notes not so tendered could be adversely affected. See "The Exchange
Offer" and "Original Notes Registration Rights."
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes are being offered to the holders of the Original Notes.
The Original Notes were offered and sold in November 1997 to a small number of
institutional and accredited investors and are eligible for trading in the
Private offerings, Resale and Trading through Automatic Linkages (PORTAL)
Market.
The Company does not intend to apply for a listing of the Exchange Notes on
a securities exchange. There is currently no established market for the Exchange
Notes and there can be no assurance as to the liquidity of markets that may
develop for the Exchange Notes, the ability of the holders of the Exchange Notes
to sell their Exchange Notes or the price at which such holders would be able to
sell their Exchange Notes. If such markets were to exist, the Exchange Notes
could trade at prices that may be lower than the initial market values thereof,
depending on many factors, including prevailing interest rates, the markets for
similar securities, and the financial performance of the Company. The Initial
Purchasers have made a market for the Original Notes. Although there is
currently no market for the Exchange Notes, the Initial Purchasers advised the
Company that they currently intend to make a market in the Exchange Notes.
However, the Initial Purchasers are not obligated to do so, and any such market
making with respect to the Original Notes or the Exchange Notes may be
discontinued at any time without notice. In addition, such market making
activities will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer or the pendency of an
applicable Shelf Registration Statement (as defined herein).
The liquidity of, and trading market for, the Exchange Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading market
independent of the financial performance of, and prospects for, the Company.
15
<PAGE> 18
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company has incurred a substantial amount of indebtedness prior to
giving effect to the indebtedness incurred in connection with the Offering and
its earnings have been insufficient to cover fixed charges for each of the years
ended December 31, 1992 to 1996. The Company incurred substantial additional
indebtedness in connection with the Offering and the financing of the
Acquisition. As of January 31, 1998 the Company had approximately $176.0 million
of outstanding indebtedness of which $100 million represents indebtedness each
the Original Notes and the remaining $76.0 million of which constitutes Senior
Debt and shareholder's deficit of $20.6 million. Furthermore, the Company's
earnings would have been insufficient to cover fixed charges by $16.1 million
for the year ended December 31, 1996. The Company may incur additional
indebtedness in the future, subject to limitations imposed by the Indenture, the
Senior Credit Facility and such other borrowing arrangements the Company may,
from time to time, be a party to. See "Capitalization," "Description of the
Notes" and "Description of the Senior Credit Facility."
The Company's ability to make scheduled payments of principal or interest,
or to refinance its indebtedness, including the Notes, depends on its future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond its
control. Based upon the current level of operations and anticipated growth, the
Company believes that cash flow from operations, together with available
borrowings under the Senior Credit Facility and other sources of liquidity, will
be adequate to meet the Company's anticipated future requirements for working
capital, capital expenditures and scheduled payments of principal and interest
on its indebtedness including the Notes. There can be no assurance that the
Company's business will generate sufficient cash flow from operations or that
future borrowings will be available in an amount sufficient to enable the
Company to service its indebtedness, including the Notes, or to make necessary
capital expenditures, or, if required, to refinance indebtedness, including the
Notes, on commercially reasonable terms or at all. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The degree to which the Company is leveraged as a result of the Offering
could have important consequences to Holders of the Notes, including, but not
limited to, the following: (i) a substantial portion of the Company's cash flow
from operations is dedicated to debt service payments and will not be available
for other purposes; (ii) the Company's ability to obtain additional financing in
the future could be limited; (iii) certain of the Company's borrowings are at
variable rates of interest, which could result in higher interest expenses in
the event of an increase in interest rates; and (iv) the Indenture and the
Senior Credit Facility contain financial and restrictive covenants that limit
the ability of the Company to, among other things, incur additional
indebtedness, borrow additional funds, dispose of assets or pay cash dividends.
Failure by the Company to comply with such covenants could result in an event of
default, which, if not cured or waived, would have a material adverse effect on
the Company, its financial condition, prospects and debt service ability. In
addition, the degree to which the Company is leveraged, as well as restrictions
under the Senior Credit Facility, would prevent it from repurchasing all Notes
tendered to it upon the occurrence of a Change of Control. See "Description of
the Notes -- Repurchase at the Option of Holders -- Change of Control," and
"Description of the Senior Credit Facility."
HISTORICAL AND ANTICIPATED LOSSES
Since commencing operations in 1986, the Company has reported a net loss in
each year, including net losses of approximately $385,000, $3.8 million, $4.2
million and $4.0 million (unaudited) for the fiscal years ended December 31,
1994, 1995, 1996 and the nine months ended September 30, 1997, respectively.
These losses are primarily attributable to: (i) depreciation, amortization and
interest expenses associated with the acquisitions of the Existing Systems; and
(ii) the depreciation expenses relating to subsequent capital expenditures. The
Acquisition Systems likewise generally have reported net losses on a historical
basis. The Company expects to experience continued net losses for the
foreseeable future.
16
<PAGE> 19
RANKING OF NOTES; SUBORDINATION
The Original Notes are, and upon issuance the Exchange Notes will be,
subordinated in right of payment to all existing and future Senior Debt,
including principal, premium, if any, and interest and all other amounts due on
or payable in connection with Senior Debt. As of January 31, 1998 the Company
had approximately $176.0 million of outstanding indebtedness of which $100
million represents the Original Notes and the remaining $76.0 million of which
constitutes Senior Debt. By reason of such subordination, in the event of the
insolvency, liquidation, reorganization, dissolution or other winding-up of the
Company or upon a default in payment with respect to, or the acceleration of,
any Senior Debt, the holders of such Senior Debt must be paid in full before the
Holders of the Notes may be paid. If the Company incurs any additional pari
passu debt, the holders of such debt would be entitled to share ratably with the
Holders of the Notes in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other winding-up of the
Company. This may have the effect of reducing the amount of proceeds paid to
Holders of the Notes. In addition, no payments may be made with respect to
principal, premium, if any, or interest on the Notes if a payment default exists
with respect to Designated Senior Debt (as defined) and, under certain
circumstances, no payments may be made with respect to principal, premium, if
any, or interest on the Notes for a period of up to 179 days if a non-payment
default exists with respect to Designated Senior Debt. In addition, the
Indenture will permit the Company and its Subsidiaries to incur additional
indebtedness if certain conditions are met. See "Description of the
Notes -- Subordination."
Under the Senior Credit Facility, the senior lenders receive: (i) a first
perfected security interest in substantially all of the current and future
assets of the Company and any subsidiaries of the Company; (ii) a first
perfected security interest in all of the issued and outstanding shares of
capital stock of the Company; (iii) a first perfected security interest in all
of the issued and outstanding capital stock of Northland Cable News, Inc.; and
(iv) guarantees by all current and future subsidiaries. In the event of a
default on secured indebtedness (whether as a result of the failure to comply
with a payment or other covenant, a cross-default, or otherwise), such lenders
will have a prior secured claim on the capital stock of the Company and the
assets of the Company and any subsidiary of the Company. If such lenders should
attempt to foreclose on their collateral, the Company's financial condition and
the value of the Notes would be materially adversely affected. See "Description
of the Senior Credit Facility."
COMPETITION; LITIGATION
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment. Because the Company's franchises are
non-exclusive, there is the potential for competition with the Company's systems
from other operators of cable television systems, including systems operated by
local governmental authorities, and from other distribution systems capable of
delivering video and other programming to homes or businesses, including direct
broadcast satellite ("DBS") systems and multichannel, multipoint distribution
systems ("MMDS"). In recent years, there has been significant growth in the
number of subscribers to DBS and MMDS services. Additionally, recent changes in
federal law have removed certain of the restrictions that have limited entry
into the cable television business by potential competitors such as telephone
companies and registered utility holding companies and their subsidiaries. Such
developments will enable local telephone companies to provide a wide variety of
video services in the telephone company's own service area which will be
directly competitive with services provided by cable television systems. Some
local telephone companies already have begun offering their competitive services
in limited areas.
Many of the Company's potential competitors have substantially greater
resources than the Company, and the Company cannot predict the extent to which
competition will materialize in its franchise areas from other cable television
operators and other distribution systems, or, if such
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competition materializes, the extent of its effect on the Company. See
"Business -- Competition" and "Legislation and Regulation."
In 1993, North Willamette Telecom, Inc., an affiliate of Canby Telephone
Association, petitioned to obtain a franchise from the City of Woodburn, Oregon
to operate a cable system which would compete with the Company's Woodburn
system. Such franchise has not been granted. On March 20, 1996, the Company was
served with a complaint in a suit commenced in the United States District Court
for the District of Oregon by North Willamette Telecom, Inc. and Canby Telephone
Association. The suit alleges the Company violated federal antitrust laws,
intentionally interfered with plaintiffs' prospective business relationships
with potential cable customers, and intentionally interfered with plaintiffs'
business relationships with the Canby Telephone Association's members. The
complaint seeks actual damages ranging from $1.2 million to $10.2 million,
punitive damages of $10.0 million and other relief. The Company denies the
allegations of the complaint and is vigorously defending the case. The Company
has filed summary judgment motions and no trial date has been set. An adverse
ruling could have a material adverse effect on the Company, its financial
condition, prospects and debt service ability. See "Business -- Litigation."
SIGNIFICANT CAPITAL EXPENDITURES; RAPID TECHNOLOGICAL ADVANCEMENTS
The business of delivering and producing televised news, information and
entertainment are characterized by new market entrants, increasingly rapid
technological change and evolving industry standards. There can be no assurance
that the Company will be able to fund the capital expenditures necessary to keep
pace with technological developments or that the Company will successfully
predict the technical demand of its subscribers. The Company's inability to
provide enhanced services in a timely manner or to predict the demands of the
marketplace could have a material adverse effect on the Company, its financial
condition, prospects and debt service ability. See "Business -- Competition."
NON-EXCLUSIVE FRANCHISES; NON-RENEWAL OR TERMINATION OF FRANCHISES
Cable television companies operate under non-exclusive franchises granted
by local authorities which are subject to renewal and renegotiation from time to
time. The Company's business is dependent upon the retention and renewal of its
local franchises. A franchise is generally granted for a fixed term ranging from
five to 15 years but in many cases is terminable if the franchisee fails to
comply with the material provisions thereof. The Company's franchises typically
impose conditions relating to the use and operation of the cable television
system, including requirements relating to the payment of fees, system bandwidth
capacity, customer service requirements, franchise renewal and termination. As
of January 31, 1998, the Company has 17 franchises (representing 21.4% of the
Company's basic subscribers) expiring prior to 2000 and 24 franchises
(representing 37.1% of its basic subscribers) expiring between 2000 and 2004.
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") prohibits franchising authorities from granting exclusive
cable television franchises and from unreasonably refusing to award additional
competitive franchises; it also permits municipal authorities to operate cable
television systems in their communities without franchises. The Cable
Communications Policy Act of 1984 (the "1984 Cable Act"), provides, among other
things, for an orderly franchise renewal process in which franchise renewal will
not be unreasonably withheld or, if renewal is denied and the franchising
authority acquires ownership of the system or effects a transfer of the system
to another person or entity, the previous operator generally is entitled to the
"fair market value" for the system covered by such franchise. Although the
Company believes that it generally has good relationships with its franchising
authorities, no assurance can be given that the Company will be able to retain
or renew such franchises or that the terms of any such renewals will be on terms
as favorable to the Company as the Company's existing franchises. The
non-renewal or termination of franchises relating to a significant portion of
the Company's subscribers could have a
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material adverse effect on the Company, its financial condition, prospects and
debt service ability. See "Business -- Franchises" and "Legislation and
Regulation."
NO ASSURANCE OF SUCCESSFUL FUTURE ACQUISITIONS
An element of the Company's acquisition strategy is to achieve operational
efficiencies by providing cable television and related services over an expanded
subscriber base within a concentrated geographic area. Consequently, the Company
seeks to acquire or exchange Existing Systems for additional cable systems and
expects that it will require additional financing to fund such acquisitions.
There can be no assurance that the Company will in the future be able to
successfully complete acquisitions or exchanges of additional cable systems
consistent with its business strategy. Further, there can be no assurance that
the Company will successfully obtain financing to complete such acquisitions, if
needed, or that the terms thereof will be favorable to the Company.
In addition, any acquisition or exchange could have an adverse effect upon
the Company's results of operations or cash flow, particularly acquisitions of
new systems which must be integrated with the Company's existing operations.
There can be no assurance that the Company will be able to integrate
successfully any acquired systems with its existing operations or realize any
efficiencies from any acquisition or exchange. There can also be no assurance
that any acquisition or exchange, if consummated, will improve operating
results. In addition, any acquisition or exchange will be subject to, among
other things, the satisfaction of customary closing conditions and the receipt
of certain third-party, or governmental approvals, including the consents of
franchising authorities. In carrying out its acquisition strategy, the Company
attempts to minimize the risk of unexpected liabilities and contingencies
associated with acquired businesses through planning, investigation and
negotiation, but such liabilities and contingencies may nevertheless accompany
acquisitions. See "Business -- Business Strategy."
CONFLICTS OF INTEREST; TRANSACTIONS WITH AFFILIATES
The Company has engaged in and expects to continue to engage in certain
transactions with its affiliates. These transactions have involved management
agreements related to supervisory and managerial services as well as day-to-day
technical, computer, financial and administrative services provided to the
Company by affiliates and investments in and/or the acquisition of assets from
affiliated companies. For the year ended December 31, 1996, approximately
$619,000 or 1.9% of the Company's revenues and approximately $2.2 million or
13.4% of its total operating, general and administrative expenses involved
related party transactions. In addition, in 1996 the Company paid NTC $1.6
million for management fees. Because officers and directors of the Company are
also officers and directors of certain affiliated companies, the terms of any
agreements between the Company and such affiliates are not and will not be the
result of arm's-length negotiations. Although the Company believes the overall
terms of each such agreement are no less favorable than those available from
unrelated parties, there can be no assurance that the terms of any transactions
between the Company and its affiliates have been or will be as favorable as the
Company could obtain from unrelated parties. See "Certain Transactions."
SUBSTANTIAL REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry generally, and the rates charged for cable
television services in particular, are subject to extensive governmental
regulation on the federal, state and local levels (but principally by the FCC
and by local franchising authorities). Many aspects of such regulation have
recently been extensively revised and are currently the subject of judicial
proceedings and administrative rulemakings, which are potentially significant to
the Company. The Company believes that the regulation of cable television
systems, including the rates charged for cable services, remains a matter of
interest to Congress, the FCC and local regulatory officials. Accordingly, no
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assurance can be given as to what future actions such parties or the courts may
take or the effect thereof on the Company. See "Legislation and Regulation."
The principal federal statute governing cable television is the
Communications Act of 1934, as amended (the "Communications Act"). Amendments to
the Communications Act in 1984 and 1992 and amendments in 1996 (codified as the
1996 Telecommunications Act) have had particular impact on the way in which
cable systems are regulated. The 1984 and 1992 amendments created a new
regulatory framework for cable operators, particularly in the areas of: (i)
cable system rates for both basic and certain non-basic services; (ii)
programming access and exclusivity arrangements; (iii) leased access terms and
conditions; (iv) horizontal and vertical ownership of cable systems; (v)
customer service requirements; (vi) franchise renewals; (vii) television
broadcast signal carriage and retransmission consent; (viii) technical
standards; (ix) customer privacy; (x) consumer protection issues; (xi) cable
equipment compatibility; (xii) obscene or indecent programming; and (xiii)
requiring subscribers to subscribe to tiers of service other than basic service
as a condition of purchasing premium services. The 1996 Telecommunications Act
substantially amended the Communications Act by, among other things, removing
barriers to competition in the cable television and telephone markets and
reducing the regulation of cable television rates.
Under the FCC's rate regulations, most cable systems were required to
reduce their basic service tier and cable programming service tier ("CPST")
rates in 1993 and 1994, and have since had their rate increases governed by a
complicated price cap scheme. However, operators also have the opportunity of
bypassing this "benchmark" regulatory scheme in favor of traditional "cost-
of-service" regulation in cases where the latter methodology appears favorable.
The 1996 Telecommunications Act provided substantial rate relief for the
cable industry generally and small cable operators in particular. Under the new
law, large operators will not be subject to rate regulation of their optional
CPSTs as of April 1, 1999, while small operators had that regulation end
immediately. The Company qualifies as a "small operator" under the statutory
definition and, thus, today remains subject to rate regulation only as to "basic
service tier" or lowest level of programming service.
With regard to continuing regulation of the basic service tier, all of the
Existing Systems and all of the Acquisition Systems except the systems serving
Greenwood and Aiken, South Carolina qualify for the favorable "cost-of-service"
treatment afforded "small systems" under existing FCC rules. The Company has
elected to rely on the favorable "small system" cost-of-service rules when its
systems are required to justify their rates for regulated services and,
therefore, has not implemented the rate reductions that would otherwise have
been required if it were subject to the FCC's benchmarks. Under the
cost-of-service rules applicable to small cable companies, eligible systems can
establish permitted rates under a simple formula that considers total operating
expenses (including depreciation and amortization expenses), net rate base, rate
of return, channel count and subscribers. If the monthly per channel rate
resulting from these inputs for a cable system is no more than $1.24, the cable
system's rates will be presumed reasonable. If the formula-generated rate
exceeds $1.24, the burden is on the cable operator to establish the
reasonableness of its calculations. Certain of the Acquisition Systems in
Greenwood and Aiken, South Carolina, by virtue of their size, are required to
comply with the cost-of-service rules applicable to larger systems; however, the
Company believes it is eligible for a waiver of the FCC's rate regulation rules
such that these systems may qualify for the simplified rate regulations afforded
to smaller systems.
Substantially all of the Company's basic service rates are currently under
the $1.24 per channel level, and the Company believes that all of its rates for
such systems in excess of the $1.24 per channel level are reasonable using the
cost-of-service methodology described above. However, FCC rules permit local
franchise authorities to review basic service rates. An adverse ruling in any
such proceeding could require the Company to reduce its rates and pay refunds. A
reduction in the rates it charges for regulated services or the requirement that
it pay refunds could have a material adverse effect on the Company, its
financial condition, prospects and debt service ability. Once the
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Company charges the maximum permitted rate allowed by FCC rules in regulated
communities, future rate increases may not exceed an inflation-indexed amount,
plus increases in certain costs beyond the cable operator's control, such as
taxes, franchise fees and increased programming costs.
Other provisions of the Communications Act could in the future have a
material adverse effect on the Company, its financial condition, prospects and
debt service ability. In particular, the 1992 Cable Act conveyed to broadcasters
the right generally to require either that the cable operator: (i) carry their
signal; or (ii) obtain their consent before doing so. To date, compliance with
these provisions has not had a material effect on the Company, although this
result may change in the future depending on such factors as market conditions,
channel capacity and similar matters when such arrangements are renegotiated.
See "Legislation and Regulation."
PAYMENT UPON CHANGE OF CONTROL
In the event of a Change of Control, each Holder will have the right to
require the Company to make an offer to repurchase such Holder's 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. Prior to commencing such
an offer to repurchase, the Company may be required to: (i) repay in full all
Debt (as defined) of the Company that would prohibit the repurchase of the
Notes, including indebtedness under the Senior Credit Facility; or (ii) obtain
the consent of the senior lender and any other consent required to make the
repurchase. If the Company is unable to repay all of such Debt or is unable to
obtain the necessary consents, the Company will be unable to offer to repurchase
the Notes and such failure would constitute an Event of Default under the
Indenture. There is no assurance that the Company will have sufficient financial
resources available to satisfy all of its obligations under the Senior Credit
Facility and the Notes in the event of a Change of Control. The events that
require a repurchase upon a Change of Control under the Indenture may also
constitute events of default under the Senior Credit Facility or subsequently
incurred indebtedness of the Company. See "Description of the
Notes -- Repurchase at the Option of Holders -- Change of Control."
FRAUDULENT TRANSFER STATUTES
Substantially all of the net proceeds from the Offering will be used by the
Company to repay a portion of the Company's indebtedness under the Senior Credit
Facility. The incurrence by the Company of indebtedness such as the Notes may be
subject to review under relevant state and federal fraudulent conveyance laws if
a bankruptcy case or lawsuit is commenced by or on behalf of unpaid creditors of
the Company. Under these laws, if a court were to find that, after giving effect
to the sale of the Notes and the application of the net proceeds therefrom,
either (a) the Company incurred such indebtedness with the intent of hindering,
delaying or defrauding creditors or (b) the Company received less than
reasonably equivalent value or consideration for incurring such indebtedness
and: (i) was insolvent or was rendered insolvent by reason of such transactions;
(ii) was engaged in a business or transaction for which the assets remaining
with the Company constituted unreasonably small capital; or (iii) intended to
incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, such court may subordinate such indebtedness to presently
existing and future indebtedness of the Company, as the case may be, avoid the
issuance of such indebtedness and direct the repayment of any amounts paid
thereunder to the Company's creditors or take other action detrimental to the
holders of such indebtedness.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its
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probable liabilities on its debts, including contingent liabilities, as they
become absolute and matured.
The Company believes that it will receive equivalent value at the time the
indebtedness under the Notes is incurred. In addition, the Company does not
believe that it, after giving effect to the Offering, and the application of the
net proceeds therefrom: (i) was or will be insolvent or rendered insolvent; (ii)
was or will be engaged in a business or transaction for which its remaining
assets constituted unreasonably small capital; or (iii) intends or intended to
incur, or believes or believed that it will or would incur, debts beyond its
ability to pay such debts as they mature. These beliefs are based on the
Company's operating history and analysis of internal cash flow projections and
estimated values of assets and liabilities of the Company at the time of the
Offering. There can be no assurance, however, that a court passing on these
issues would make the same determination.
RELIANCE ON MANAGEMENT; RESPONSIBILITY TO AFFILIATES
The Company's business is substantially dependent upon the performance of
the senior managers of NTC, who provide management services to the Company
pursuant to a Management Agreement (as defined) between NTC and the Company.
Through NTC, the Company maintains a strong management team, and the loss of any
of these individuals could have a material adverse effect on the Company, its
financial condition, prospects and debt service ability. Moreover, each of these
senior managers devotes a substantial amount of his time to the affairs of
affiliates of the Company. See "Management" and "Certain Transactions."
CONTROL BY PRINCIPAL SHAREHOLDER
The Company is a wholly owned subsidiary of NTC. John S. Whetzell, Chairman
of the Board and President of NTC, beneficially owns 22.8% of the outstanding
common stock of NTC and he effectively may be able to control all matters
requiring approval by the shareholders of the Company, including the election of
directors.
UNCERTAINTY OF ADEQUATE INSURANCE
The Company's equipment and its physical plant are subject to casualty from
a variety of sources. Although the Company has obtained commercial insurance
against certain risks, there can be no assurance that such insurance will be
adequate. The Company began self-insuring its aerial and underground plant in
1996. The Company has recently begun to make monthly contributions into an
insurance fund maintained by NTC. The fund, which currently has an insignificant
balance, is maintained for the collective benefit of the Company and its
affiliates. If an uninsured loss was incurred by the Company or any of its
affiliates, the fund would be applied to defray a portion of such loss. If the
Company was to sustain a material uninsured loss, such reserves would be
insufficient to fully fund such loss. To the extent the Company's uninsured
losses exceed the fund's balance or the fund is depleted from losses incurred by
affiliates of the Company, the resulting reduction in cash flow caused by
interrupted service, together with the capital cost of replacing such equipment
and/or physical plant, could have a material adverse effect on the Company, its
financial condition, prospects and debt service ability. See
"Business -- Insurance."
FORWARD LOOKING STATEMENTS
This Prospectus contains statements that are not based on historical fact,
including without limitation statements containing the words "believes,"
"anticipates," "intends," "expects" and words of similar import. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, events or developments to be
materially different from any future results, events or developments expressed
or implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions, both nationally
and in the regions in which the Company operates;
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technology changes; competition; changes in business strategy or development
plans; the high leverage of the Company; the ability to attract and retain
qualified personnel; existing governmental regulations and changes in, or the
failure to comply with, governmental regulations; liability and other claims
asserted against the Company; and other factors referenced in this Prospectus,
including without limitation under the captions "Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future results, events or developments.
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USE OF PROCEEDS
There will be no cash proceeds to the Company resulting from the Exchange
Offer.
The Company used the gross proceeds from the sale of the Original Notes to:
(i) repay a portion of the Senior Credit Facility (as defined) and (ii) pay fees
and expenses related to the offering of Original Notes. The indebtedness repaid
under the Senior Credit Facility bore interest at a weighted average rate of
approximately 8.6919% per annum as of December 16, 1997, and had a maturity date
of December 31, 2005.
The Company has executed a definitive agreement pursuant to which it will
acquire the Acquisition Systems for approximately $70.0 million. The Company
intends to draw on the Senior Credit Facility to finance the purchase price of
the Acquisition. See "Business -- The Acquisition."
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Company and the Guarantor under the Registration Rights Agreement.
The Original Notes were originally issued and sold on November 12, 1997
(the "Issue Date"). Such sales were not registered under the Securities Act in
reliance upon the exemption provided by Section 4(2) of the Securities Act and
Rule 144A promulgated under the Securities Act. In connection with the sale of
the Original Notes, the Company agreed to file with the Commission a
registration statement relating to the Exchange Offer (the "Registration
Statement"), pursuant to which the Exchange Notes, consisting of another series
of senior subordinated notes of the Company covered by such Registration
Statement and containing substantially identical terms to the Original Notes,
except as set forth in this Prospectus, would be offered in exchange for
Original Notes tendered at the option of the holders thereof. If (i) the Company
determines in reasonably good faith that (x) because of any changes in the law
or the applicable interpretations of the Staff of the Commission, the Commission
is not likely to permit the Company to effect the Exchange Offer prior to the
150th day after the Issue Date (the "Effectiveness Date"), or (y) that the
Exchange Notes would not be tradable upon receipt by the holders of Original
Notes that participate in the Exchange Offer without restriction under state and
federal securities laws (other than due solely to the status of a holder of
Original Notes as an Affiliate of the Company or by breach by such holder of its
representation to the Company as described in the last paragraph under "-- Terms
and Conditions of the Letter of Transmittal" below), (ii) the Exchange Offer is
not consummated within 180 days after the Issue Date, (iii) in certain
circumstances, certain holders of unregistered Exchange Notes so request or (iv)
in the case of any holder of Original Notes that participates in the Exchange
Offer, such holder of Original Notes does not receive Exchange Notes on the date
of the exchange that may be sold without restriction under state and federal
securities laws (other than due solely to the status of such holder of Original
Notes as an Affiliate of the Company or by breach by such holder of its
representation to the Company as described in the last paragraph under "-- Terms
and Conditions of the Letter of Transmittal" below) and so notifies the Company
within 60 days after such holder of Original Notes first becomes aware of such
restriction and concurrently therewith provides the Company with a reasonable
basis for its conclusion, then, in the case of each of clauses (i) through (iv)
of this sentence, the Company will file with the Commission a registration
statement (the "Shelf Registration Statement") to cover resales of the Original
Notes by the holders thereof who satisfy certain conditions relating to the
provision of information in connection with the Shelf Registration Statement. In
the event that (i) the Company fail to file the Registration Statement, (ii) the
Registration Statement or, if applicable, the Shelf Registration Statement, is
not declared effective by the Commission, or (iii) the Exchange Offer is not
consummated or the Shelf Registration Statement ceases to be effective, in each
case within specified time periods, the interest rate borne by the Original
Notes will be increased. See "Original Notes Registration Rights."
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TERMS OF THE EXCHANGE
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the Letter of Transmittal accompanying the
Registration Statement of which this Prospectus is a part (the "Letter of
Transmittal"), $1,000 in principal amount of Exchange Notes for each $1,000 in
principal amount of Original Notes. The terms of the Exchange Notes are
substantially identical to the terms of the Original Notes for which they may be
exchanged pursuant to this Exchange Offer, except that the Exchange Notes will
generally be freely transferable by holders thereof, and the holders of the
Exchange Notes (as well as remaining holders of any Original Notes) are not
entitled to certain registration rights and certain additional interest
provisions which are applicable to the Original Notes under the Registration
Rights Agreement. The Exchange Notes will evidence the same debt as the Original
Notes and will be entitled to the benefits of the Indenture. See "Description of
the Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered or accepted for exchange.
Based on their view of interpretations set forth in no-action letters
issued by the Staff to third parties, the Company believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange for the Original Notes may be
offered for resale, resold and otherwise transferred by holders thereof (other
than any holder which is (i) an Affiliate of the Company, (ii) a broker-dealer
who acquired Original Notes directly from the Company or (iii) a broker-dealer
who acquired Original Notes as a result of market making or other trading
activities) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business, and such holders are not
engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. Broker-dealers who acquired Original Notes as a result of market making or
other trading activities may use this Prospectus, as supplemented or amended, in
connection with resales of the Exchange Notes. The Company has agreed that, for
a period of 180 days after the Registration Statement is declared effective,
they will make this Prospectus available to any broker-dealer for use in
connection with any such resale. Any holder who tenders in the Exchange Offer
for the purpose of participating in a distribution of the Exchange Notes or any
other holder that cannot rely upon such interpretations must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Tendering holders of Original Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of the Original Notes
pursuant to the Exchange Offer.
The Exchange Notes will bear interest from and including their respective
dates of issuance. Holders whose Original Notes are accepted for exchange will
receive accrued interest thereon to, but not including, the date of issuance of
the Exchange Notes, such interest to be payable with the first interest payment
on the Exchange Notes, but will not receive any payment in respect of interest
on the Original Notes accrued after the issuance of the Exchange Notes. Interest
on the Notes is payable semiannually in arrears on May 15 and November 15 of
each year, commencing May 15, 1998 at a rate of 10 1/4% per annum.
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EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on , 1998 unless the
Company in its sole discretion extend the period during which the Exchange Offer
is open, in which event the term "Expiration Date" means the latest time and
date on which the Exchange Offer, as so extended by the Company, expires. The
Company reserves the right to extend the Exchange Offer at any time and from
time to time prior to the Expiration Date by giving written notice to Harris
Trust Company of California (the "Exchange Agent") and by timely public
announcement communicated by no later than 5:00 p.m. on the next business day
following the Expiration Date, unless otherwise required by applicable law or
regulation, by making a release to the Dow Jones News Service. During any
extension of the Exchange Offer, all Original Notes previously tendered pursuant
to the Exchange Offer will remain subject to the Exchange Offer.
The initial Exchange Date will be the first business day following the
Expiration Date. The Company expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Original Notes for any reason,
including if any of the events set forth below under "Conditions to the Exchange
Offer" shall have occurred and shall not have been waived by the Company and
(ii) amend the terms of the Exchange Offer in any manner, whether before or
after any tender of the Original Notes. If any such termination or amendment
occurs, the Company will notify the Exchange Agent in writing and will either
issue a press release or give written notice to the holders of the Original
Notes as promptly as practicable. Unless the Company terminates the Exchange
Offer prior to 5:00 p.m., New York City time, on the Expiration Date, the
Company will exchange the Exchange Notes for Original Notes on the Exchange
Date.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record holders of Original Notes and
will be furnished to brokers, banks and similar persons whose names, or the
names of whose nominees, appear on the lists of holders for subsequent
transmittal to beneficial owners of Original Notes.
HOW TO TENDER
The tender to the Company of Original Notes by a holder thereof pursuant to
one of the procedures set forth below will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
GENERAL PROCEDURES
A holder of an Original Note may tender the same by (i) properly completing
and signing the Letter of Transmittal or a facsimile thereof (all references in
this Prospectus to the Letter of Transmittal shall be deemed to include a
facsimile thereof) and delivering the same, together with the certificate or
certificates representing the Original Notes being tendered and any required
signature guarantees (or a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") pursuant to the procedure described below), to the
Exchange Agent at its address set forth on the back cover of this Prospectus on
or prior to the Expiration Date or (ii) complying with the guaranteed delivery
procedures described below.
If tendered Original Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Original Notes are to be reissued) in the
name of the registered holder, the signature of such signer need not be
guaranteed. In any other case, the tendered Original Notes must be endorsed or
accompanied by written instruments of transfer in form satisfactory to the
Company and duly executed by the registered holder and the signature on the
endorsement or instrument of transfer must be guaranteed by a bank, broker,
dealer, credit union, savings association, clearing agency or other institution
(each an "Eligible Institution") that is a member of a recognized signature
26
<PAGE> 29
guarantee medallion program within the meaning of Rule 17Ad-15 under the
Exchange Act. If the Exchange Notes and/or Original Notes not exchanged are to
be delivered to an address other than that of the registered holder appearing on
the note register for the Original Notes, the signature on the Letter of
Transmittal must be guaranteed by an Eligible Institution.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Original Notes should contact such holder promptly and instruct such
holder to tender Original Notes on such beneficial owner's behalf. If such
beneficial owner wishes to tender such Original Notes himself, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering such Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such beneficial owner's name or follow the
procedures described in the immediately preceding paragraph. The transfer of
record ownership may take considerable time.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Original Notes at The Depository Trust Company (the "Book-Entry Transfer
Facility") for purposes of the Exchange Offer within two business days after
receipt of this Prospectus, and any financial institution that is a participant
in the Book-Entry Transfer Facility's systems may make book-entry delivery of
Original Notes by causing the Book-Entry Transfer Facility to transfer such
Original Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility in accordance with the BookEntry Transfer Facility's procedures for
transfer. However, although delivery of Original Notes may be effected through
book-entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at the address specified on the back cover of this Prospectus on or prior
to the Expiration Date or the guaranteed delivery procedures described below
must be complied with.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND ALL OTHER DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE BE
OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE
TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold, 31% of the gross proceeds otherwise
payable to a holder pursuant to the Exchange Offer if the holder does not
provide his taxpayer identification number (social security number or employer
identification number, as applicable) and certify that such number is correct.
Each tendering holder should complete and sign the main signature form and the
Substitute Form W-9 included as part of the Letter of Transmittal, so as to
provide the information and certification necessary to avoid backup withholding,
unless an applicable exemption exists and is proved in a manner satisfactory to
the Company and the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
If a holder desires to accept the Exchange Offer and time will not permit a
Letter of Transmittal or Original Notes to reach the Exchange Agent before the
Expiration Date, a tender may be effected if the Exchange Agent has received at
its office listed on the Letter of Transmittal on or prior to the Expiration
Date a letter, telegram or facsimile transmission from an Eligible Institution
setting forth the name and address of the tendering holder, the principal amount
of the Original Notes being tendered, the names in which the Original Notes are
registered and, if possible, the certificate numbers of the Original Notes to be
tendered, and stating that the tender is being made thereby and guaranteeing
that within three New York Stock Exchange trading days after the date of
execution of such letter, telegram or facsimile transmission by the Eligible
Institution, the Original Notes, in
27
<PAGE> 30
proper form for transfer, will be delivered by such Eligible Institution
together with a properly completed and duly executed Letter of Transmittal (and
any other required documents). Unless Original Notes being tendered by the
above-described method (or a timely Book-Entry Confirmation) are deposited with
the Exchange Agent within the time period set forth above (accompanied or
preceded by a properly completed Letter of Transmittal and any other required
documents), the Company may, at their option, reject the tender. Copies of a
Notice of Guaranteed Delivery which may be used by Eligible Institutions for the
purposes described in this paragraph are available from the Exchange Agent.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by the Original Notes (or a timely Book-Entry Confirmation) is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Original Notes tendered pursuant to a Notice of Guaranteed Delivery or letter,
telegram or facsimile transmission to similar effect (as provided above) by an
Eligible Institution will be made only against deposit of the Letter of
Transmittal (and any other required documents) and the tendered Original Notes
(or a timely Book-Entry Confirmation).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Original Notes will be
determined by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders not in proper
form or the acceptances for exchange of which may, in the opinion of counsel to
the Company, be unlawful. The Company also reserves the absolute right to waive
any of the conditions of the Exchange Offer or any defect or irregularities in
tenders of any particular holder whether or not similar defects or
irregularities are waived in the case of other holders. Neither the Company, the
Exchange Agent nor any other person will be under any duty to give notification
of any defects or irregularities in tenders or shall incur any liability for
failure to give any such notification. The Company' interpretation of the terms
and conditions of the Exchange Offer (including the Letter of Transmittal and
the instructions thereto) will be final and binding.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Original Notes for exchange (the "Transferor")
exchanges, assigns and transfers the Original Notes to the Company and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Original Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Original
Notes and to acquire Exchange Notes issuable upon the exchange of such tendered
Original Notes, and that, when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered Original Notes, free
and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim. The Transferor also warrants that it will, upon request,
execute and deliver any additional documents deemed by the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Original Notes. The Transferor further agrees that acceptance of any
tendered Original Notes by the Company and the issuance of Exchange Notes in
exchange therefor shall constitute performance in full by the Company of their
obligations under the Registration Rights Agreement and that the Company shall
have no further obligations or liabilities thereunder (except in certain limited
circumstances). All authority conferred by the Transferor will survive the death
or incapacity of the Transferor and every obligation of the Transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of such Transferor.
By tendering Original Notes and executing the Letter of Transmittal, the
Transferor certifies that (a) it is not an Affiliate of the Company, that it is
not a broker-dealer that owns Original Notes
28
<PAGE> 31
acquired directly from the Company or an Affiliate of the Company, that it is
acquiring the Exchange Notes offered hereby in the ordinary course of such
Transferor's business and that such transferor has no arrangement with any
person to participate in the distribution of such Exchange Notes, (b) that it is
an Affiliate of the Company or of the initial purchaser of the Original Notes in
the Offering and that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable to it, or
(c) that it is a participating Broker-Dealer (as defined in the Registration
Rights Agreement) and that it will deliver a prospectus in connection with any
resale of such Exchange Notes. By tendering Original Notes and executing the
Letter of Transmittal, the Transferor further certifies that it is not engaged
in and does not intend to engage in a distribution of the Exchange Notes.
WITHDRAWAL RIGHTS
Original Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth on the back cover of this Prospectus prior to the Expiration
Date. Any such notice of withdrawal must specify the person named in the Letter
of Transmittal as having tendered Original Notes to be withdrawn, the
certificate numbers of Original Notes to be withdrawn, the principal amount of
Original Notes to be withdrawn, a statement that such holder is withdrawing his
election to have such Original Notes exchanged, and the name of the registered
holder of such Original Notes, and must be signed by the holder in the same
manner as the original signature on the Letter of Transmittal (including any
required signature guarantees) or be accompanied by evidence satisfactory to the
Company that the person withdrawing the tender has succeeded to the beneficial
ownership of the Original Notes being withdrawn. The Exchange Agent will return
the properly withdrawn Original Notes promptly following receipt of notice of
withdrawal. All questions as to the validity of notices of withdrawals,
including time of receipt, will be determined by the Company, and such
determination will be final and binding on all parties.
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Original Notes validly tendered and not withdrawn and
the issuance of the Exchange Notes will be made on the Exchange Date.
The Exchange Agent will act as agent for the tendering holders of Original
Notes for the purposes of receiving Exchange Notes from the Company and causing
the Original Notes to be assigned, transferred and exchanged. Upon the terms and
subject to conditions of the Exchange Offer, delivery of Exchange Notes to be
issued in exchange for accepted Original Notes will be made by the Exchange
Agent promptly after acceptance of the tendered Original Notes. Original Notes
not accepted for exchange by the Company will be returned without expense to the
tendering holders (or in the case of Original Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the procedures described above, such non-exchanged Original Notes
will be credited to an account maintained with such Book- Entry Transfer
Facility) promptly following the Expiration Date or, if the Company terminates
the Exchange Offer prior to the Expiration Date, promptly after the Exchange
Offer is so terminated.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Exchange Notes
in respect of any properly tendered Original Notes not previously accepted and
may terminate the Exchange Offer (by oral or written notice to the Exchange
Agent and by timely public announcement communicated by no later than 5:00 p.m.
on the next business day following the Expiration Date, unless otherwise
required by
29
<PAGE> 32
applicable law or regulation, by making a release to the Dow Jones News Service)
or, at their option, modify or otherwise amend the Exchange Offer, if (a) there
shall be threatened, instituted or pending any action or proceeding before, or
any injunction, order or decree shall have been issued by, any court or
governmental agency or other governmental regulatory or administrative agency or
commission, (i) seeking to restrain or prohibit the making or consummation of
the Exchange Offer or any other transaction contemplated by the Exchange Offer,
(ii) assessing or seeking any damages as a result thereof or (iii) resulting in
a material delay in the ability of the Company to accept for exchange some or
all of the Original Notes pursuant to the Exchange Offer; (b) any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced, enacted,
promulgated or deemed applicable to the Exchange Offer or any of the
transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority, agency
or court, domestic or foreign, that in the reasonable judgment of the Company
might directly or indirectly result in any of the consequences referred to in
clauses (a)(i) or (ii) above or, in the reasonable judgment of the Company,
might result in the holders of Exchange Notes having obligations with respect to
resales and transfers of Exchange Notes which are greater than those described
in the interpretations of the Staff referred to on the cover page of this
Prospectus, or would otherwise make it inadvisable to proceed with the Exchange
Offer; or (c) a material adverse change shall have occurred in the business,
condition (financial or otherwise), operations, or prospects of the Company.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by them with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in whole
or in part at any time or from time to time in their sole discretion. The
failure by the Company at any time to exercise any of the foregoing rights will
not be deemed a waiver of any such right, and each right will be deemed an
ongoing right which may be asserted at any time or from time to time. In
addition, the Company have reserved the right, notwithstanding the satisfaction
of each of the foregoing conditions, to terminate or amend the Exchange Offer.
Any determination by the Company concerning the fulfillment or
nonfulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Original Notes
tendered and no Exchange Notes will be issued in exchange for any such Original
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or qualification of the Indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
EXCHANGE AGENT
Harris Trust Company of California (the "Exchange Agent") has been
appointed as the Exchange Agent for the Exchange Offer. Letters of Transmittal
must be addressed or transmitted to the Exchange Agent at the mailing address,
hand delivery address or facsimile numbers set forth on the back cover of this
Prospectus. Delivery to an address other than as set forth herein, or
transmissions of instructions via a facsimile or telex number other than the
ones set forth herein, will not constitute a valid delivery.
SOLICITATION OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The Company
will, however, pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians,
30
<PAGE> 33
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding tenders for their customers. The expenses to be incurred in
connection with the Exchange Offer, including the fees and expenses of the
Exchange Agent and printing, accounting, investment banking and legal fees, will
be paid by the Company and are estimated to be approximately $120,000.
No person has been authorized to given any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Neither the delivery of this
Prospectus nor any exchange made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the respective dates as of which information is given herein. The
Exchange Offer is not being made to (nor will tenders be accepted from or on
behalf of) holders of Original Notes in any jurisdiction in which the making of
the Exchange Offer or the acceptance thereof would not be in compliance with the
laws of such jurisdiction. However, the Company may, at their discretion, take
such action as they may deem necessary to make the Exchange Offer in any such
jurisdiction and extend the Exchange Offer to holders of Original Notes in such
jurisdiction. In any jurisdiction the securities laws or blue sky laws of which
require the Exchange Offer to be made by a licensed broker or dealer, the
Exchange Offer is being made on behalf of the Company by one or more registered
brokers or dealers which are licensed under the laws of such jurisdiction.
DISSENTER AND APPRAISAL RIGHTS
HOLDERS OF ORIGINAL NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL
RIGHTS IN CONNECTION WITH THE EXCHANGE OFFER.
FEDERAL INCOME TAX CONSEQUENCES
The exchange of Original Notes for Exchange Notes by tendering holders will
not be a taxable exchange for federal income tax purposes, and such holders
should not recognize any taxable gain or loss as a result of such exchange.
OTHER
Participation in the Exchange Offer is voluntary and holders of Original
Notes should carefully consider whether to accept the terms and conditions
thereof. Holders of the Original Notes are urged to consult their financial and
tax advisors in making their own decisions on what action to take with respect
to the Exchange Offer.
As a result of the making of and upon acceptance for exchange of all
validly tendered Original Notes pursuant to the terms of this Exchange Offer,
the Company will have fulfilled a covenant contained in the terms of the
Original Notes and the Registration Rights Agreement. Holders of the Original
Notes who do not tender their Original Notes in the Exchange Offer will continue
to hold such Original Notes and will be entitled to all the rights, and
limitations applicable thereto under the Indenture, except for any such rights
under the Registration Rights Agreement which by their terms terminate or cease
to have further effect as a result of the making of this Exchange Offer. See
"Description of the Notes." All untendered Original Notes will continue to be
subject to the restriction on transfer set forth in the Indenture. To the extent
that Original Notes are tendered and accepted in the Exchange Offer, the trading
market, if any, for any remaining Original Notes could be adversely affected.
See "Risk Factors-- Consequences of Failure to Exchange Original Notes."
The Company may in the future seek to acquire untendered Original Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company have no present plan to acquire any Original
Notes which are not tendered in the Exchange Offer.
31
<PAGE> 34
CAPITALIZATION
The following table sets forth: (i) the Company's actual consolidated
capitalization as of September 30, 1997; (ii) the Company's consolidated
capitalization, on a pro forma basis to give effect to the Offering, and the
application of the net proceeds therefrom, as if each had occurred on September
30, 1997; and (iii) the Company's capitalization on a pro forma basis to give
effect to the Offering, and the application of the net proceeds therefrom, and
the Acquisition as if each had occurred on September 30, 1997. This table should
be read in conjunction with "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Selected Historical
and Pro Forma Consolidated Financial Data," and the Company's unaudited actual
consolidated and pro forma financial statements, including the related notes
thereto included elsewhere in this Offering Memorandum.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------------------------
PRO FORMA FOR
PRO FORMA FOR THE OFFERING AND
ACTUAL THE OFFERING THE ACQUISITION
-------- ------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt (including current portion):
Senior Credit Facility(1)........................... $102,822 $ 7,822 $ 77,107
Notes offered hereby................................ -- 100,000 100,000
Other indebtedness.................................. 146 146 146
-------- -------- --------
Total long-term debt........................ 102,968 107,968 177,253
Shareholder's deficit................................. (20,632) (20,632) (20,632)
-------- -------- --------
Total capitalization........................ $ 82,336 $ 87,336 $156,621
======== ======== ========
</TABLE>
- ---------------
(1) Concurrently with the closing of the Offering, the Company and The First
National Bank of Chicago ("First Chicago"), as lender and managing agent,
amended and restated the Senior Credit Facility to, among other things,
adjust covenants to reflect the new capital structure and to increase
revolving credit availability. The Senior Credit Facility consists of a
$25.0 million reducing revolving credit facility and a $75.0 million term
loan with availability subject to certain borrowing conditions. The Company
had received a commitment from First Chicago for the Supplemental Credit
Facility with maximum borrowings of $115.0 million which would have provided
any additional financing necessary to consummate the Special Repurchase
Offer in the event the Acquisition was not consummated. The Acquisition was
consummated on January 2, 1998 and the Company subsequently has permitted
the commitment to expire. See "Description of the Senior Credit Facility"
and "Description of the Notes -- Repurchase at the Option of
Holders -- Special Repurchase Offer."
32
<PAGE> 35
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected historical and pro forma
consolidated financial data for the Company for each of the years in the
five-year period ended December 31, 1996 and for the nine-month periods ended
September 30, 1996 and 1997. The selected historical consolidated financial data
for the years ended December 31, 1992 to 1996 have been derived from the
consolidated financial statements of the Company which have been audited by
Arthur Andersen LLP, independent public accountants. The pro forma financial
data for the year ended December 31, 1996 and as of and for the nine-month
period ended September 30, 1997 have also been adjusted for financial
information derived from the historical carve-out financial statements of Aiken
II Cable Systems (a component of Robin Cable Systems, L.P.) and Greenwood Cable
System (a component of InterMedia Partners of Carolina, L.P.), audited by Price
Waterhouse LLP, independent accountants. In the opinion of the Company, the
unaudited selected historical and pro forma consolidated financial data
presented as of and for the nine-month periods ended September 30, 1996 and 1997
reflect all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of such data. Actual and pro forma results for
the nine-month period ended September 30, 1997 are not necessarily indicative of
the future financial position or future results of operations of the Company for
any other interim period or the year as a whole.
The following information should be read in conjunction with, and is
qualified in its entirety by, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and accompanying notes of the Company and the Acquisition Systems and the Pro
Forma Unaudited Consolidated Combined Financial Statements and accompanying
discussion and notes included herein. The pro forma financial data is derived
from the Company's Pro Forma Unaudited Consolidated Combined Financial
Statements and the notes thereto contained elsewhere in this Offering
Memorandum, which have not been audited by the independent auditors of the
Company or the Sellers. Such pro forma financial data are intended for
informational purposes only and are not necessarily indicative of the future
financial position or future results of operations of the combined Company or of
the financial position or the results of operations of the combined Company that
would have been realized had the Moses Lake Acquisition, the Offering, and the
application of the net proceeds therefrom, and the Acquisition occurred as of
the dates or for the periods presented.
33
<PAGE> 36
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE
FISCAL YEAR ENDED DECEMBER 31, MONTHS
---------------------------------------------------------------------------------- ENDED
PRO FORMA(1) SEPTEMBER
---------------------- 30,
FOR THE --------
FOR THE MOSES LAKE
MOSES ACQUISITION,
LAKE THE
ACQUISITION OFFERING
AND THE AND THE
OFFERING ACQUISITION
1992 1993 1994 1995 1996 1996 1996 1996
-------- -------- -------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenues............. $ 11,957 $ 13,191 $ 15,687 $ 26,998 $ 33,181 $36,371 $ 49,990 $ 23,905
Operating expenses:
Operating................... 3,202 3,639 4,479 8,542 10,500 11,394 15,551 7,660
General and administrative.. 2,232 2,496 2,782 4,710 5,955 6,598 9,653 4,230
Management fees............. -- -- 332 1,320 1,625 1,785 2,466 1,170
Depreciation and
amortization.............. 5,490 5,337 5,307 9,022 10,727 12,910 20,076 7,591
------- ------- ------- -------- -------- -------- -------- --------
Total operating expenses.. 10,924 11,472 12,900 23,594 28,807 32,687 47,746 20,651
------- ------- ------- -------- -------- -------- -------- --------
Income from operations....... 1,033 1,719 2,787 3,404 4,374 3,684 2,244 3,254
Interest expense............ (3,051) (2,592) (3,226) (7,215) (8,263) (11,924) (17,986) (5,884)
Other income (expense),
net....................... (5) 112 54 53 (340) (340) (342) 104
------- ------- ------- -------- -------- -------- -------- --------
Net loss..................... $ (2,023) $ (761) $ (385) $ (3,758) $ (4,229) $(8,580) $(16,084) $ (2,526)
======= ======= ======= ======== ======== ======== ======== ========
FINANCIAL RATIOS AND OTHER
DATA:
EBITDA(3).................... $ 6,523 $ 7,056 $ 8,094 $ 12,426 $ 15,101 $16,594 $ 22,320 $ 10,845
Annualized Operating Cash
Flow(4)......................................................................................................................
Capital expenditures......... $ 1,908 $ 1,709 $ 1,825 $ 2,731 $ 2,843 $ 2,843 $ 4,581 $ 2,024
Ratio of pro forma total debt to Annualized
Operating Cash Flow(4)........................................................................................................
Ratio of pro forma Annualized Operating Cash Flow to cash interest expense(4)(5)..............................................
Deficiency of earnings to
fixed charges(6)............ $ (2,023) $ (761) $ (385) $ (3,758) $ (4,229) $(8,580) $(16,084) $ (2,526)
OPERATING STATISTICAL DATA:
Homes passed................. 47,488 48,200 93,245 115,421 132,905 132,905 191,553 117,905
Basic subscribers............ 37,210 38,631 64,130 79,848 90,327 90,327 125,442 77,835
Basic penetration............ 78.4% 80.1% 68.8% 69.2% 68.0% 68.0% 65.5% 66.0%
Premium units................ 11,581 12,021 20,219 23,924 27,406 27,406 45,253 21,893
Premium penetration.......... 31.1% 31.1% 31.5% 30.0% 30.3% 30.3% 36.1% 28.1%
Average monthly revenue per
subscriber(7)............... $ 27.70 $ 29.23 $ 29.59 $ 31.12 $ 33.22 $ 32.70 $ 32.59 $ 33.06
Cash Flows Provided by (Used
in):
Operating Activities........ 3,638 4,542 5,823 5,551 8,042 4,882
Investing Activities........ (1,878) (1,699) (28,194) (24,480) (24,830) (2,665)
Financing Activities........ (1,809) (2,994) 23,875 17,364 18,292 (2,582)
EBITDA per subscriber(8)..... $ 181.37 $ 187.58 $ 187.34 $ 175.80 $ 184.87 $182.11 $ 176.81 $ 182.98
<CAPTION>
PRO FORMA(2)
-----------------------
FOR THE
OFFERING
FOR THE AND THE
OFFERING ACQUISITION
1997 1997 1997
-------- -------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenues............. $ 29,259 $29,259 $ 40,230
Operating expenses:
Operating................... 9,497 9,497 12,918
General and administrative.. 5,332 5,332 7,492
Management fees............. 1,433 1,433 1,982
Depreciation and
amortization.............. 9,653 9,653 15,028
-------- -------- --------
Total operating expenses.. 25,915 25,915 37,420
-------- -------- --------
Income from operations....... 3,344 3,344 2,810
Interest expense............ (7,378) (8,853) (13,400)
Other income (expense),
net....................... 72 72 92
-------- -------- --------
Net loss..................... $ (3,962) $(5,437) $ (10,498)
======== ======== ========
FINANCIAL RATIOS AND OTHER
DATA:
EBITDA(3).................... $ 12,997 $12,997 $ 17,838
Annualized Operating Cash
Flow(4)..................... $17,656 $ 23,548
Capital expenditures......... $ 3,230 $ 3,230 $ 4,249
Ratio of pro forma total debt
Operating Cash Flow(4)....... 6.1 x 7.5x
Ratio of pro forma Annualized 1.6 x 1.4x
Deficiency of earnings to
fixed charges(6)............ $ (3,962) $(5,437) $ (10,498)
OPERATING STATISTICAL DATA:
Homes passed................. 135,180 135,180 194,440
Basic subscribers............ 92,800 92,800 128,505
Basic penetration............ 68.6% 68.6% 66.1%
Premium units................ 28,972 28,972 47,035
Premium penetration.......... 31.2% 31.2% 36.6%
Average monthly revenue per
subscriber(7)............... $ 34.63 $ 34.63 $ 34.57
Cash Flows Provided by (Used
in):
Operating Activities........ 6,899
Investing Activities........ (10,051)
Financing Activities........ 1,822
EBITDA per subscriber(8)..... $ 191.75 $191.75 $ 184.70
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................. $ 35,403 $ 31,793 $ 61,695 $ 75,755 $ 91,599
Total debt................... 41,869 38,728 65,531 83,145 102,155
Shareholder's deficit........ (16,876) (17,637) (18,022) (21,780) (26,009)
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------
PRO FORMA(2)
-----------------------
FOR THE
OFFERING
FOR THE AND THE
OFFERING ACQUISITION
1997 1997 1997
-------- -------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................. $ 89,118 $94,118 $ 163,747
Total debt................... 102,968 107,968 177,253
Shareholder's deficit........ (20,632) (20,632) (20,632)
</TABLE>
34
<PAGE> 37
- ---------------
(1) The unaudited pro forma consolidated combined statement of operations data
for the year ended December 31, 1996 give effect to the Moses Lake
Acquisition, the Offering, and the application of the net proceeds
therefrom, and the Acquisition as if they had occurred on the first day of
such period. See "Pro Forma Unaudited Consolidated Combined Financial
Statements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(2) The unaudited pro forma consolidated combined statement of operations data
for the nine-month period ended September 30, 1997 give effect to the
Offering, and the application of the net proceeds therefrom, and the
Acquisition as if they had occurred on the first day of such period. The
unaudited pro forma consolidated combined balance sheet data as of September
30, 1997 give effect to the Offering, and the application of the net
proceeds therefrom, and the Acquisition as if they had occurred on September
30, 1997. See "Pro Forma Unaudited Consolidated Combined Financial
Statements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(3) EBITDA represents income 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 (loss)
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. Moreover, EBITDA is not a standardized
measure and may be calculated in a number of ways. Accordingly, the EBITDA
information provided may not be comparable to other similarly titled
measures provided by other companies. 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.
(4) Operating Cash Flow represents the sum of (a) pre-tax income or deficit,
excluding extraordinary gains and losses and gains and losses from sales of
assets, (b) interest expense, (c) depreciation and amortization, and (d)
deferred management fees. Annualized Operating Cash Flow represents the
product of Operating Cash Flow for the most recently ended fiscal quarter
multiplied by four. The ratios shown were calculated using Annualized
Operating Cash Flow for the quarter ended September 30, 1997. Both the
Company's Senior Credit Facility and the Indenture under which the Notes are
issued rely on such annualized measures in establishing compliance with
covenants with respect to the ratio of total debit to Annualized Operating
Cash Flow. Effective with the closing of the Senior Credit Facility and the
effective date of the Indenture, in each case November 12, 1997, the ratio
of total debt to Annualized Operating Cash Flow was required to be below
7.0. Since November 12, 1997 the Company has been in compliance with this
and all other covenants contained in the Senior Credit Facility and the
Indenture.
(5) Cash interest expense represents total interest expense as reduced for
interest expense relating to the amortization of deferred financing costs.
(6) For purposes of this calculation, "earnings" is defined as earnings before
extraordinary items and accounting changes, interest expense, amortization
of deferred financing costs, taxes and the portion of rent expense under
operating leases representative of interest. Fixed charges consist of
interest expense, amortization of deferred financing costs and a portion of
rent expense under operating leases representative of interest.
(7) Reflects service revenues for the applicable period divided by the average
number of basic subscribers for the applicable period, divided by the number
of months in the applicable period.
(8) Reflects EBITDA for the applicable period divided by the average number of
basic subscribers for the applicable period. For purposes of this
calculation, EBITDA for the quarter ended September 30, 1997 was multiplied
by four.
35
<PAGE> 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides additional information regarding the
financial condition and results of operations of the Company for the nine-month
periods ended September 30, 1996 and 1997 and for each of the years ended
December 31, 1994, 1995 and 1996. This discussion should be read in conjunction
with "Selected Historical and Pro Forma Consolidated Financial Data" and the
Company's consolidated financial statements and the notes thereto appearing
elsewhere in this Offering Memorandum.
On January 2, 1998 the Company acquired the Acquisition Systems for
approximately $70.0 million. The purchase of the Acquisition Systems resulted in
a substantial increase in the number of subscribers and the revenue and expenses
of the Company. Accordingly, the discussion and analysis of historical periods
does not reflect the significant impact the Acquisition will have on the
Company. See "Business -- The Acquisition."
GENERAL
Both the Company and the Acquisition Systems generate substantially all of
their revenues from monthly subscriber fees for basic, premium, optional
programming tiers and other cable television services. The balance of the
revenues generated by the Company and the Acquisition Systems are attributable
to various ancillary sources, including installation charges, advertising,
in-home wiring maintenance contracts, converter rentals, and commissions from
home shopping networks.
During the past three fiscal years the Company has engaged in significant
acquisition activity which has accounted for the majority of the increases in
revenues, operating expenses and EBITDA during this period. These acquisitions
have been primarily financed through borrowings under the Senior Credit Facility
which have resulted in substantial increases in interest expense.
The Company has consistently reported and the Acquisition Systems have
experienced net losses due to the high level of depreciation and amortization
expenses associated with cable systems. Additionally, the Company has incurred
significant interest expense associated with the financing of acquisitions. The
Company expects to experience continued net losses for the foreseeable future.
EBITDA as a percentage of revenue ("EBITDA Margin") for the Company has
declined over the past three fiscal years and for the nine months ended
September 30, 1997. In August 1994, the Company entered into a Management
Agreement with its parent, NTC, under which it agreed to pay to NTC a management
fee equal to 5.0% of the Company's gross revenues and to reimburse certain of
NTC's expenses. The initiation of this agreement in late 1994 had a significant
impact on the 1995 EBITDA Margin compared to 1994. Additionally, the Company's
acquisition activity since 1994 has resulted in the integration of cable
television operations which had significantly varying operating characteristics
and EBITDA Margins. The operating characteristics of acquired systems that
affected EBITDA Margins included rates charged to subscribers and the amount of
programming offered which directly relates to programming costs incurred. As the
Company pursues its acquisition strategy, including the Acquisition Systems, it
is expected that fluctuations in EBITDA Margins will continue which may not be
reflective of the year to year operating performance of the Existing Systems.
See "Pro Forma Unaudited Consolidated Combined Financial Statements."
36
<PAGE> 39
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of revenues.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Operating............................. 28.6 31.6 31.6 32.0 32.5
General and administrative............ 17.7 17.5 18.0 17.7 18.2
Management fees....................... 2.1 4.9 4.9 4.9 4.9
Depreciation and amortization......... 33.8 33.4 32.3 31.8 33.0
------- ----- ------ - ----- ------ -
Total operating expenses....... 82.2 87.4 86.7 86.4 88.6
Income from operations.................. 17.8 12.6 13.2 13.6 11.4
Interest expense...................... (20.6) (26.7) (24.9) (24.6) (25.2)
Other income (expense), net........... 0.3 0.2 (1.0) 0.4 0.3
------- ----- ------ - ----- ------ -
Net loss................................ (2.5%) (13.9%) (12.8%) (10.6%) (13.5%)
======= ===== ======= ===== =======
EBITDA(1)............................... 51.6% 46.0% 45.5% 45.4% 44.4%
======= ===== ======= ===== =======
</TABLE>
- ---------------
(1) 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.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Basic subscribers increased 14,965 or 19.2%, from 77,835 to 92,800 for the
nine months ended September 30, 1997.
Revenues. Revenues increased $5.4 million or 22.6%, from $23.9 million to
$29.3 million for the nine months ended September 30, 1997. Such increase was
primarily attributable to a full period inclusion of the three Moses Lake area
systems serving approximately 12,580 subscribers which were acquired in October
1996 (the "Moses Lake Acquisition"). Average monthly revenue per basic
subscriber increased $1.57 or 4.7%, from $33.06 to $34.63 for the nine months
ended September 30, 1997. Such increase was attributable to: (i) rate increases,
which averaged 6.7%, implemented in a majority of the Company's systems
effective August 1, 1996; and (ii) revenue from the increase in penetration of
new product tiers. Basic revenue per average basic subscriber increased $1.31 or
5.9%, from $22.39 to $23.70 for the nine months ended September 30, 1997. Tier
revenue per average basic subscriber increased $0.56 or 23.9%, from $2.34 to
$2.90 for the nine months ended September 30, 1997. Excluding the impact of the
Moses Lake Acquisition, for the nine months ended September 30, 1997: (i)
revenues would have increased $2.0 million or 8.4%, from $23.9 million to $25.9
million; and (ii) revenue per average basic subscriber would have increased
$2.09 or 6.3%, from $33.06 to $35.15.
Operating Expenses. Operating expenses, which include costs related to
programming, technical personnel, repairs and maintenance and advertising sales,
increased $1.8 million or 23.4%, from $7.7 million to $9.5 million for the nine
months ended September 30, 1997. Operating expenses as a percentage of revenues
increased from 32.0% to 32.5% for the nine months ended September 30, 1997. A
substantial portion of these increases was due to the Moses Lake Acquisition,
which included approximately 12,580 subscribers. Excluding the impact of the
Moses Lake Acquisition, operating expenses would have increased approximately
$700,000 or 9.1%, from $7.7 million to
37
<PAGE> 40
$8.4 million for the nine months ended September 30, 1997. Such increase would
have been attributable to: (i) annual wage and benefit increases; and (ii)
higher programming costs resulting from rate increases by certain programming
vendors and the launch of new programming services in various systems.
General and Administrative Expenses. General and administrative expenses,
which include on-site office and customer service personnel costs, customer
billing, postage and marketing expenses and franchise fees increased
approximately $1.1 million or 26.2%, from $4.2 million to $5.3 million for the
nine months ended September 30, 1997. General and administrative expenses, as a
percentage of revenues, increased from 17.7% to 18.2% for the nine months ended
September 30, 1997. These increases were attributable primarily to the Moses
Lake Acquisition. Excluding the impact of the Moses Lake Acquisition, general
and administrative expenses would have increased approximately $300,000 or 7.1%,
from $4.2 million to $4.5 million for the nine months ended September 30, 1997.
This increase was attributable to: (i) annual wage and benefit increases; and
(ii) increases in revenue-based expenses such as franchise fees.
Management Fees. Management fees increased $200,000 or 16.7%, from $1.2
million to $1.4 million for the nine months ended September 30, 1997. Such
increase was directly attributable to the revenue increases discussed above.
Management fees are calculated at 5.0% of gross revenues.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $2.1 million or 27.6%, from $7.6 million to $9.7 million for
the nine months ended September 30, 1997. Such increase was due to the Moses
Lake Acquisition and the Company's capital expenditures.
Interest Expense. Interest expense increased by $1.5 million or 25.4%, from
$5.9 million to $7.4 million for the nine months ended September 30, 1997. Such
increase was primarily attributable to increased borrowings incurred in
connection with the Moses Lake Acquisition which increased average outstanding
indebtedness $21.9 million or 26.6%, from $82.2 million to $104.1 million for
the nine months ended September 30, 1997.
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
The Company served 90,327 basic subscribers as of December 31, 1996, an
increase of 13.1%. In 1996, the net number of subscribers added through system
acquisitions was approximately 12,582. Excluding such acquired subscribers, the
Company served 77,745 basic subscribers as of December 31, 1996.
Revenues. Revenues increased $6.2 million or 23.0%, from $27.0 million to
$33.2 million in 1996. Such increase was due primarily to: (i) the full period
inclusion of systems acquired in 1995; and (ii) results for the Moses Lake area
systems acquired in October 1996. Average monthly revenue per basic subscriber
increased $2.10 or 6.7%, from $31.12 to $33.22 in 1996. Such increase was
attributable to: (i) increases in rates charged for subscriptions to basic and
tier services; (ii) an increase in the average number of tier subscribers from
21,682 to 28,964 in 1996; and (iii) increases in advertising revenue. Revenues,
from systems owned as of January 1, 1995, increased $2.0 million or 8.1%, from
$24.6 million to $26.6 million in 1996. Average monthly revenue per basic
subscriber, for systems owned as of January 1, 1995, increased $2.50 or 8.0%,
from $31.22 to $33.72 in 1996.
Operating Expenses. Operating expenses increased $2.0 million or 23.5%,
from $8.5 million to $10.5 million in 1996. Such increase was primarily
attributable to the Company's acquisition activities. Operating expenses as a
percentage of revenues remained the same at 31.6%.
General and Administrative Expenses. General and administrative expenses
increased $1.3 million or 27.7%, from $4.7 million to $6.0 million in 1996. Such
increase was primarily attributable to the Company's acquisition activities.
General and administrative expenses, as a percentage of reve-
38
<PAGE> 41
nues, increased from 17.5% to 18.0% in 1996. Such increase was primarily
attributable to increases in: (i) property tax expense; and (ii) consulting
fees.
Management Fees. Management fees increased approximately $300,000 or 23.1%,
from $1.3 million to $1.6 million in 1996. Such increase was attributable to the
revenue increases discussed above. Management fees are calculated at 5.0% of
gross revenues.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994
The Company served 79,848 basic subscribers as of December 31, 1995, an
increase of 15,718 or 24.5%. In 1995, the net number of subscribers added
through system acquisitions was approximately 14,415. Excluding such acquired
subscribers, the Company served 65,433 basic subscribers as of December 31,
1995.
Revenues. Revenues increased $11.3 million or 72.0%, from $15.7 million to
$27.0 million in 1995. Such increase was due primarily to the acquisition of
systems in late 1994 and in 1995. Average monthly revenue per basic subscriber
increased $1.53 or 5.2%, from $29.59 to $31.12 in 1995. Such increase was
attributable to: (i) increases in rates charged for subscriptions to basic and
tier services; (ii) an increase in the average number of tier subscribers from
14,171 to 21,682; and (iii) a 32.5% increase in average monthly advertising
revenue per basic subscriber. Revenues from systems owned as of January 1, 1994,
increased $1.6 million or 11.3%, from $14.2 million to $15.8 million in 1995.
Average monthly revenue per basic subscriber, for systems owned as of January 1,
1994, increased $1.98 or 6.6%, from $29.80 to $31.78 in 1995. These increases
for systems owned as of January 1, 1994 were attributable to: (i) a 1.8% growth
in basic subscribers served; (ii) increases in revenues from launches of new
product tiers; and (iii) the Company's expanding advertising sales efforts.
Operating Expenses. Operating expenses increased $3.3 million or 78.6%,
from $4.2 million to $7.5 million in 1995. Such increase was primarily
attributable to system acquisitions in late 1994 and in 1995. Operating expenses
as a percentage of revenues increased from 28.6% to 31.6% in 1995. Such increase
was attributable to increases in: (i) pole attachment fees; and (ii) costs
associated with the Company's expanding advertising sales efforts.
General and Administrative Expenses. General and administrative expenses
increased $1.9 million or 67.9%, from $2.8 million to $4.7 million in 1995. Such
increase was primarily attributable to system acquisitions in late 1994 and
1995. These costs declined as a percentage of revenues from 17.7% to 17.5% in
1995. Such decrease was primarily attributable to a decrease in wage and benefit
costs as a percentage of revenues from 2.9% to 2.5% in 1995.
Management Fees. Management fees increased $968,000 or 291.6%, from
$332,000 to $1.3 million in 1995. Such increase was attributable to the
initiation of a management fee payable to the Company's parent, effective August
1994, calculated at 5.0% of the Company's gross revenue.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business generally requires substantial capital for
the construction, expansion and maintenance of the signal distribution system.
In addition, the Company has pursued, and intends to pursue, a business strategy
which includes selective acquisitions. The Company has financed these
expenditures through a combination of cash flow from operations and borrowings
under the Senior Credit Facility. For the years ended December 31, 1994, 1995
and 1996 and for the nine months ended September 30, 1996 and 1997, the
Company's net cash provided from operations was $5.8 million, $5.6 million, $8.0
million, $4.9 million and $6.9 million, respectively, all of which were
sufficient to meet the Company's debt service obligations, working capital and
capital expenditure requirements for the respective periods, excluding
acquisitions. Acquisitions of cable television systems during these periods
primarily were financed through bank borrowings. The Company's debt service
obligations for the year ended December 31, 1998 are expected to be $19.1
39
<PAGE> 42
million. The Company anticipates that cash flow from operations will be
sufficient to service its debt and to fund capital expenditures through December
31, 1998. The Company's debt service obligations for the year ended December 31,
1999 are anticipated to be $21.9 million. The Company believes that cash flow
from operations will be adequate to meet the Company's long-term liquidity
requirements, excluding acquisitions, prior to the maturity of its long-term
indebtedness, although no assurance can be given in this regard.
Net cash provided by operating activities was $6.9 million for the nine
months ended September 30, 1997. Adjustments to the $4.0 million net loss for
the period to reconcile to net cash provided by operating activities consisted
primarily of $9.9 million of depreciation and amortization, off-set by other
changes in operating balance sheet accounts.
Net cash used in investing activities was $10.1 million for the nine months
ended September 30, 1997, and consist primarily of $5.3 million for the
acquisition of cable television systems in and around the communities of Marlin,
Madisonville and Buffalo, Texas, and capital expenditures of $3.2 million.
Net cash provided by financing activities was $1.8 million for the nine
months ended September 30, 1997. The Company had $5.0 million in additions to
long term debt and made $4.2 million of principal payments on notes payable.
EBITDA increased approximately $2.2 million or 20.4%, from $10.8 million to
$13.0 million for the nine months ended September 30, 1997. EBITDA Margin
decreased from 45.4% to 44.4% for the nine months ended September 30, 1997.
These changes were attributable primarily to the Moses Lake Acquisition, which
contributed approximately $1.4 million of EBITDA for the nine months ended
September 30, 1997. The EBITDA Margin for the Moses Lake area systems was 39.7%
for the nine months ended September 30, 1997. Excluding the effects of the Moses
Lake Acquisition, EBITDA would have increased $800,000 or 7.4%, from $10.8
million to $11.6 million for the nine months ended September 30, 1997.
Net cash provided by operating activities was $8.0 million for the fiscal
year ended December 31, 1996. Adjustments to the $4.2 million net loss for such
period to reconcile to net cash provided by operating activities consisted
primarily of $11.0 million of depreciation and amortization, off-set by other
changes in operating balance sheet accounts.
Net cash used in investing activities was $24.8 million for the fiscal year
ended December 31, 1996. Net cash used in investing activities consisted
primarily of the $22.2 million for the acquisition of cable television systems
in and around the communities of Moses Lake, Othello, Ephrata, and certain
unincorporated areas of Grant and Adams counties, all in the state of
Washington, and for the payment of a holdback note related to a 1995
acquisition. Net cash used in investing activities also consisted of $2.8
million of capital expenditures.
Net cash provided by financing activities was $18.3 million for the fiscal
year ended December 31, 1996. Net cash provided by financing activities
consisted primarily of $22.0 million in additions to notes payable, off-set by
$2.6 million of principal payments on notes payable and $1.0 million of loan
fees.
EBITDA increased $2.7 million or 21.8%, from $12.4 million to $15.1 million
in 1996. Such increase was primarily attributable to the Company's acquisition
activities. EBITDA Margin declined from 46.0% to 45.5% in 1996. Such decrease
was attributable to: (i) the acquisition of certain systems with lower EBITDA
Margins; and (ii) the resulting increase in operating and general and
administrative expenses as a percentage of revenues.
Net cash provided by operating activities was $5.6 million for the fiscal
year ended December 31, 1995. Adjustments to the $3.8 million net loss for the
period to reconcile to net cash provided by operating activities consisted
primarily of $9.2 million of depreciation and amortization, off-set by other
changes in operating balance sheet accounts.
40
<PAGE> 43
Net cash used in investing activities was $24.5 million for the fiscal year
ended December 31, 1995. Net cash used in investing activities consisted
primarily of the $21.7 million acquisition of cable television systems in and
around the communities of Clemson-Seneca, South Carolina, Oconee County, South
Carolina, and Mexia, Texas, and for the payment of a holdback notes related to
acquisitions occurring in 1994. Net loss was also adjusted for $2.7 million of
capital expenditures.
Net cash provided by financing activities was $17.4 million for the fiscal
year ended December 31, 1995. Net cash provided by financing activities
consisted primarily of $19.7 million in additions to notes payable, off-set by
$2.4 million of principal payments on notes payable.
EBITDA increased $4.3 million or 53.1%, from $8.1 million to $12.4 million
in 1995. Such increase was primarily attributable to the system acquisitions.
EBITDA Margin declined from 51.6% to 46.0% in 1995. Such decrease was
attributable to: (i) the initiation of a management fee payable to the Company's
parent in August 1994; and (ii) increases in operating expenses as a percentage
of revenues.
Effective June 30, 1997, the Company received a non-cash capital
contribution of approximately $9.3 million which replaced, in its entirety, the
then outstanding net unsecured advances that had previously been owed to NTC and
other affiliates of the Company other than amounts due for normal operations,
management fees paid to NCC and for services provided by affiliated entities as
discussed above. As of September 30, 1997, the Company had no outstanding
unsecured indebtedness to affiliates. See "Certain Transactions -- Capital
Contribution."
Upon consummation of the Offering, and the application of the proceeds
therefrom, and the Acquisition, on a pro forma basis as of September 30, 1997,
the Company will increase its total consolidated Debt to approximately $177.3
million from $103.0 million. Following the consummation of the Offering, and the
application of proceeds therefrom, and the Acquisition, the Company expects to
have unused commitments under the Senior Credit Facility of approximately $22.9
million which will be available for permitted acquisitions (as defined under the
Senior Credit Facility) and general corporate purposes subject to the Company's
compliance with all covenants under the Senior Credit Facility. The Company has
received a commitment from its senior lender for the Supplemental Credit
Facility with maximum borrowings of $115.0 million which will provide any
additional financing necessary to consummate the Special Repurchase Offer in the
event the Acquisition is not consummated. Interest payments under the Notes and
interest and principal payments under the Senior Credit Facility will represent
significant liquidity requirements for the Company. See "-- Recent
Developments," "Description of the Senior Credit Facility" and "Description of
the Notes -- Repurchase at the Option of Holders -- Special Repurchase Offer."
Borrowings under the Senior Credit Facility will bear interest at floating
rates and will require payments on various dates depending on the interest rate
options selected by the Company. The Company expects that cash provided by
operations will be sufficient to cover its future debt service obligations.
CAPITAL EXPENDITURES
For the years ended December 31, 1994, 1995 and 1996 and for the nine
months ended September 30, 1996 and 1997, the Company had capital expenditures
of $1.8 million, $2.7 million, $2.8 million, $2.0 million and $3.2 million,
respectively. Capital expenditures included: (i) expansion and improvements of
cable properties; (ii) additions to plant and equipment; (iii) maintenance of
existing equipment; and (iv) cable line drops and extensions and installations
of cable plant facilities.
The Company plans to invest approximately $14.1 million in system upgrades
prior to December 31, 1999. This represents anticipated expenditures for
upgrading and rebuilding certain distribution facilities, new product launches,
extensions of distribution facilities to add new subscribers and general
maintenance. It is expected that cash flow from operations will be sufficient to
fund planned capital expenditures.
41
<PAGE> 44
BUSINESS
The Company owns and operates 41 cable television systems serving small
cities, towns and rural communities (i.e., non-urban markets) in California,
Georgia, Oregon, South Carolina, Texas and Washington. 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. See
"Certain Transactions."
Since closing its initial acquisition in 1986, Northland Cable Television,
Inc. has continued to target, negotiate and complete acquisitions of cable
systems and integrate the operation of such systems. The Company believes it has
created a loyal relationship with the communities it serves by maintaining local
offices, hiring staff predominantly from these communities and providing high
quality customer service. In many communities, the Company offers its exclusive
local news and information programming, produced by the Company's wholly owned
subsidiary, Northland Cable News, Inc. The Company has increased its basic and
premium subscribers through strategic acquisitions, selective system upgrades
and extensions of its cable systems. Additionally, the Company believes its
subscriber growth and revenue per subscriber have been enhanced by consistent
economic growth and favorable demographics in its markets. As a result of these
factors, from December 31, 1992 through September 30, 1997, the Company
experienced compound annual growth in basic subscribers and EBITDA on an
annualized basis of 21.2% and 22.8%, respectively. As of September 30, 1997, the
Existing Systems passed approximately 135,180 homes and served 92,800 basic
subscribers, representing a basic penetration rate of 68.6%. The Existing
Systems achieved average monthly revenue per basic subscriber of $34.63 for the
nine months ended September 30, 1997.
On January 2, 1998 the Company acquired the Acquisition Systems from the
Sellers. The Acquisition Systems are clustered in close proximity to several of
the Existing Systems in South Carolina, which the Company believes will allow it
to achieve certain economies of scale and operating efficiencies. As of
September 30, 1997, the Acquisition Systems passed an estimated 59,260 homes and
served approximately 35,705 basic subscribers, representing a basic penetration
rate of 60.3%. The Acquisition Systems achieved average monthly revenue per
basic subscriber of $34.43 for the nine months ended September 30, 1997. Other
than the Acquisition Systems, the Company has not acquired any systems since
September 30, 1997 and, while the Company continually evaluates acquisition
opportunities, it has no current plans to make any material acquisitions.
The Company seeks to quickly assimilate acquired systems into its existing
operations. Management's strategy to integrate acquired systems enhance the
financial performance of the Company's systems includes: (i) customizing
programming services to the local market; (ii) upgrading its cable systems to
increase signal quality, improve technical reliability and expand channel
capacity; (iii) offering more diversified packages of programming services and
pricing; and (iv) leveraging its local presence for both marketing and
community-focused customer service. As of September 30, 1997, after giving pro
forma effect to the Acquisition, the Company's systems passed an estimated
194,440 homes and served approximately 128,505 basic subscribers, for a basic
penetration rate of 66.1%. For the nine months ended September 30, 1997 and the
year ended December 31, 1996, on a pro forma basis, the Company had revenues of
approximately $40.2 million and $50.0 million, respectively, and EBITDA of
approximately $17.8 million and $22.3 million, respectively.
The Company believes it is well positioned to capitalize on favorable
competitive and economic characteristics associated with owning and operating
cable television systems in non-urban markets. These attractive characteristics
as compared to urban and suburban markets, include: (i) lower population
densities which lead to a higher likelihood of only one cable television
provider; (ii) lower churn rates; (iii) greater subscriber penetration rates;
(iv) limited reception of over-the-air television stations; and (v) fewer
alternative entertainment sources.
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By clustering systems, the Company is able to take advantage of certain
economies of scale, such as reduced payroll, billing and technical costs on a
per subscriber basis, and consolidated regional advertising. The Company intends
to continue to pursue its clustering strategy through the acquisition of
additional systems in or near its current operating regions.
John S. Whetzell is the founder, Chairman of the Board and President of NTC
and the Company. Mr. Whetzell has assembled a senior management team of six
individuals who have an average of approximately 21 years of experience in the
cable industry to execute the Company's business strategy. The Company's senior
management team has been in place for over 10 years. The Company believes that
the depth and experience of its senior management, together with their history
of managing the Company as a team, is a key asset which significantly enhances
the Company's operating performance. See "Management."
BUSINESS STRATEGY
The Company's objective is to capitalize on its experience and expertise in
acquiring and operating cable television systems. Elements of the Company's
operating and acquisition strategy are discussed below.
Target Non-Urban Markets. The Company operates clusters of cable television
systems serving non-urban markets. The Company believes non-urban markets
provide attractive and stable subscriber demographics and opportunities for
clustering systems. As a result of the Company's experience in operating cable
systems in non-urban markets, management believes it can continue to increase
subscriber penetration in its Existing Systems while pursuing strategic
acquisitions which complement the Company's Existing Systems.
Pursue Strategic Acquisitions. The Company actively considers opportunities
to acquire additional cable systems in non-urban markets and generally targets
markets with limited off-air broadcast signal reception, few entertainment
alternatives and strong community identity. In general, the Company seeks to
acquire stand-alone systems, or groups of systems, with an emphasis on those in
close proximity to its Existing Systems. In addition, the Company considers
acquisitions in other geographic areas where the Company believes it can
leverage its experience in operating cable systems in non-urban markets. From
time to time the Company may divest itself, through asset exchanges or outright
sales, of cable systems that do not readily lend themselves to the Company's
philosophy of clustering systems or for other reasons. Among the factors the
Company considers in evaluating the desirability of a potential acquisition or
asset exchange opportunity are price and terms, subscriber densities, plant
quality, availability of off-air broadcast signals, growth potential (in terms
of homes passed, revenue and EBITDA) and whether the target system can be
readily integrated into the Company's operations.
Strategically Upgrade Systems. The Company strategically upgrades its cable
systems as part of its goal to satisfy current and future customer demand and
maximize return on investment. The centerpiece of this strategy is the
systematic deployment of fiber optic technology. The Company believes that
construction of fiber optic backbones significantly enhances picture quality and
system reliability and expands channel capacity, such that the Company is able
to offer a product that is competitive or superior to other potential video
providers competing in the same markets. Typically, the Company utilizes a 550
MHz system architecture for new trunk and feeder lines, with the flexibility to
upgrade to 750 MHz capacity in those specific districts of a service area where
future demand for such capacity may develop. The Company believes this strategy
enables it to be more responsive, in a cost-efficient manner, to fast changing
technologies and local demand for new services, such as data transfer services
and digital tiers. As of September 30, 1997, on a pro forma basis, 65.9% of the
Company's subscribers were served by systems with fiber optic backbones. The
Company plans to invest approximately $14.1 million in system upgrades prior to
December 31, 1999, at which time, on a pro forma basis the Company anticipates
that over 70% of the Company's subscribers will be served by systems with fiber
optic backbones.
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Pursue New Business Opportunities. The Company has identified several
business opportunities which complement its core video delivery operations. In
many systems, the Company has begun utilizing its own advertising sales force to
market spot advertising availabilities and production to area merchants.
Advertising revenue has grown rapidly and constituted 5.5% of the Company's
revenues for the year ended December 31, 1996. In addition, the Company is
seeking to construct fiber optic wide area networks in certain communities to be
leased to local governments, schools and businesses for various
telecommunications applications, such as remote classrooms, voice networks and
data transfer. The Company is also exploring the launch of enhanced digital
video, such as Headend In the Sky(R) ("HITS"), a digital video compression
service. Digital video service such as HITS will enable the Company to
significantly expand its program offering by more efficiently utilizing current
analog channel capacity. The Company also believes that high speed data services
delivered via hybrid fiber and coaxial plant may provide the Company with
opportunities for new revenue sources, such as Internet access, in selected
communities.
Focus on the Community. A significant component of the Company's business
strategy is to bring all aspects of its programming and operations to a local
focus in order to increase revenues, EBITDA and subscriber loyalty and to
provide key competitive advantages in the markets it serves.
Customize Programming and Expand Service Offerings. The Company
believes that a system-by-system, decentralized approach to
programming is required as each area served has unique demographic and
economic characteristics. A primary focus of the Company's programming
strategy is the offering of specialty tiers of service which typically
contain eight to ten channels of programming such as family, sports or
movie channels that target particular niches of subscribers. The
Company's tier subscribers have grown at a compound annual growth rate
of 27.2% from December 31, 1992 through September 30, 1997. Upon
acquiring a system, the Company analyzes the system's current
programming and tier structure and, in most cases, takes prompt action
to increase the menu of services and channels provided. For example,
after acquiring a system in Moses Lake, Washington in October 1996,
the Company increased the number of channels offered from 39 to 53,
including one additional basic channel and the addition of a new
nine-channel optional tier and four new pay services. Average monthly
revenue per subscriber in the Moses Lake system grew by approximately
15.9%, increasing from $28.26 per month at the time of acquisition
(for the first full month of operations) to a monthly average of
$32.74 in the third quarter of 1997. The Company intends to implement
a similar strategy in the Acquisition Systems.
Provide Local News. The Company, through its wholly owned subsidiary,
Northland Cable News, Inc., provides local news, sports and
information to several of the Company's cable systems, serving 42.2%
of the Company's current subscribers. This news service, Northland
Cable News is available exclusively to systems owned by the Company
and its affiliates with a total of approximately 96,966 subscribers
served as of September 30, 1997. Northland Cable News focuses on
stories of particular interest to the residents of each community,
including local news, sports, weather, features and coverage of local
people and events. The Company believes that Northland Cable News
serves to differentiate the Company's programming from any potential
competitors and strengthens the Company's ties with the community.
Northland Cable News also enables systems to expand local advertising
sales. As part of its operational strategy, the Company intends to
introduce Northland Cable News in certain of the Acquired Systems.
Maintain Local Offices and Personnel. Because the Company specializes
in operating cable systems in small cities and towns, the Company
emphasizes locally focused customer service. Key aspects of the
Company's customer service commitment include local offices and a
decentralized management structure. Conveniently accessible offices in
or near each of the communities it serves are staffed predominantly by
locally hired employees who are
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generally familiar with the community's customer base. Local employees and
managers have authority to quickly resolve customer-related problems and
serve to put a local "face" to the Northland Cable Television name.
Personnel at local offices implement the Northland Quality Assurance
Program, which was introduced in 1989 and entails random telephonic
customer surveys and telephonic follow-up within 48 hours of any service
call. In addition, local offices integrate themselves into the communities
they serve, purchasing such items as vehicles, uniforms and office supplies
from local merchants, conducting charity food drives and utilizing Company
"bucket trucks" for civic purposes.
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 Company's Existing Systems and
the Acquisition Systems which follows is as of September 30, 1997.
<TABLE>
<CAPTION>
AVERAGE
MONTHLY
REVENUE
PERCENT OF PREMIUM PER
HOMES BASIC BASIC BASIC SERVICE PREMIUM BASIC EBITDA
REGION PASSED(1) SUBSCRIBERS(2) PENETRATION SUBSCRIBERS(3) UNITS(4) PENETRATION SUBSCRIBER MARGIN
- ------------------- --------- -------------- ----------- -------------- ------- ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EXISTING SYSTEMS
So.
Car./Georgia... 35,815 24,362 68.0% 19.0% 7,470 30.7% $38.12 47.7%
Washington....... 34,670 25,847 74.6% 20.1% 7,767 30.0% $34.26 43.3%
Texas............ 46,385 29,834 64.3% 23.2% 9,038 30.3% $32.83 49.0%
Oregon/Calif..... 18,310 12,757 69.7% 9.9% 4,697 36.8% $32.87 44.1%
------- ------- ------ ----- ------ -----
Total Existing
Systems(5)....... 135,180 92,800 68.6% 72.2% 28,972 31.2% $34.63 45.3%
ACQUISITION SYSTEMS
South Carolina... 59,260 35,705 60.3% 27.8% 18,063 50.6% $34.43 44.1%
------- ------- ----- ------
Total Systems(5)... 194,440 128,505 66.1% 100.0% 47,035 36.6% $34.57 45.0%
======= ======= ===== ======
</TABLE>
- ---------------
(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 the Existing
Systems and the Acquisition Systems.
(4) Premium service units represents the number of subscriptions to premium
channels.
(5) EBITDA Margin for the Existing Systems and "Total Systems" includes
Northland Cable News, Inc.'s net operating results.
The South Carolina/Georgia Region. Prior to the Acquisition, the South
Carolina/Georgia Region consisted of four headends serving 24,362 subscribers.
Two headends, located in Clemson, South Carolina and Statesboro, Georgia, serve
21,451 subscribers or 88.1% of the total subscribers in the region. The region
is currently operated from two local offices located in Clemson and Statesboro.
After giving effect to the Acquisition, the South Carolina/Georgia region
consists of 10 headends serving 60,067 subscribers. Two of the headends are
expected to be interconnected by year-end 1999.
Clemson, South Carolina. The Clemson area systems serve 15,586
subscribers from three headends, one of which is expected to be
eliminated through interconnection. The Clemson
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<PAGE> 48
system, which is home to Clemson University, is the largest system, serving
12,675 subscribers, and is in the final stages of a 400 MHz rebuild
project, in which approximately 90% of the subscribers are expected to
benefit from expanded channel capacity by spring 1998. The Company is
culminating an intensive five-year capital plan for the Clemson area
systems which includes the installation of a fiber optic backbone designed
to support a 750 MHz trunk and feeder architecture. Additionally, the
Clemson area systems offer Northland Cable News, have a strong advertising
sales effort and their principal office and headend sites are owned by the
Company.
Statesboro, Georgia. The Statesboro system serves 8,776 subscribers
from a single headend and is in the final phase of a 400 MHz upgrade
scheduled for completion by early 1998. The Statesboro system offers
Northland Cable News, has a strong advertising sales effort and owns
its office and headend site. Statesboro, which is home to Georgia
Southern University, has experienced steady population growth, with a
compound annual growth rate for the period 1990 through 1995 of 2.4%,
more than double the national average of 1.1%, in each case according
to the U.S. Bureau of the Census.
The Acquisition Systems. The six Acquisition Systems serve portions of
Aiken, Greenwood, McCormick, Laurens, Abbeville, Saluda and Edgefield
Counties in western South Carolina. The Acquisition Systems passed an
estimated 59,260 homes and served approximately 35,705 basic
subscribers. Over 89% of the subscribers in the Acquisition Systems
are served by cable plant with 400 MHz or better capacity. The Company
expects to upgrade the Greenwood system to 550 MHz capacity by
year-end 1999, which will result in approximately 93% of subscribers
in the Acquisition Systems being served by cable plant with 550 MHz
capacity. Although this system currently employs fiber optic
technology, the Company plans to design and construct an expanded
fiber optic backbone designed to support a 750 MHz trunk and feeder
architecture by year-end 1999.
The Aiken and Greenwood systems serve approximately 15,794 and 16,301
subscribers, respectively, constituting approximately 89.9% of the
subscribers served by the Acquisition Systems. Aiken and Greenwood
counties have a diversified industrial base consisting of local,
national and foreign manufacturing companies covering such diverse
industries as pharmaceuticals, textiles, industrial robotics,
gardening seeds and prefabricated homes. Specific employers in the
region include Greenwood Mills, Fuji Photo, Monsanto, Sara Lee,
Schlumberger Industries, Tarma MidAtlantic and Velux-Greenwood.
Piedmont Technical College, located in Greenwood, has 3,000 regular
students and 15,000 continuing education students further diversifying
the local economy. The largest employer in the Aiken area is the
Westinghouse Savannah River Company.
The Washington Region. The Washington Region serves 25,847 subscribers from
five headends and is operated from three offices located in Port Angeles,
Bainbridge Island, and Moses Lake, Washington. The three largest headends serve
21,097 subscribers or 81.6% of the Company's total subscribers in the region.
Port Angeles, Washington. The Port Angeles system serves 8,622
subscribers from one headend. The system utilizes a fiber optic
backbone designed to support a 750 MHz trunk and feeder architecture
with 30.0% of the subscribers served by 450 MHz capacity plant and the
remainder of subscribers served by 330 MHz capacity plant. A 450 MHz
upgrade is in process. The system provides Northland Cable News, which
acts as a major news source for the area. Port Angeles is located near
the Olympic National Park and is the county seat for Clallam County.
The system's office and headend sites are owned by the Company.
Bainbridge Island, Washington. The Bainbridge Island system serves
5,220 subscribers from one headend. Although physically close to
Seattle, hilly terrain makes for poor off-air reception in many areas
of the island. Current channel capacity is 330 MHz. The construction
of a fiber optic backbone designed to support a 750 MHz trunk and
feeder architecture
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<PAGE> 49
is 50.0% accomplished, with completion expected by early 1998. A 550 MHz
design upgrade is now 25.0% accomplished, with completion expected by
year-end 1999. The system's combination office and headend site is owned.
Northland Cable News is offered to subscribers, which has helped develop a
successful advertising sales business. Bainbridge Island had a compound
annual population growth rate for the period 1990 through 1995 of 3.6%, far
exceeding the national average.
Moses Lake, Washington. The Moses Lake area systems serve 12,005
subscribers from three headends. The Moses Lake headend serves 60.4%
of the subscribers and has 400 MHz channel capacity including a
recently constructed fiber optic backbone designed to support a 750
MHz trunk and feeder architecture. With the resulting increased
channel capacity, the Company added 14 new channels, including a new
product tier that it believes will enhance the financial performance
of that system. The office, three headend sites and a microwave site
are owned by the Company. The three headends are interconnected via
microwave for the delivery of certain off-air broadcast signals
imported from the Seattle and Spokane, Washington markets. Each system
maintains a separate headend facility for reception and distribution
of satellite signals. The Othello system recently was upgraded to 400
MHz capacity, and the Ephrata System is intended to be upgraded to 550
MHz capacity by year-end 1999. The Moses Lake area, located in central
Washington state, has experienced a compound annual growth rate of its
population for the period 1990 through 1995 of 3.3%, well above the
national average.
The Texas Region. The Texas Region is characterized by smaller systems,
with 19 headends serving 29,834 subscribers. Three of the region's headends are
scheduled to be interconnected by year-end 1999. Six headends currently serve
64.0% of the subscribers. Additionally, the Company's management structure
allows it to achieve operating efficiencies, as only five local offices are
required to service the region.
Stephenville, Texas. The Stephenville area systems serve 6,183
subscribers from a cluster of three headends. Stephenville is home to
Tarleton State College, an affiliate of Texas A&M University.
Approximately 78.4% of subscribers currently are served by plant with
400 MHz capacity, and due to the systems size and household density,
the systems will not require fiber optic technology to achieve 550 MHz
capacity. The systems have experienced steady growth in their tier
subscriptions and advertising sales revenue. The office and headend
site are owned by the Company.
Mexia, Texas. The Mexia area systems serve 6,871 subscribers from a
cluster of five headends, with the two largest headends, Mexia and
Fairfield/Teague, serving 89.8% of the subscribers. The Mexia and
Fairfield/Teague systems currently have channel capacity of 400 MHz,
with Mexia utilizing a fiber optic backbone. The Company recently
launched a new product tier in Fairfield/Teague which the Company
believes will enhance the financial performance of that system. The
Mexia area has a diversified economy with Nucor Steel, Inc. as a major
employer.
Marble Falls, Texas. The Marble Falls area systems serve 8,685
subscribers from a cluster of five headends. The Company recently
completed a fiber optic interconnect of the Horseshoe Bay system to
the Marble Falls system, thereby eliminating the Horseshoe Bay
headend. Over the next two years, the Company plans to continue its
strategy to interconnect headends by completing a fiber optic
interconnect of the Kingsland system to the Marble Falls system,
thereby eliminating an additional headend. At the completion of the
Kingsland interconnect, approximately 66.0% of the subscribers in the
area will be served from a single headend. The combination office and
headend site in Marble Falls is owned by the Company. The Burnet
system is currently at 450 MHz capacity and over the next three to
five years the remaining systems in the Marble Falls area are
scheduled to be upgraded to 400 MHz or 450 MHz capacity. The Marble
Falls region is a popular outdoor
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<PAGE> 50
recreation and retirement area for families from nearby Austin and San
Antonio. The population growth rate in the area is 3.7%, in excess of three
times the national average.
The remaining six headends in the Texas region serve 8,095 subscribers,
with 89.0% of subscribers served by plant with 330 MHz capacity or better.
The Oregon/California Region. The Oregon/California Region serves 12,757
subscribers from seven headends, which are operated from three offices located
in Woodburn, Oregon, and Yreka and Oakhurst, California. Three headends serve
10,980 subscribers or 86.1% of the total subscribers in the region.
Woodburn, Oregon. Located between Portland and Salem, Oregon, the
Woodburn system serves 4,170 subscribers from one headend with a 450
MHz capacity system. The office and headend site are owned. The
system's Northland Cable News production was a key factor in its
recently being named the Business of the Year by the Woodburn Chamber
of Commerce. Woodburn is located in the Willamette Valley, a major
agricultural area, and has historically enjoyed strong population
growth. See "-- Competition" and "-- Litigation."
Oakhurst, California. The Oakhurst, California area is one of the
entrances to Yosemite National Park. The Oakhurst area systems serve
4,949 subscribers from a cluster of five headends. The Oakhurst
headend serves 64.1% of the subscribers in the area and is currently
330 MHz capacity. An upgrade of the Oakhurst system to 450 MHz
capacity is in process, and the Company anticipates that 32.0% of
Oakhurst system's subscribers will be served by 450 MHz capacity plant
by mid-1998, and the entire Oakhurst system upgrade will be completed
by 1999. The current upgrade plan includes the construction of a fiber
optic backbone, with the interconnect and subsequent elimination of
one headend.
Yreka, California. The Yreka, California system, located near Mt.
Shasta National Park, serves 3,638 subscribers from a single headend.
Yreka is the county seat of Siskiyou County. The majority of the
system currently has 330 MHz capacity. An upgrade of the system to 450
MHz capacity is now underway. Portions of the system serving 64.2% of
the subscribers already have been designed to 450 MHz capacity, with
completion projected by year-end 1999. The Yreka office and headend
sites are owned by the Company.
THE ACQUISITION
The Acquisition is part of a transaction among the Company and certain
affiliates of the Company and the Sellers and an affiliate of the Sellers,
whereby 12 cable television systems serving approximately 54,400 subscribers
were purchased by the Company and certain Company affiliates on January 2, 1998
for approximately $101.8 million. Allocation of the systems among the Company
and its affiliates was based on NTC's analysis of geographic concentration, ease
of technical and administrative integration and the financial and local
management capacities of the Company and its affiliates. The approximately $70.0
million purchase price paid by the Company for the Acquisition Systems was
arrived at by negotiations between the Company and the Sellers, independent of
the negotiations of the purchase price for the other systems. See "Risk
Factors -- Conflicts of Interest; Transactions with Affiliates."
INDUSTRY OVERVIEW
A cable television system receives television, radio and data signals at
the system's "headend" site by means of off-air antennas, microwave relay
systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to deliver a wide variety of channels of television
programming, primarily entertainment and informational video programming, to the
homes of subscribers who pay fees for this service, generally on a monthly
basis. A cable television system may also produce its own television programming
and other information services for distribution through the system. See
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"Business -- Northland Cable News." Cable television systems generally are
constructed and operated pursuant to non-exclusive franchises or similar
licenses granted by local governmental authorities for a specified period of
time.
The cable television industry developed in the United States in the late
1940s and early 1950s in response to the needs of residents in predominantly
rural and mountainous areas of the country where the quality of off-air
television reception was inadequate due to factors such as topography and
remoteness from television broadcast towers. In the 1960s, cable systems also
developed in small and medium-sized cities and suburban areas that had a limited
availability of clear off-air television station signals. All of these markets
are regarded within the cable industry as "classic" cable television system
markets. In more recent years, cable television systems have been constructed in
large urban cities and nearby suburban areas, where good off-air reception from
multiple television stations usually is already available, in order to offer
customers the numerous satellite-delivered channels typically carried by cable
systems that are not otherwise available through broadcast television reception.
Cable television systems offer customers various levels (or "tiers") of
cable services consisting of broadcast television signals of local network
affiliates, independent and educational television stations, a limited number of
broadcast television signals from so-called "super stations" originating from
distant cities (such as WGN), various satellite-delivered, non-broadcast
channels (such as Cable News Network ("CNN"), MTV: Music Television ("MTV"), the
USA Network ("USA"), ESPN and Turner Network Television ("TNT")), programming
originated locally by the cable television system (such as public, educational
and governmental access programs) and informational displays featuring news,
weather and public service announcements. Cable television systems also offer
"premium" television services to customers on a per-channel basis and sometimes
on a pay-per-view basis. These services (such as Home Box Office ("HBO") and
Showtime and selected regional sports networks) are satellite channels that
consist principally of feature films, live sporting events, concerts and other
special entertainment features, usually presented without commercial
interruption.
A customer generally pays an initial installation charge and fixed monthly
fees for basic, tier and premium television services and for other services
(such as the rental of converters and remote control devices). Such monthly
service fees constitute the primary source of revenue for cable television
systems. In addition to customer revenue, cable television systems also
frequently offer to their customers home shopping services, which pay such
systems a share of revenue from products sold in the systems' service areas.
Some cable television systems also receive revenue from the sale of available
spots on advertiser-supported programming.
PROGRAMMING AND SUBSCRIBER RATES
The Company has various contracts to obtain basic, satellite and premium
programming for the systems from program suppliers, including, in limited
circumstances, some broadcast stations, with compensation generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures
and/or offer marketing support. In addition, the Company is a member of the
National Cable Television Cooperative (the "NCTC"), a programming consortium
consisting of small to medium sized cable operators and individual cable systems
serving, in the aggregate, over eight million cable subscribers. The consortium
helps create efficiencies in the areas of securing and administering certain
billing related aspects of programming contracts, as well as to establish more
favorable programming rates and contract terms for small and medium sized cable
operators. The Company contracts for approximately 25.6% of its programming
through the NCTC. The Company does not have long-term programming contracts for
the supply of a substantial amount of its programming, due in part to ongoing
negotiations with a number of its programming suppliers, but also due to the
Company's belief that it is in its best interests to enter into long-term
programming contracts only if additional benefits are derived from the
contractual arrangements. In cases where the Company does have
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such contracts, they are generally for fixed periods of time ranging from one to
five years and are subject to negotiated renewal. While management believes that
the Company's relations with its programming suppliers are generally good, the
loss of contracts with certain of its programming suppliers could have a
material adverse effect on the Company, its financial condition, prospects and
debt service ability.
Cable programming costs are expected to continue to increase due to
additional programming being provided to customers, inflationary increases and
other factors. In 1995, 1996 and the first nine months of 1997, programming
costs as a percentage of the Company's revenues were 20.9%, 20.7% and 20.1%,
respectively.
Cable television systems offer their customers programming that includes
the local network, independent and educational broadcast television stations, a
limited number of broadcast television signals from distant cities, numerous
satellite-delivered, non-broadcast channels and in some systems local
information and public, educational and governmental access channels. Depending
upon each system's channel capacity and viewer interests, the Company offers up
to four tiers of cable television programming: a basic programming tier
(consisting generally of network, independent and public television signals
available over-the-air), an "expanded basic" programming tier (consisting
generally of satellite-delivered programming services with broad based
viewership appealing to a wide variety of subscriber tastes), a specialty tier
(consisting of satellite-delivered programming, services tailored to particular
niche subscriber groups such as the Sci-Fi Channel, Home & Garden, The Cartoon
Network, American Movie Classics, ESPN2 and regional sports programming) and a
fourth tier consisting of premium services purchased from content suppliers such
as HBO, Cinemax and The Disney Channel. In certain systems, the Company, through
its subsidiary Northland Cable News, produces a local news program which is
cablecast in a variety of time slots. See "Business -- Northland Cable News."
Monthly customer rates for services vary from market to market, primarily
according to the amount of programming provided. As of September 30, 1997, the
Company's monthly full basic service rates for residential customers ranged from
$21.25 to $28.20, per-channel premium service rates ranged from $2.95 to $13.50
per service and tier service rates ranged from $5.95 to $9.95. As of September
30, 1997, the weighted average price for the Company's monthly full basic
service rate was approximately $25.46.
In addition to subscriber fees, the Company derived 5.5% of its revenues in
fiscal 1996 from the sale of local spot advertising time on locally produced and
satellite-delivered programming. The Company also derives modest amounts of
revenue from affiliations with home shopping services (which offer merchandise
for sale to customers and compensate system operators with a percentage of their
sales receipts) and from offering in-home wiring maintenance contracts to
subscribers.
A one-time installation fee, which the Company may wholly or partially
waive during limited promotional periods, is usually charged to new customers.
The Company charges monthly fees for converters and remote control tuning
devices, although these devices are typically only installed when the customer's
television is not capable of delivering the number of channels included in the
programming tier purchased. The Company also charges administrative fees for
delinquent payments for service. Customers are free to discontinue service at
any time without additional charge but may be charged a reconnection fee to
resume service. Multiple dwelling unit accounts typically are offered a bulk
rate in exchange for single-point billing and basic service to all units.
NORTHLAND CABLE NEWS
The Company, through its wholly owned subsidiary, Northland Cable News,
Inc., provides local news and information to several of the Company's cable
systems, serving 42.2% of the Company's current subscribers. This news service,
Northland Cable News, also is provided to the Company's affiliates, resulting in
a total of approximately 96,966 subscribers served as of September 30, 1997.
Northland Cable News focuses on stories of particular interest to the residents
of each community,
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including local news, sports, weather, features and coverage of local people and
events. Northland Cable News is available exclusively to systems owned by the
Company and its affiliates, and serves to differentiate the Company's
programming from any potential competitors. The Company believes that Northland
Cable News increases the number of subscribers where offered by enhancing the
appeal of the Company's cable services and strengthens the Company's ties with
the community. Northland Cable News also enables systems to expand local
advertising sales. In addition, Northland Cable News, Inc. has introduced radio
programming on AM radio stations owned by affiliates of the Company in
Statesboro, Georgia and Corsicana, Texas. The Company believes such
crossmarketing techniques will foster synergistic revenue and promotional
opportunities as well as significant cost efficiencies in the reporting of local
news and sports. See "Certain Transactions -- Arrangements Between Northland
Cable News and Affiliates."
CUSTOMER SERVICE AND MARKETING
The Company emphasizes customer service, which it believes is important to
the successful operation of its business. By specializing in operating cable
television systems in small towns and cities, the Company focuses on adopting
business approaches which permit it to provide high-quality locally focused
service to each community served. The Company believes that a system-by-system,
decentralized approach to operations is required as each area served has
distinct characteristics such as demographics, economic diversity and geographic
setting. The Company's local management strives to become an integral part of
the communities served. These efforts enable the Company periodically to adjust
its local service offerings so that the needs of a particular community can be
met on a timely basis.
To ensure the successful execution of the Company's local customer service
and marketing strategies, the Company maintains conveniently accessible local
offices in many of its service areas. In the communities it serves, the Company
has found that many customers prefer to personally visit the local office to pay
their bills or ask questions about their service. The Company's local staff, who
are typically native to the areas they serve, are familiar with the community's
customer base. The Company believes that this combination of local offices and
local staffing helps the Company to provide the highest level of customer
service. Additionally, the Company believes its familiarity with the communities
it serves allows it to customize its menu of services and respective pricing to
provide its customers with products that are both diverse and affordable.
Since 1989, the Company has operated under a Quality Assurance Program
which seeks to ensure that quality and consistent service is provided to each
customer. The Quality Assurance Program focuses on both customer satisfaction
and system technical performance. To evaluate customer satisfaction at each
system, on an annual basis, Company employees at the corporate, regional and
local levels make an aggregate of over 500 telephone calls to customers chosen
on a random basis. Additionally, local customer service representatives call
each customer within 48 hours after a service call to determine whether all
problems have been resolved. System technical performance is also monitored by
random telephone calls to customers and system tests which exceed the FCC's
minimum requirements.
Finally, the Company believes that highly trained and motivated employees
with sound technical and interpersonal skills are essential in providing quality
service to its customers. In 1995, the Company developed a comprehensive
training and certification program which provides specific technical training as
well as wage increases and career advancement incentives. The training program
is multi-leveled, offering specific structured steps of company-paid courses,
monitored on the job training for specialized tasks, and periodic scheduled
performance evaluations. The Company believes that this training program will
help to ensure the continued successful implementation of its Quality Assurance
Program.
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TECHNICAL OVERVIEW
The following table sets forth certain information regarding the analog
channel capacities and miles of plant of the Company's systems after giving
effect to the Acquisition as if it had occurred as of September 30, 1997:
<TABLE>
<CAPTION>
220 TO 270 330 TO 350 400 TO 550
MHZ 300 MHZ MHZ MHZ
22 TO 31 UP TO 37 UP TO 47 UP TO 77
CHANNELS CHANNELS CHANNELS CHANNELS TOTAL
---------- -------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Number of headends................... 7 10 11 13 41
Subscribers as of September 30, 2,173 14,447 36,866 75,019 128,505
1997...............................
% of total subscribers............... 1.7% 11.2% 28.7% 58.4% 100.0%
Miles of plant....................... 155 524 1,208 2,448 4,335
% of total plant..................... 3.5% 12.1% 27.9% 56.5% 100.0%
</TABLE>
The Company has completed rebuilds and upgrades to 400 MHz or better on
nine cable systems. These systems represent over 1,100 miles of coaxial plant
and serve over 38.0% of the total subscribers of the Existing Systems. In
addition, the Company has begun plans to upgrade 890 miles of plant, improving
its 300 MHz, 330 MHz and 350 MHz systems to 400 MHz or better. On average these
plans are more than 35.0% complete. The Company expects to invest $800,000, $5.9
million and $7.3 million, in the fourth quarter of 1997, 1998 and 1999,
respectively, to continue to upgrade its plant.
The Company systematically deploys fiber optic technology to accomplish its
near and long-term service and operating capacity objectives. This strategy
provides for future capacity expansion to 750 MHz and beyond due to fiber optic
capability of carrying hundreds of video, data, and voice channels over extended
distances without the extensive signal amplification typically required for
coaxial cable. The Company's plans include the use of fiber optic technology to
interconnect headends and installation of fiber optic backbones to reduce
amplifier cascades, thereby gaining operational efficiencies and improved
picture quality and system reliability.
On a pro forma basis, 65.9% of the Company's subscribers are served by
systems that have deployed fiber optic technology. Furthermore, due to their
compact geographic nature, systems serving 15.6% of subscribers will not require
fiber optic technology to achieve operating capacities of 550 MHz.
The Company utilizes a "trap" system whereby a technician installs filters,
or traps, at each cabled home enabling the technician to configure the
programming received by each subscriber. As compared to converters, traps allow
subscribers benefits such as full use of their remote controls and VCR recording
of any channel while watching any other channel at the same time. This method
also enables the Company to reduce piracy of cable services by placing the
signal interdiction device outside the customer's premises.
FRANCHISES
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, including: (i) time limitations on
commencement and completion of construction; (ii) conditions of service
including customer response requests, technical standards, compliance with FCC
regulations and the provision of free service to schools and certain other
public institutions; and (iii) the maintenance of insurance and indemnity bonds.
Certain provisions of local franchises are subject to federal regulation under
the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecommunications Act.
Certain localities, including unincorporated areas in Texas where certain of the
Company's Existing Systems are located, do not require franchises to operate
cable systems.
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As of September 30, 1997, on a pro forma basis, the Company held 82
franchises. These franchises, all of which are non-exclusive, generally provide
for the payment of fees to the issuing authority. Annual franchise fees
typically range from 3.0% to 5.0% of the gross revenue generated by a system.
For the past three years, franchise fee payments made by the Company have
averaged approximately 3.0% of total gross system revenue. Franchise fees are
generally passed directly through to the customers on their monthly bills.
General business or utility taxes may also be imposed in various jurisdictions.
As amended by the 1996 Telecommunications Act, the 1984 Cable Act prohibits
franchising authorities from imposing franchise fees in excess of 5.0% of gross
revenue from the provision of cable services and also permits the cable operator
to seek renegotiation and modification of franchise requirements if warranted by
changed circumstances. Most of the Company's franchises can be terminated prior
to their stated expirations for uncured breaches of material provisions. See
"Legislation and Regulation."
The following table sets forth the number of franchises by year of
franchise expiration and the number and percentage of basic subscribers as of
September 30, 1997, after giving pro forma effect to the Acquisition:
<TABLE>
<CAPTION>
NUMBER PERCENTAGE NUMBER PERCENTAGE
OF OF TOTAL OF BASIC OF BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES SUBSCRIBERS SUBSCRIBERS
- ------------------------------------------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Prior to 2000.................................... 17 20.7% 27,536 21.4%
2000 - 2004...................................... 24 29.3% 47,707 37.1%
2005 - 2008...................................... 22 26.8% 27,272 21.2%
2009 and after................................... 19 23.2% 22,434 17.5%
-- ----- ------- -----
Subtotal....................................... 82 100.0% 124,949 97.2%
No franchise required............................ 3,556 2.8%
------- -----
Total.......................................... 128,505 100.0%
======= =====
</TABLE>
The Company believes that it has good relationships with its franchising
authorities. To date, the Company has never had a franchise revoked for any of
its systems, and no request of the Company for franchise renewals or extensions
has been denied. However, such renewed or extended franchises have sometimes
resulted in more rigorous franchise requirements.
The 1984 Cable Act provides for, among other things, procedural and
substantive safeguards for cable operators and creates an orderly franchise
renewal process in which renewal of franchise licenses issued by governmental
authorities cannot be unreasonably withheld, or, if renewal is withheld and the
franchise authority chooses to acquire the system or transfer ownership to
another person, such franchise authority or other person must pay the operator
either: (i) the "fair market value" (without value assigned to the franchise)
for the system if the franchise was granted after the effective date of the 1984
Cable Act (December 1984) or the franchise was pre-existing but the franchise
agreement did not provide a buyout; or (ii) the price set in franchise
agreements predating the 1984 Cable Act. In addition, the 1984 Cable Act
established comprehensive renewal procedures which require that an incumbent
franchisee's renewal application be assessed on its own merits and not as part
of a comparative process with competing applications. See "Legislation and
Regulation."
The 1984 Cable Act also establishes buyout rates in the event the franchise
is terminated "for cause" and the franchise authority desires to acquire the
system. For franchises which post-date the existence of the 1984 Cable Act or
pre-date the 1984 Cable Act but do not specify buyout terms, the franchise
authority must pay the operator an "equitable" price. To date, none of the
Company's franchises has been terminated.
The 1992 Cable Act prohibits the award of exclusive franchises, prohibits
franchising authorities from unreasonably refusing to award additional
franchises and permits them to operate cable systems themselves without
franchises. The 1996 Telecommunications Act provides that no state or
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local laws or regulations may prohibit or have the effect of prohibiting any
entity from providing any interstate or intrastate telecommunications service.
State and local authorities retain authority to manage the public rights of way
and "competitively neutral" requirements concerning right of way fees, universal
service, public safety and welfare, service quality, and consumer protection are
permitted with respect to telecommunications services. See "Legislation and
Regulation" and "Risk Factors -- Non-Exclusive Franchises; Non-Renewal or
Termination of Franchises."
COMPETITION
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
satellite master antenna television services, DBS services, wireless cable
services, newspapers, movie theaters, live sporting events, online computer
services and home video products, including videotape cassette recorders. The
extent to which a cable communications system is competitive depends, in part,
upon the cable system's ability to provide, at a reasonable price to customers,
a greater variety of programming and other communications services than those
which are available off-air or through other alternative delivery sources and
upon superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises granted
on a non-exclusive basis. The 1992 Cable Act prohibits franchising authorities
from unreasonably denying requests for additional franchises and permits
franchising authorities to operate cable television systems without a franchise.
It is possible that a franchising authority might grant a second franchise to
another company containing terms and conditions more favorable than those
afforded the Company.
Well-financed businesses from outside the cable industry (such as the
public utilities and other companies that own the poles to which cable is
attached) may become competitors for franchises or providers of competing
services. Congress has repealed the prohibition against national television
networks owning cable systems, and telephone companies may now enter the cable
industry, as described below. Such new entrants may become competitors for
franchises or providers of competitive services. In general, a cable system's
financial performance will be adversely affected when a competing cable service
exists (referred to in the cable industry as an "overbuild").
In 1993, a potential competitor petitioned to obtain a franchise from the
City of Woodburn, Oregon to operate a cable system which would compete with the
Company's Woodburn system. Such franchise has not been granted. The Company's
Woodburn system serves 4,170 subscribers, constituting approximately 3.2% of the
Company's total subscribers on a pro forma basis. See "-- Litigation" and "Risk
Factors -- Competition; Litigation."
In recent years, the FCC and the Congress have adopted policies providing a
more favorable operating environment for new and existing technologies that
provide, or have the potential to provide, substantial competition to cable
television systems. These technologies include, among others, DBS, whereby
signals are transmitted by satellite to small receiving dishes located on
subscribers' homes. Programming is currently available to DBS subscribers
through conventional, medium- and high-powered satellites. Existing DBS systems
offer in excess of seventy-five channels of programming and pay-per-view
services and are expected to increase channel capacity to 100 or more channels,
enabling them to provide program service comparable to and in some instances,
superior to those of cable television systems. At least four well-financed
companies currently offer DBS services and have undertaken extensive marketing
efforts to promote their products. The FCC has implemented regulations under the
1992 Cable Act to enhance the ability of DBS systems to make available to home
satellite dish owners certain satellite delivered cable programming at
competitive costs. Programming offered by DBS systems has certain advantages
over cable systems with respect to number of channels offered, programming
capacity and digital quality, as well as disadvantages that include high upfront
and monthly costs and a lack of local
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<PAGE> 57
programming, service and equipment distribution. DBS systems will provide
increasing competition to cable systems as the cost of DBS reception equipment
continues to decline. At least one DBS provider is undertaking the technical and
legislative steps necessary to enhance its service by adding local broadcast
signals which could further increase competitive pressures from DBS systems.
Cable television systems also compete with wireless program distribution
services such as MMDS which uses low power microwave to transmit video
programming over the air to customers. Additionally, the FCC recently adopted
new regulations allocating frequencies in the 28 GHz band for a new multichannel
wireless video service similar to MMDS, known as Local Multipoint Distribution
Service ("LMDS"). LMDS is also suited for providing wireless data services,
including the possibility of Internet access. Wireless distribution services
generally provide many of the programming services provided by cable systems,
although current technology limits the number of channels which may be offered.
Moreover, because MMDS service generally requires unobstructed "line of sight"
transmission paths, the ability of MMDS systems to compete may be hampered in
some areas by physical terrain and foliage.
The 1996 Telecommunications Act eliminated the previous prohibition on the
provision of video programming by local exchange telephone companies ("LECs") in
their telephone service areas. Various LECs currently are providing and seeking
to provide video programming services within their telephone service areas
through a variety of distribution methods, primarily through the deployment of
broadband wire facilities, wireless transmission and installation of traditional
cable systems alongside existing telephone equipment. Cable television systems
could be placed at a competitive disadvantage if the delivery of video
programming services by LECs becomes widespread, since LECs may not be required,
under certain circumstances, to obtain local franchises to deliver such video
services or to comply with the variety of obligations imposed upon cable
television systems under such franchises. Issues of cross subsidization by LECs
of video and telephony services also pose strategic disadvantages for cable
operators seeking to compete with LECs that provide video services. The Company
believes, however, that the small to medium markets in which it provides or
expects to provide cable services are unlikely to support competition in the
provision of video and telecommunications broadband services given the lower
population densities and higher costs per subscriber of installing plant. The
1996 Telecommunications Act's provisions promoting facilities-based broadband
competition are primarily targeted at larger systems and markets. The 1996
Telecommunications Act includes certain limited exceptions to the general
prohibition on buy outs and joint ventures between incumbent cable operators and
LECs for smaller non-urban cable systems and carriers meeting certain criteria.
See "Legislation and Regulations."
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information useful
both to consumers and businesses. The FCC also permits commercial and
noncommercial FM stations to use their subcarrier frequencies to provide
nonbroadcast services including data transmissions. The FCC has established an
over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. The expansion of fiber optic systems by LECs and other common
carriers, and electric utilities is providing facilities for the transmission
and distribution to homes and businesses of video services, including
interactive computer-based services like the Internet, data and other nonvideo
services.
The business of delivering and producing televised news, information and
entertainment are characterized by new market entrants, increasingly rapid
technological change and evolving industry standards. There can be no assurance
that the Company will be able to fund the capital expenditures necessary to keep
pace with technological developments or that the Company will successfully
predict the technical demand of its subscribers. The Company's inability to
provide enhanced
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services in a timely manner or to predict the demands of the marketplace could
have a material adverse effect on the Company, its financial condition,
prospects and debt service ability.
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environments are constantly occurring. Thus,
it is not possible to predict the effect that ongoing or future developments
might have on the cable industry or on the operations of the Company. See "Risk
Factors -- Competition; Litigation" and "Significant Capital Expenditures; Rapid
Technological Advancements in the Cable Television Business."
EMPLOYEES
As of September 30, 1997, the Company had approximately 170 full-time
employees and nine part-time employees. Ten of the Company's employees at its
Moses Lake, Washington system are represented by a labor union. The Company
considers its relations with its employees to be good.
PROPERTIES
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.
INSURANCE
With certain exceptions, the Company has insurance covering risks incurred
in the ordinary course of business, including general liability, property
coverage and business interruption insurance. As is typical in the cable
television industry, the Company does not maintain insurance
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covering its underground plant. Furthermore, due to significant industry wide
insurance increases in premiums, the Company elected not to renew its aerial
plant casualty insurance effective June 30, 1996. A cable system's "aerial
plant" consists of its transmission lines, equipment attached to utility poles
and other above-ground fixtures. Such equipment is subject to damage from a
variety of factors, notably hurricanes and ice and wind storms. Although none of
the Company's Systems are located in coastal areas, and thus not likely to be
severely damaged by hurricanes, many are subject to risks from ice and wind
storms. To attempt to mitigate these risks, the Company has entered into a
"self-insurance" arrangement with certain of its affiliates. See "Certain
Transactions -- Insurance." However, if the Company's aerial plant sustains
significant damage, or if the self-insurance program is inadequate to cover such
losses, the resulting reduction in cash flow caused by interrupted service,
together with the capital cost of replacing damaged equipment, could have a
material adverse effect on the Company, its financial condition, prospects and
debt service ability. See "Risk Factors -- Uncertainty of Adequate Insurance."
Notwithstanding the foregoing, the Company believes that the amounts and types
of its insurance coverage are commercially reasonable for its current needs.
LITIGATION
In 1993, North Willamette Telecom, Inc., an affiliate of Canby Telephone
Association, petitioned to obtain a franchise from the City of Woodburn, Oregon
to operate a cable system which would compete with the Company's Woodburn
system. Such franchise has not been granted. On March 20, 1996, the Company was
served with a complaint in a suit commenced in the United States District Court
for the District of Oregon by North Willamette Telecom, Inc. and Canby Telephone
Association. The suit alleges the Company violated federal antitrust laws,
intentionally interfered with plaintiffs' prospective business relationships
with potential cable customers, and intentionally interfered with plaintiffs'
business relationships with the Canby Telephone Association's members. The
complaint seeks actual damages ranging from $1.2 million to $10.2 million,
punitive damages of $10.0 million and other relief. The Company denies the
allegations of the complaint and is vigorously defending the case. The Company
has filed summary judgment motions and no trial date has been set. An adverse
ruling could have a material adverse effect on the Company, its financial
condition, prospects and debt service ability.
In addition, the Company is a party to ordinary and routine litigation
proceedings that are incidental to the Company's business. Management believes
that the outcome of all pending legal proceedings will not, individually or in
the aggregate, have a material adverse effect on the Company, its financial
condition, prospects and debt service ability. See "Risk Factors -- Competition;
Litigation."
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LEGISLATION AND REGULATION
INTRODUCTION
The operation of cable television systems is extensively regulated by the
FCC, some state governments and most local governments. The Telecommunications
Act of 1996 alters the regulatory structure governing the nation's
telecommunications providers. The Telecommunications Act of 1996 is intended to
remove barriers to competition in both the cable television market and the local
telephone market. It also reduces the scope of cable rate regulation.
The 1996 Telecommunications Act requires the FCC to undertake a host of
implementing rulemakings, the final outcome of which cannot yet be determined.
Moreover, Congress and the FCC have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect the
Company's operations. This section briefly summarizes key laws and regulations
affecting the operation of the Company's systems and does not purport to
describe all present, proposed, or possible laws and regulations affecting the
Company or its systems. See "Risk Factors -- Substantial Regulation in the Cable
Television Industry."
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the cable
television industry. Under that regime, all cable systems are subject to rate
regulation, unless they face "effective competition" in their local franchise
area. Federal law now defines "effective competition" on a community-specific
basis as requiring either low penetration (less than 30%) by the incumbent cable
operator, appreciable penetration (more than 15%) by competing multichannel
video providers ("MVPs"), or the presence of a competing MVP affiliated with a
local telephone company.
Although the FCC rules control, local government units (commonly referred
to as "local franchising authorities" or "LFAs") are primarily responsible for
administering the regulation of the lowest level of cable, the basic service
tier ("BST"), which typically contains local broadcast stations and public,
educational, and government access channels. Before an LFA begins BST rate
regulation, it must certify to the FCC that it will follow applicable federal
rules, and many LFAs have voluntarily declined to exercise this authority. LFAs
also have primary responsibility for regulating cable equipment rates. Under
federal law, charges for various types of cable equipment must be unbundled from
each other and from monthly charges for programming services. The 1996
Telecommunications Act allows operators to aggregate costs for broad categories
of equipment across geographic and functional lines.
The FCC itself directly administers rate regulation of an operator's cable
programming service tiers ("CPST"), which typically contain satellite-delivered
programming. Under the 1996 Telecommunications Act, the FCC can regulate CPST
rates only if an LFA first receives at least two rate complaints from local
subscribers and then files a formal complaint with the FCC. When new CPST rate
complaints are filed, the FCC now considers only whether the incremental
increase is justified and will not reduce the previously established CPST rate.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carnage. The FCC has modified its rate
adjustment regulations to allow for annual rate increases and to minimize
previous problems associated with regulatory lag. Operators also have the
opportunity of bypassing this "benchmark" regulatory scheme in favor of
traditional "cost-of-service," regulation in cases where the latter methodology
appears favorable. Premium cable services offered on a per-channel or
per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. Federal law requires that the
BST be offered to all cable subscribers, but limits the ability of
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operators to require purchase of any CPST before purchasing premium services
offered on a per-channel or per-program basis.
In an effort to ease the regulatory burden on small cable systems, the FCC
has created special rate rules applicable for systems with fewer than 15,000
subscribers owned by an operator with fewer than 400,000 subscribers. The
special rate rules allow for a simplified cost-of-service showing. All of the
Company's Existing Systems are eligible for these simplified cost-of-service
rules, and have calculated rates generally in accordance with those rules. All
of the Acquisition Systems, except the systems serving Greenwood and Aiken,
South Carolina, are also eligible for the simplified cost-of-service rules. The
Company believes, however, it is eligible for a waiver of the FCC's rate
regulation rules such that the Greenwood and Aiken systems may qualify for the
simplified rate regulations afforded to smaller systems.
The 1996 Telecommunications Act provides additional relief for small cable
operators. For franchising units with less than 50,000 subscribers and owned by
an operator with less than one percent of the nation's cable subscribers (i.e.,
approximately 600,000 subscribers) that is not affiliated with any entities with
aggregate annual gross revenue exceeding $250 million, CPST rate regulation is
automatically eliminated. The Company and all of its Existing Systems qualify
for this CPST deregulation.
The 1996 Cable Act sunsets FCC regulation of CPST rates for all systems
(regardless of size) on March 31, 1999. It also relaxes existing uniform rate
requirements by specifying that uniform rate requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing still may
be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Cable Act provides that no state or local laws or regulations may
prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The extent to which state and local governments may
impose requirements in such situations recently has been, and will continue to
be, the subject of litigation. The outcome of that litigation, and its effect on
the Company, cannot be predicted. The favorable pole attachment rates afforded
cable operators under federal law can be gradually increased by utility
companies owning the poles (beginning on February 8, 2001) if the operator
provides telecommunications service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Cable Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. Certain aspects of the
FCC's initial interconnection order were rejected by the Eighth Circuit Court of
Appeals on July 18, 1997, on the ground that the states, not the FCC, have
statutory authority to set the prices that incumbent local exchange carriers may
charge for interconnection. It is expected that the FCC will seek review by the
United States Supreme Court of the ruling.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Cable Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers ("LECs"), including the Bell
Operating Companies, can now compete with cable operators both inside and
outside their telephone service areas. Because of their resources, LECs could be
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formidable competitors to traditional cable operators, and certain LECs have
begun offering cable service.
Under the 1996 Cable Act, a LEC providing video programming to subscribers
generally will be regulated as a traditional cable operator (subject to local
franchising and federal regulatory requirements), unless the LEC elects to
provide its programming via an "open video system" ("OVS"). To qualify for OVS
status, the LEC must reserve two-thirds of the system's activated channels for
unaffiliated entities.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures between
cable operators and LECs in the same market. The 1996 Telecommunications Act
provides a few limited exceptions to this buyout prohibition, including a
carefully circumscribed "rural exemption." The 1996 Telecommunications Act also
provides the FCC with the limited authority to grant waivers of the buyout
prohibition (subject to LFA approval).
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The 1996 Cable Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Because of their resources, electric utilities could be formidable competitors
to traditional cable systems, and a few electric utilities have announced plans
to offer video programming. Recent technological advances have increased the
likelihood that electric utilities may become competitive with the Company.
ADDITIONAL OWNERSHIP RESTRICTIONS
The 1996 Cable Act eliminates statutory restrictions on broadcast/cable
cross-ownership (including broadcast network/cable restrictions), but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Cable Act also
eliminates the three year holding period required under the 1992 Cable Act's
"anti-trafficking" provision. The 1996 Cable Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
("SMATV") and MMDS facilities, but lifts those restrictions where the cable
operator is subject to effective competition. FCC regulations permit cable
operators to own and operate SMATV systems within their franchise area, provided
that such operation is consistent with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national program services. A companion rule establishing
a nationwide ownership cap on any cable operator equal to 30% of all domestic
cable subscribers has been stayed pending further judicial review.
There are no federal restrictions on non-U.S. entities having an ownership
interest in cable television systems or the FCC licenses commonly employed by
such systems.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act conveyed to a commercial broadcaster the right generally
to elect every three years either to require: (i) that the local cable operator
carry its signals ("must carry"); or (ii) that such operator obtain the
broadcaster's retransmission consent before doing so. The Company has been able
to reach agreements with all of the broadcasters who elected retransmission
consent and has not been required by broadcasters to remove any broadcast
stations from the cable television channel line-ups. To date, compliance with
the "retransmission consent" and "must
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carry" provisions of the 1992 Cable Act has not had a material effect on the
Company, although this result may change in the future depending on such factors
as market conditions, the introduction of digital broadcasts, channel capacity
and similar matters when such arrangements are renegotiated.
CHANNEL SET-ASIDES
LFAs can include franchise provisions, requiring cable operators to set
aside certain channels for public, educational and governmental access
programming. Federal law also requires cable systems to designate a portion of
their channel capacity (up to 15% in some cases) for commercial leased access by
unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but use of commercial leased access channels has
been relatively limited. The FCC recently modified its leased access rules,
making leased access somewhat more favorable to potential users. The changes,
however, were not as dramatic as leased access users had hoped, and should not
significantly infringe on the Company's control over its channel line-up. The
revised maximum rate formula has been challenged by one leased access applicant
in an appeal to the D.C. Circuit Court.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on dealings
between cable operators and cable programmers. The 1992 Cable Act precludes
video programmers affiliated with cable companies from favoring cable operators
over competitors and requires such programmers to sell their programming to
other multichannel video distributors. This provision limits the ability of
vertically integrated cable programmers to offer exclusive programming
arrangements to cable companies.
OTHER FCC REGULATIONS
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as equal employment opportunity, subscriber
privacy, programming practices (including, among other things, syndicated
program exclusivity, network program non-duplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, and children's programming advertisements), registration of
cable systems and facilities licensing, maintenance of various records and
public inspection files, frequency usage, lockbox availability, antenna
structure notification, tower marking and lighting, consumer protection and
customer service standards, technical standards, and consumer electronics
equipment compatibility. The FCC recently adopted rules relating to the
ownership of cable wiring located inside multiple dwelling unit complexes. The
FCC has concluded that such wiring can, in certain cases, be unilaterally
acquired by the complex owner, making it easier for complex owners to terminate
service from the incumbent cable operator in favor of a new entrant. The FCC
recently imposed new Emergency Alert System requirements on cable operators
which will be phased in over several years. The FCC recently adopted "closed
captioning" rules that the Company does not expect to have an adverse effect on
its operations. The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
PENDING PROCEEDING
The FCC has initiated a rulemaking proceeding involving whether cable
customers must be allowed to purchase cable converters from third party vendors.
If the FCC concludes that such distribution is required, and does not make
appropriate allowances for signal piracy concerns, it may become more difficult
for cable operators to combat theft of service.
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COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenue to a
federal copyright royalty pool (which varies depending on the size of the system
and the number of distant broadcast television signals carried), cable operators
can obtain blanket permission to retransmit copyrighted material on broadcast
signals. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect the Company's ability to obtain desired broadcast programming. In
addition, the cable industry pays music licensing fees to BMI and is negotiating
a similar arrangement with ASCAP. Copyright clearances for non-broadcast
programming services are arranged through private negotiations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in exchange for the use of public rights-of-way. Federal law now prohibits
franchise authorities from granting exclusive franchises or from unreasonably
refusing to award additional franchises. Cable franchises generally are granted
for fixed terms and in many cases include monetary penalties for non-compliance
and may be terminable if the franchisee fails to comply with material
provisions.
The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. Although LFAs have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, LFAs cannot require the payment of franchise
fees exceeding 5% of the system's gross revenue, cannot dictate the particular
technology used by the system, and cannot specify video programming other than
identifying broad categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchise
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for consent. Historically,
franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of their franchises. However, there
can be no assurance that renewal will be granted or that renewals will be made
on similar terms and conditions.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of state governmental agencies.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning directors and
executive officers of the Company, none of whom are compensated by the Company
for their respective services to the Company and each of whom devotes a
substantial amount of his time to the affairs of affiliated entities other than
the Company. Each director holds office until the next annual meeting of
shareholders or until his successor is elected or appointed and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- ------------------------------------------------------------
<S> <C> <C>
John S. Whetzell.......... 56 Director, Chairman of the Board and President
Richard I. Clark.......... 40 Director, Vice President, Treasurer and Assistant Secretary
James A. Penney........... 43 Vice President and Secretary
Gary S. Jones............. 40 Vice President
Richard J. Dyste.......... 52 Vice President, Technical Services
James E. Hanlon........... 64 Divisional Vice President
H. Lee Johnson............ 54 Divisional Vice President
John E. Iverson........... 61 Director and Assistant Secretary
</TABLE>
John S. Whetzell. Mr. Whetzell has been President, Chairman of the Board
and a director of the Company since its inception in 1985. He also serves as
President, Chairman of the Board and a director of Northland Telecommunications
Corporation, Northland Communications Corporation (which is the general partner
of each of the Company's five affiliated limited partnerships), Northland Cable
Services Corporation ("NCSC"), Cable Ad-Concepts, Inc., Northland Cable News,
Inc., Northland Cable Properties, Inc., Northland Media, Inc. ("NMI"),
Statesboro Media, Inc., ("SMI") and Corisicana Media, Inc. ("CMI"),
(collectively, the "Northland Affiliates"). He has been involved with the cable
television industry for over 21 years and currently serves as a director on the
board of the Cable Telecommunications Association, a national cable television
association. Between 1979 and 1982, he was in charge of the Ernst & Whinney
national cable television consulting services. Mr. Whetzell first became
involved in the cable television industry when he served as the Chief Economist
of the Cable Television Bureau of the FCC from 1974 to 1979. He provided
economic studies which support the deregulation of cable television both in
federal and state arenas. Mr. Whetzell also participated in the formulation of
accounting standards for the industry and assisted the FCC in negotiating and
developing the pole attachment rate formula for cable television. His
undergraduate degree is in economics from George Washington University, and he
has an MBA degree from New York University.
Richard I. Clark. Mr. Clark has served as Vice President and Treasurer of
the Company since 1985, as Assistant Secretary since 1987 and as a director
since 1985. Mr. Clark also serves as Vice President, Treasurer, Assistant
Secretary and a director of each of the Northland Affiliates. Mr. Clark was an
original incorporator of Northland Telecommunications Corporation and is
responsible for the administration and investor relations activities of
Northland Telecommunications Corporation, including financial planning and
corporate development. He has directed cable television feasibility studies and
on-site market surveys. Mr. Clark has assisted in the design and maintenance of
financial and budget computer programs, and has prepared documents for major
cable television companies in franchising and budgeting projects through the
application of these programs. From 1979 to 1982, Mr. Clark was employed by
Ernst & Whinney in the area of providing cable television consultation services
and has been involved with the cable television industry for nearly 17 years. In
1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a
Bachelor of Arts degree in accounting.
James A. Penney. Mr. Penney has served as Vice President and General
Counsel of the Company since 1985, and as Secretary since 1987. Mr. Penney also
serves as Vice President,
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General Counsel and Secretary of each of the Northland Affiliates. Mr. Penney is
responsible for advising all Northland systems with regard to legal and
regulatory matters, and also is involved in the acquisition and financing of new
cable systems. From 1983 until 1985 he was associated with the law firm of Ryan,
Swanson & Cleveland. Mr. Penney holds a Bachelor of Arts degree from the
University of Florida and a Juris Doctor from The College of William and Mary,
where he was a member of The William and Mary Law Review.
Gary S. Jones. Mr. Jones has been Vice President of the Company since 1986.
He also serves as Vice President of each of the Northland Affiliates. Mr. Jones
is responsible for cash management, financial reporting and banking relations
for the Company and each of the Northland Affiliates, and is involved in the
acquisition and financing of new cable systems. Prior to joining the Company,
Mr. Jones was employed as a Certified Public Accountant with Laventhol & Horwath
from 1980 to 1986. Mr. Jones received his Bachelor of Arts degree in Business
Administration with a major in accounting from the University of Washington in
1979.
Richard J. Dyste. Mr. Dyste has been Vice President-Technical Services of
the Company since 1988. Mr. Dyste also serves as Vice President-Technical
Services of each of the Northland Affiliates other than NCSC. Mr. Dyste joined
the Company in 1986, originally as an engineer and operations consultant. From
1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable, which owned the
Bainbridge Island, Washington system now owned by the Company. Mr. Dyste is a
past President and a current member of the Mount Rainier Chapter of the Society
of Cable Television Engineers, Inc. He is a graduate of Washington Technology
Institute.
James E. Hanlon. Mr. Hanlon has served as Divisional Vice President of the
Company since 1985. Mr. Hanlon also serves as Divisional Vice President of each
of the Northland Affiliates other than NCSC, NMI and CMI. Prior to his
association with the Company, he served as Chief Executive of M.C.T.
Communications from 1981 to 1985. His responsibilities included supervision of
the franchise, construction and operation of a cable television system located
near Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of the CATV
Division of Buford Television, Inc., and from 1973 to 1979, he served as
President and General Manager of Suffolk Cablevision in Suffolk County, New
York. Mr. Hanlon has also served as Vice President and Corporate Controller of
Viacom International, Inc. and Division Controller of New York Yankees, Inc. Mr.
Hanlon has a Bachelor of Science degree in Business Administration from St.
Johns University.
H. Lee Johnson. Mr. Johnson has been Divisional Vice President of the
Company since 1994. Mr. Johnson also serves as Divisional Vice President of each
of the Northland Affiliates other than NCPI, NCSC, NMI and CMI. Mr. Johnson
served as Regional Manager for several systems of the Company and its affiliates
from 1986 to 1994 until his promotion to Divisional Vice President. Prior to his
association with the Company, Mr. Johnson served as Regional Manager for Warner
Communications, managing four cable systems in Georgia from 1968 to 1973. Mr.
Johnson has also served as President of Sunbelt Finance Corporation and was
employed as a System Manager for Statesboro CATV, which owned the Statesboro,
Georgia system now owned by the Company. Mr. Johnson has been involved in the
cable television industry for nearly 27 years and is a current member of the
Society of Cable Television Engineers. He is a graduate of Swainsboro Technical
Institute.
John E. Iverson. Mr. Iverson has served as Assistant Secretary and a
director of the Company since 1985. He also serves as Assistant Secretary and a
director of each of the Northland Affiliates. Mr. Iverson is currently a member
of the law firm of Ryan, Swanson & Cleveland. He is a member of the Washington
State Bar Association and American Bar Association and has been practicing law
for more than 33 years. Mr. Iverson is the past President and a trustee of the
Pacific Northwest Ballet Association. Mr. Iverson has a Juris Doctor degree from
the University of Washington.
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EXECUTIVE COMPENSATION
None of the employees of the Company are deemed to be executive officers of
the Company. Services of the executive officers and other employees of NTC are
provided to the Company for which the Company pays NTC a fee pursuant to the
Management Agreement and overhead reimbursements. The executive officers and
other employees of NTC who provide services to the Company are compensated in
their capacity as executive officers and employees of NTC and therefore receive
no compensation from the Company. No portion of the management fee paid by the
Company is allocated to specific employees for the services performed by such
employees. See "Certain Transactions -- Management Agreement with NTC."
DIRECTOR COMPENSATION
The Company does not currently compensate members of its Board of Directors
for their services as directors.
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PRINCIPAL SHAREHOLDERS
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 Prospectus
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.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES BENEFICIALLY SHARES BENEFICIALLY
BENEFICIAL OWNER OWNED(1) OWNED
- ---------------------------------------------------------- ------------------- -------------------
<S> <C> <C>
John S. Whetzell.......................................... 1,006,826 22.8%
Adele P. Butler........................................... 530,000 12.1%
Pamela B. McCabe.......................................... 510,144 11.6%
Robert M. Arnold.......................................... 384,000 8.7%
Richard I. Clark.......................................... 306,826 7.0%
Robert A. Mandich......................................... 278,400 6.3%
James E. Hanlon........................................... 56,826 1.3%
John E. Iverson........................................... 50,000 1.1%
Gary S. Jones............................................. 46,493 *
James A. Penney........................................... 46,026 *
Richard J. Dyste.......................................... 42,826 *
H. Lee Johnson............................................ 9,826 *
All executive officers and directors as a group (eight
persons)................................................ 1,567,643 35.4%
</TABLE>
- ---------------
* Represents less than 1% of the shares beneficially owned.
(1) This table is based on information supplied by executive officers and
directors of the Company and the shareholders of NTC. Subject to applicable
community property laws, each shareholder named in the table has sole voting
and investment power with respect to the shares set forth opposite such
shareholder's name.
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CERTAIN TRANSACTIONS
GENERAL
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 under
the caption "Principal Shareholders" appearing elsewhere in this Prospectus. In
addition to the Company, NTC has three other direct, wholly-owned subsidiaries:
Northland Communications Corporation ("NCC"); Northland Cable Services
Corporation ("NCSC"); and Northland Media, Inc. ("NMI"). In turn, NCC is the
sole shareholder of Northland Cable Properties, Inc. ("NCP") and is the managing
general partner of Northland Cable Properties Five Limited Partnership
("NCP-5"), Northland Cable Properties Six Limited Partnership ("NCP-6"),
Northland Cable Properties Seven Limited Partnership ("NCP-7"), Northland Cable
Properties Eight Limited Partnership ("NCP-8") and Northland Premier Cable
Limited Partnership ("Premier" and, together with NCP-5, NCP-6, NCP-7 and NCP-8,
the "Limited Partnerships"). In addition, NCP-5 is the sole shareholder of
Corsicana Media, Inc. NCSC is the sole shareholder of Cable Ad-Concepts, Inc.
("CAC") and NMI is the sole shareholder of Statesboro Media, Inc. Each of the
Company's directors is also a director of NTC and each of its wholly-owned
direct subsidiaries and certain other NTC Affiliates and the Company's officers
are also officers of certain of the NTC Affiliates. See "Management."
MANAGEMENT AGREEMENT WITH NTC
NTC currently supervises all aspects of the business and operations of the
Company pursuant to an Operating Management Agreement between the Company and
NTC dated August 23, 1994 (the "Management Agreement"). The Management Agreement
continues in effect until terminated by either party on 30-days' written notice.
The Management Agreement provides that NTC shall render or cause to be
rendered supervisory services to the Company, including, among other things
supervising and monitoring: (i) the affairs, management and operations of the
Company and its systems; (ii) the accounting and other financial books and
records of the Company and its systems; (iii) the hiring, training and
supervision of the Company's employees; and (iv) the Company's fulfillment of
its contractual obligations in connection with its systems. In return for its
management services, NTC receives a management fee, payable quarterly, equal to
5.0% of the Company's gross revenues (the "Management Fee"). For the years ended
December 31, 1994, 1995 and 1996, and for the nine months ended September 30,
1997, the Company paid a Management Fee of $331,602, $1.3 million, $1.6 million
and $1,432,783, 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, 1994, 1995 and
1996, and for the nine months ended September 30, 1997, the Company reimbursed
Northland Communications Corporation approximately $622,486, $1.4 million, $1.7
million and $1,480,167, respectively, for such expenses.
ARRANGEMENTS BETWEEN NORTHLAND CABLE NEWS, INC. AND AFFILIATES
Pursuant to an arrangement commenced in July 1994, Northland Cable News,
Inc. receives monthly program license fees from the Company as well as NCP-5,
NCP-6, NCP-7 and NCPI as
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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, 1994, 1995 and 1996, and for the nine months ended
September 30, 1997, were $342,462, $602,263, $619,466 and $559,026,
respectively.
ARRANGEMENTS WITH CABLE AD-CONCEPTS, INC.
Cable Ad-Concepts, Inc. ("CAC") is a wholly owned indirect subsidiary of
NTC engaged in the business of developing and producing video commercial
advertisements for cablecast on certain systems owned by NTC. NTC affiliates
which utilize CAC's services are the Company, each of the Limited Partnerships
and NCPI. The aggregate amount of the fees charged by CAC to its affiliates is
based upon costs incurred in providing such advertisements, and is allocated
among participating affiliates based upon relative subscriber counts. Total fees
paid to CAC by the Company for the years ended December 31, 1994, 1995 and 1996,
and for the nine months ended September 30, 1997, were $33,790, $161,627,
$196,491 and $183,102, respectively.
ARRANGEMENTS WITH CABLE TELEVISION BILLING, INC.
Cable Television Billing, Inc. ("CTB") is a wholly owned indirect
subsidiary of NTC engaged in the business of providing billing services to the
Company, NCPI and each of the Limited Partnerships. The aggregate amount of the
fees charged by CTB to its affiliates is based upon costs incurred in providing
such billing services, and is allocated among participating affiliates based
upon relative subscriber counts and revenues. Fees paid by the Company to CTB
for billing services for the years ended December 31, 1994, 1995 and 1996, and
for the nine months ended September 30, 1997, were $105,779, $175,632, $231,756
and $192,776, respectively.
OPERATING AGREEMENTS WITH AFFILIATES
The Company is party to operating agreements with NCP-7 pursuant to which,
in certain instances, the Company serves as the local managing agent for certain
of NCP-7's systems and, in other instances, NCP-7 serves as the local managing
agent for certain of the Company's systems. In addition, the Company and its
affiliates render miscellaneous services to one another on a cost-of-service
basis. For the year ended December 31, 1996 and the nine months ended September
30, 1997, the Company paid affiliates an aggregate of $184,952 and $91,770,
respectively, for such services and received $100,800 and $94,681, respectively,
for performing such services for affiliates.
INSURANCE
The Company is part of a self-insurance program with the Limited
Partnerships and NCPI to provide casualty coverage for their respective aerial
and underground plants. Commencing in 1997, the Company began making monthly
contributions into an insurance fund maintained by NTC, which fund is maintained
for the collective benefit of the Company, each of the Limited Partnerships and
NCPI. If an uninsured loss were incurred by the Company, any of the Limited
Partnerships or NCPI, the fund would be applied to defray a portion of such
loss. To the extent the Company's losses exceed the fund's balance or the fund
is depleted from losses incurred by affiliates of the Company, the Company must
bear such losses directly. For the nine months ended September 30, 1997, the
Company contributed $41,469 to the self insurance fund. As of September 30,
1997, the balance available under the fund was $96,445. See "Risk
Factors -- Uncertainty of Adequate Insurance" and "Business -- Insurance."
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CAPITAL CONTRIBUTION
Effective June 30, 1997, the Company received a non-cash capital
contribution of approximately $9.3 million which replaced, in its entirety, the
then outstanding net unsecured advances that had previously been owed to NTC and
other affiliates of the Company other than amounts due for normal operations,
management fees paid to NCC and for services provided by affiliated entities as
discussed above. As of September 30, 1997 the Company had no outstanding
unsecured indebtedness to affiliates. See Note 2 of the Company's consolidated
financial statements.
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DESCRIPTION OF THE SENIOR CREDIT FACILITY
The Company has amended and restated the Company's Senior Credit Facility
with First Chicago, as lender and managing agent. The Senior Credit Facility, as
amended, establishes an eight-year reducing revolving loan facility in the
initial aggregate principal amount of $25.0 million (the "Reducing Revolving
Facility") and an eight-year term loan in the aggregate principal amount of
$75.0 million (the "Term Loan"). The Company had also received a commitment from
First Chicago for the Supplemental Credit Facility with maximum borrowings of
$115.0 million which will provide any additional financing necessary to
consummate the Special Repurchase Offer in the event the Acquisition was not
consummated. The Acquisition was consummated on January 2, 1998 and the
commitment for Supplemental Credit Facility was terminated by the Company. See
"Description of the Notes -- Repurchase at the Option of Holders -- Special
Repurchase Offer." As of February 3, 1998 the Company was in compliance with the
terms of the Senior Credit Facility.
Purpose. Proceeds from borrowings under the Senior Credit Facility were
utilized to finance the Acquisition, and were and will be for working capital
purposes and other permitted uses as described in the Senior Credit Facility.
Availability and Repayment. The Reducing Revolving Facility was undrawn at
the time of the Acquisition. Borrowings under the Term Loan were approximately
$74.9 million to consummate the Acquisition. Under the terms of the Senior
Credit Facility, the Company has the ability to borrow on a revolving basis
under the Term Loan until March 31, 1998 at which time the balances drawn under
the Term Loan shall convert to a term loan and be subject to quarterly principal
reductions aggregating $1.0 million, $2.4 million, $3.0 million, $7.0 million,
$11.0 million, $14.9 million, $18.0 million, and $18.0 million for the years
ending December 31, 1998 through 2005, respectively. Availability under the
Reducing Revolving Facility is subject to compliance with all covenants
contained in the Senior Credit Facility including the interest coverage ratio
and leverage ratio described below.
Security; Guaranty. Obligations under the Senior Credit Facility are
secured by: (i) a first perfected security interest in substantially all of the
current and future assets of the Company and its subsidiaries; (ii) a first
perfected security interest in all of the issued and outstanding shares of
capital stock of the Company; (iii) a first perfected security interest in all
of the issued and outstanding capital stock of Northland Cable News, Inc.; and
(iv) guarantees by all current and future Subsidiaries.
Interest. At the Company's election, the interest rate per annum applicable
to the Senior Credit Facility is a fluctuating rate of interest measured by
reference to either: (i) an adjusted London inter-bank offered rate ("LIBOR")
plus a borrowing margin; or (ii) the base rate of First Chicago the "Base Rate,"
which Base Rate is equal to the greater of the Federal Funds Effective Rate plus
0.50% or the corporate base rate announced by First Chicago, plus a borrowing
margin. The applicable borrowing margin vary, based upon the Company's leverage
ratio, from 1.00% to 3.00% for LIBOR loans and from 0.00% to 1.75% for Base Rate
loans. [current rates for Term Borrowing]
Fees. The Company has paid and has agreed to pay in the future certain fees
with respect to the Senior Credit Facility, including: (i) quarterly commitment
fees in the amount of 0.50% on the average daily unborrowed amounts; (ii)
upfront amendment fees; and (iii) agent, administrative and other similar fees.
Covenants. The Senior Credit Facility contains a number of covenants which
require the Company to furnish periodic financial and other reports to the
lenders under the Senior Credit Facility and which restrict the ability of the
Company to: (i) dispose of assets other than obsolete equipment or otherwise in
the ordinary course of business; (ii) incur additional indebtedness other than
certain enumerated exceptions including the Notes, capitalized leases not to
exceed $500,000 at any one time and additional indebtedness not to exceed
$1,000,000 at any one time; (iii) incur guarantee obligations other than in the
ordinary course of business or guarantees from or on behalf
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<PAGE> 73
of the Company's subsidiaries; (iv) prepay other indebtedness, including the
Notes; (v) sell any notes or accounts receivable except in the ordinary course
of business; (vi) pay dividends other than dividends from a wholly-owned
subsidiary of the Company to the Company or redeem any capital stock; (vii)
create liens on assets other than in the ordinary course such as those arising
by operation of law, liens and easements affecting real property which do not
affect its marketability and liens securing additional indebtedness not to
exceed $1 million; (viii) make investments other than in permitted instruments
or make other loans and advances; (ix) make acquisitions, engage in mergers or
consolidations other than those for which the consideration paid is less than $2
million or the Company has obtained the consent of the Senior Lender; (x) change
the business conducted by the Company to that other than owning and operating
cable television systems; (xi) change control such that the Company ceases to be
a wholly-owned subsidiary of NTC or the acquisition by any entity of more than
20% of the voting stock of NTC; (xii) entering into any transaction with an
affiliate other than in the ordinary course of business on an arms length basis;
(xiii) pay management fees to affiliates of the Company in excess of 5% of the
Company's monthly revenues provided that no event of default is then continuing.
In addition, the Company is required 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 below) to interest expense) of at least 1.25 to 1.00 initially,
increasing over time to 2.25 to 1.00; (B) a fixed charge coverage ratio (the
rate of the Company's Annual Operating Cash Flow (as defined below) to capital
expenditures and principal and interest payments) of at least 1.05 to 1.0
commencing December 31, 1997; (C) a pro forma debt service ratio (the ratio of
the Company's current Operating Cash Flow (as defined below) to the Company's
debt service obligations for the following twelve months) of 1.15 to 1 through
March 31, 1998 and 1.20) to 1 thereafter; and (D) a leverage ratio (the ratio of
total Debt (as defined below) to Annualized Operating Cash Flow) of not more
than 7.00 to 1.00 initially, decreasing over time to 4.00 to 1.00 in accordance
with the following schedule:
<TABLE>
<CAPTION>
PERIOD RATIO
------------------------------------------------------------ ------
<S> <C>
Through 12/31/98............................................ 7.00:1
1/1/99 through 12/31/99..................................... 6.75:1
1/1/00 through 12/31/00..................................... 6.25:1
1/1/01 through 12/31/01..................................... 5.75:1
1/1/02 through 12/31/02..................................... 5.00:1
1/1/03 through 12/31/03..................................... 4.50:1
1/1/04 and thereafter....................................... 4.00:1
</TABLE>
For purposes hereof, "Operating Cash Flow" is defined as the sum of (a)
pre-tax income or deficit, excluding extraordinary gains and losses and gains
and losses from sales of assets, (b) interest expense, (c) depreciation and
amortization, and (d) deferred management fees. "Annualized Operating Cash Flow"
is defined as the product of Operating Cash Flow for the most recently ended
fiscal quarter multiplied by four. "Annual Operating Cash Flow" is defined as
Operating Cash Flow for the preceding four quarters and "Debt" is defined as the
sum of (i) indebtedness for borrowed money (including accrued but unpaid
interest that is due and owing); (ii) guarantees; (iii) letters of credit; (iv)
obligations under non-competition agreements; and (v) capitalized lease
obligations but excluding (1) intercompany debt and (2) subordinated notes
issued to sellers in connection with acquisitions of assets.
The Senior Credit Facility also contains provisions that prohibit any
modification of the Indenture in any manner adverse to the lenders thereunder
and that limit the Company's ability to refinance the Notes without the consent
of such lenders.
Events of Default: The Senior Credit Facility contains defined events of
default including: (i) non payment of principal under the Senior Credit Facility
when due, or non payment of interest
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<PAGE> 74
upon any indebtedness or of any commitment fee or other obligations under the
Senior Credit Facility; (ii) the breach by the Company of any terms or
provisions of the Senior Credit Facility; (iii) inaccuracy of any
representations or warranties made by the Company or any of its subsidiaries, to
the lenders under or in connection with the Senior Credit Facility or any loan;
(iv) any change of control such that the Company ceases to be a wholly owned
subsidiary of NTC or the acquisition by any entity of 20% or more of the voting
stock of NTC; (v) revocation or expiration of any license, authorization,
consent or permit (including any cable television franchise or FCC license)
necessary for the ownership or essential for the operation by the Company of any
cable television system; (vi) default or acceleration of any indebtedness of the
Company or its subsidiaries or NTC in excess of $100,000, including the Notes;
(vii) non-compliance with the Employee Retirement Income Security Act of 1974;
(viii) noncompliance with applicable environmental laws, or the Company or any
of its subsidiaries becoming the subject of any proceeding or investigation
pertaining to the release of any toxic or hazardous waste or substance into the
environment; and (ix) the bankruptcy or insolvency of the Company or any of its
subsidiaries or NTC.
Supplemental Credit Facility. The Senior Credit Facility specifically
permits the Company, without first obtaining any consents or waivers, to make
the Special Repurchase Offer and to make the Special Repurchase Payment, whether
through the drawing by the Company of committed lines thereunder or otherwise.
Additionally, the Company covenanted with the Holders of the Original Notes that
the Company would exercise or extend, on or before January 15, 1998, its
commitment under the Supplemental Credit Facility to have available for drawing
an amount equal to 100% of the Special Repurchase Payment in the event all of
the Notes were tendered for repurchase. The Acquisition was consummated on
January 2, 1998 and the Company permitted the commitment under the Supplemental
Credit Facility to expire. See "Description of the Notes -- Repurchase at the
Option of Holders -- Special Repurchase Offer."
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<PAGE> 75
DESCRIPTION OF THE NOTES
The Exchange Notes will be issued, and the Original Notes were issued,
under an indenture (the "Indenture"), dated as of November 12, 1997, by and
among the Company, the Subsidiary Guarantor and Harris Trust Company of
California, as Trustee (the "Trustee"). The terms of the Exchange Notes are the
same in all respects (including principal amount, interest rate, maturity,
security and ranking) as the terms of the Original Notes for which they may be
exchanged pursuant to the Exchange Offer, except that the Exchange Notes (1) are
freely transferable by holders thereof (except as provided below) and (ii) are
not entitled to certain registration rights and certain additional interest
provisions which are applicable to the Original Notes under the Registration
Rights Agreement.
The following is a summary of certain provisions of the Notes and the
Indenture. This summary does not purport to be complete and is subject to the
detailed provisions of, and is qualified in its entirety by reference to, the
Notes and the Indenture. A copy of the Indenture may be obtained from the
Company or the Initial Purchasers. The definitions of certain terms used in the
following summary are set forth below under "-- Certain Definitions." Reference
is made to the Indenture for the full definition of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
Unless the context otherwise requires, all references herein to the "Notes"
shall include the Original Notes and the Exchange Notes. The Original Notes and
the Exchange Notes will be considered collectively to be a single class for all
purposes under the Indenture, including without limitation, waivers, amendments,
redemptions and for purposes of this Description of the Notes. For purposes of
this summary, the term "Company" refers only to Northland Cable Television,
Inc., a Washington corporation, and not to its Subsidiary, Northland Cable News,
Inc., a Washington corporation.
GENERAL
The Exchange Notes will be issued and the Original Notes were issued
pursuant to the Indenture. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are subject to all
such terms, and Holders of the Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. Copies of the Indenture available as set
forth below under "-- Additional Information."
The Original Notes are, and the Exchange Notes will be, general unsecured
obligations of the Company and the Original Notes are, and the Exchange Notes
will be, subordinated in right of payment to all current and future Senior Debt.
The Company's payment obligations under the Original Notes are, and the Exchange
Notes will be, jointly and severally guaranteed (the "Subsidiary Guarantees") on
a senior subordinated basis by the Guarantors. See "-- Subsidiary Guarantees."
As of September 30, 1997, on a pro forma basis giving effect to the Acquisition
and the Offering and the application of the net proceeds therefrom, the Company
would have had Senior Debt of approximately $77.3 million. The Indenture will
permit the incurrence of additional Senior Debt in the future.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $150.0 million,
$100.0 million of which were issued on the Issue Date, and will mature on
November 15, 2007. Interest on the Notes will accrue at the rate of 10 1/4% per
annum and will be payable semi-annually in arrears on May 15 and November 15,
commencing on May 15, 1998, to Holders of record on the immediately preceding
May 1 and November 1. Interest on the Notes will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
date of original issuance. Interest will be computed on the basis of a 360-day
year comprised of twelve 30-day months. Principal, premium, if any, and interest
on the Notes will be payable at the office or agency of the Company maintained
for
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such purpose within the City and State of New York or, at the option of the
Company, payment of interest may be made by check mailed to the Holders of the
Notes at their respective addresses set forth in the register of Holders of the
Notes; provided that all payments of principal, premium, interest with respect
to Notes the Holders of which have given wire transfer instructions to the
Company will be required to be made by wire transfer of immediately available
funds to the accounts specified by the Holders thereof. Until otherwise
designated by the Company, the Company's office or agency in New York will be
the office of the Trustee maintained for such purpose. The Notes will be issued
in denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of principal, premium, if any, and interest on the Original
Notes is, and on the Exchange Notes will be, subordinated in right of payment,
as set forth in the Indenture, to the prior payment in full of all Senior Debt,
whether outstanding on the Issue Date or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshaling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full of all Obligations due in respect of such Senior Debt (including
interest after the commencement of any such proceeding at the rate specified in
the applicable Senior Debt) before the Holders of the Notes will be entitled to
receive any payment with respect to the Notes, and until all Obligations with
respect to Senior Debt are paid in full, any distribution to which the Holders
of the Notes would be entitled shall be made to the holders of Senior Debt
(except that Holders of the Notes may receive Permitted Junior Securities and
payments made from the trust described under "-- Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under
"-- Legal Defeasance and Covenant Defeasance") if (i) a default in the payment
of the principal, premium, if any, or interest on Designated Senior Debt occurs
and is continuing beyond any applicable period of grace or (ii) any other
default occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any Designated
Senior Debt. Payments on the Notes may and shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment blockage
may be commenced unless and until (i) 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the Notes that
have come due have been paid in full in cash. No nonpayment default that existed
or was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice
unless such default shall have been waived for a period of not less than 90
days.
As a result of the subordination provisions described above, in the event
of the insolvency, liquidation, reorganization or other winding up of the
Company, the lenders under the Senior Credit Facility and other creditors who
are holders of Senior Debt, as well as creditors with secured obligations that
are not defined as Debt under the Indenture, must be paid in full before payment
of amounts due on the Notes. Accordingly, there may be insufficient assets
remaining after such payments to pay amounts due on the Notes. See "-- Certain
Covenants -- Incurrence of Debt and Issuance of Preferred Stock."
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<PAGE> 77
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Original Notes are, and the
Exchange Notes will be, jointly and severally guaranteed on a senior
subordinated basis by the Guarantors. As of the date of this Prospectus, the
Company's sole Subsidiary, Northland Cable News, Inc., is the Guarantor of the
Notes, and all future Subsidiaries of the Company are expected to become
Guarantors of the Notes.
The Subsidiary Guarantee of each Guarantor will be subordinated to the
prior payment in full of all senior debt of such Guarantor (as of January 31,
1998 the Guarantor had no senior debt outstanding), and the amounts for which
the Guarantors will be liable under the guarantees issued from time to time with
respect to Senior Debt. The obligations of each Guarantor under its Subsidiary
Guarantee will be limited so as not to constitute a fraudulent conveyance under
applicable law. See, however, "Risk Factors -- Fraudulent Transfer Statutes."
The Indenture provides that no Guarantor may consolidate with or merge with
or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless: (i) subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Guarantor) assumes all the obligations of such Guarantor pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee under the Notes and the Indenture; (ii) immediately after giving effect
to such transaction, no Default or Event of Default exists; (iii) such
Guarantor, or any Person formed by or surviving any such consolidation or
merger, would have Consolidated Net Worth immediately after giving effect to
such transaction equal to or greater than the Consolidated Net Worth of such
Guarantor immediately preceding the transaction; and (iv) the Company would be
permitted by virtue of the Company's pro forma Debt to Operating Cash Flow
Ratio, at the time of such transaction and immediately after giving pro forma
effect thereto, be permitted to incur at least $1.00 of additional Debt pursuant
to the Debt to Operating Cash Flow Ratio test set forth in the first paragraph
of the covenant described below under the caption "-- Certain
Covenants -- Incurrence of Debt and Issuance of Preferred Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, then such Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock of
such Guarantor) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Cash Proceeds of such sale or other disposition are
applied in accordance with the applicable provisions of the Indenture. See
"-- Repurchase at the Option of Holders -- Asset Sales" and "-- Special
Repurchase Offer."
OPTIONAL REDEMPTION
The Original Notes are not, and the Exchange Notes will not be, redeemable
at the Company's option prior to November 15, 2002. Thereafter, the Notes will
be subject to redemption at any time at the option of the Company, in whole or
in part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
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<PAGE> 78
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on November 15 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
--------------------------------------------------------- ----------
<S> <C>
2002..................................................... 105.125%
2003..................................................... 103.417%
2004..................................................... 101.708%
2005 and thereafter...................................... 100.000%
</TABLE>
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
Notwithstanding the foregoing, at any time prior to November 15, 2000, the
Company may redeem up to 30% of the aggregate principal amount of the Notes
issued under the Indenture at a redemption price of 110.25% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the
redemption date, with the Net Cash Proceeds of a Public Equity Offering;
provided that at least 70% of the Notes remain outstanding immediately after the
occurrence of such redemption; and provided, further, that such redemption shall
occur within 45 days of the date of the closing of such Public Equity Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
the Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided
that no Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of the Notes to be redeemed at its registered
address. Notices of redemption may not be conditional. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note. The Notes
called for redemption become due on the date fixed for redemption. On and after
the redemption date, interest ceases to accrue on the Notes or portions of them
called for redemption.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of the original
Notes has, and Holder of Exchange Notes will have, the right to require the
Company to repurchase all or any part (equal to $1,000 or an integral multiple
thereof) of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the date of purchase (the "Change of Control Payment"). Within 30 days
following any Change of Control, the Company will mail a notice to each Holder
of the Notes describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 90 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
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<PAGE> 79
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Trustee an amount
equal to the Change of Control Payment in respect of all Notes or portions
thereof so tendered and (iii) deliver or cause to be delivered to the Trustee
the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of the Notes or portions thereof being purchased by
the Company. The Trustee will promptly mail to each Holder of the Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will either
repay all outstanding Senior Debt or obtain the requisite consents, if any,
under all agreements governing outstanding Senior Debt to permit the repurchase
of the Notes required by this covenant and the Company's failure to comply with
this covenant shall constitute an Event of Default under the Indenture. The
Company will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Senior Credit Facility currently prohibits the Company from purchasing
any Notes except as described below under "-- Special Redemption Offer," and
also provides that certain change of control events with respect to the Company
would constitute a default thereunder. Any future credit facility or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing Notes, the
Company could seek the consent of its lenders to the purchase of the Notes or
could attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes. In such case, the Company's
failure to purchase tendered Notes would constitute an Event of Default under
the Indenture which would, in turn, constitute a default under the Senior Credit
Facility. In such circumstances, the subordination provisions in the Indenture
would likely restrict payments to the Holders of the Notes. Finally, the
Company's ability to pay cash to the Holders of the Notes upon a repurchase may
be limited by the Company's then existing financial resources. See "Risk
Factors -- Payment Upon Change of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
Subsidiary to, consummate an Asset Sale unless: (i) the Company (or such
Subsidiary, as the case may be) receives consideration at the time of such Asset
Sale at least equal to the fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise disposed
of; and (ii) at least 75% of the consideration therefor received by the Company
or such Subsidiary is in the form of (a) cash or Cash Equivalents or (b)
properties and capital assets (including franchises and
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<PAGE> 80
licenses required to own and operate such properties) to be used in the same
lines of business being conducted by the Company or any Subsidiary at such time,
or Equity Interests in one or more Persons which thereby become Wholly Owned
Subsidiaries of the Company whose assets consist primarily of such properties
and capital assets; provided that the amount of (x) any liabilities (as shown on
the Company's or such Subsidiary's most recent balance sheet) of the Company or
any Subsidiary (other than contingent liabilities and liabilities that are by
their terms subordinated to the Notes or any guarantee thereof) that are assumed
by the transferee of any such assets pursuant to a customary novation agreement
that releases the Company or such Subsidiary from further liability and (y) any
securities, notes or other obligations received by the Company or any such
Subsidiary from such transferee that are immediately converted by the Company or
such Subsidiary into cash (to the extent of the cash received), shall be deemed
to be cash for purposes of this provision.
Within 365 days after an Asset Sale, the Company may, at its option, (a)
apply such Net Cash Proceeds to repay Senior Debt (and to correspondingly reduce
commitments with respect thereto in the case of revolving borrowings), or (b)
commit in writing to apply such Net Cash Proceeds to a Related Business
Investment. Pending the final application of any such Net Cash Proceeds, the
Company may temporarily reduce Senior Debt outstanding under the Senior Credit
Facility or otherwise invest such Net Cash Proceeds in any manner that is not
prohibited by the Indenture. Any Net Cash Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $5.0 million, the Company will be required to make an offer to
all Holders of the Notes (an "Asset Sale Offer") to purchase the maximum
principal amount of the Notes that may be purchased out of the Excess Proceeds,
at an offer price in cash in an amount equal to 100% of the principal amount
thereof plus accrued and unpaid interest thereon, if any, to the date of
purchase, in accordance with the procedures set forth in the Indenture. To the
extent that the aggregate amount of the Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
the Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds,
the Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
Special Repurchase Offer
In the event the Acquisition is not consummated by March 1, 1998, each
Holder of the Original Notes had, and each Holder of the Exchange Notes would
have had the right to require the Company to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such Holder's Notes pursuant to
the offer described below (the "Special Repurchase Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest thereon, if any, to the date of purchase (the "Special
Repurchase Payment"). The Company would have mailed a notice to each Holder of
the Notes no later than March 31, 1998 describing the reasons the Acquisition
was not consummated by such date and offering to repurchase Notes on the date
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed (the "Special Repurchase
Payment Date"), pursuant to the procedures required by the Indenture and
described in such notice. The Company would have complied with the requirements
of Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable in
connection with any Special Repurchase Offer.
On the Special Repurchase Payment Date, the Company would have, to the
extent lawful, (i) accepted for payment all Notes or portions thereof properly
tendered pursuant to the Special Repurchase Offer, (ii) deposited with the
Trustee an amount equal to the Special Repurchase Payment in respect of all
Notes or portions thereof so tendered and (iii) delivered or cause to be
delivered to the Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The
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<PAGE> 81
Trustee would have promptly mailed to each Holder of the Notes so tendered the
Special Repurchase Payment for such Notes, and the Trustee would have promptly
authenticated and mailed (or cause to be transferred by book entry) to each
Holder a new Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such new Note would have been in a
principal amount of $1,000 or an integral multiple thereof. The Company would
have publicly announced the results of the Special Repurchase Offer on or as
soon as practicable after the Special Repurchase Payment Date.
The Senior Credit Facility specifically permits the Company, without first
obtaining any consents or waivers, to make the Special Repurchase Offer and to
make the Special Repurchase Payment, whether through the drawing by the Company
of committed lines thereunder or otherwise. Additionally, the Company had
covenanted with the Holders of the Notes that the Company would exercise or
extend, on or before January 15, 1998, its commitment under the Supplemental
Credit Facility to have available for drawing an amount equal to 100% of the
Special Repurchase Payment in the event all of the Notes were tendered for
repurchase. The Acquisition was consummated on January 2, 1998 and the Special
Repurchase Offer terminated on that date. The Company permitted its commitment
under the Supplemental Credit Facility to expire after the consummation of the
Acquisition.
CERTAIN COVENANTS
Incurrence of Debt and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise
(collectively, "incur"), with respect to any Debt (including Acquired Debt) and
that the Company will not issue any Disqualified Stock and will not permit any
Subsidiary to issue any shares of preferred stock; provided, however, that if no
Default or Event of Default with respect to the Notes shall have occurred and be
continuing, or shall occur as a consequence of the incurrence of such Debt, the
Company or any Subsidiary may incur Debt (including Acquired Debt), and the
Company may issue Disqualified Stock and its Subsidiaries may issue shares of
preferred stock if, at the time of such incurrence or issuance and after giving
effect to the incurrence of such Debt (and any other Debt incurred since the end
of the last full fiscal quarter or fiscal year for which internal financial
statements are available and the application of the proceeds thereof), the Debt
to Operating Cash Flow Ratio would be less than or equal to 7.00 to 1.0, if such
Debt is incurred or such Disqualified Stock or preferred stock is issued on or
prior to December 31, 1998, or would be less than or equal to 6.75 to 1.0, if
such Debt is incurred or such Disqualified Stock or preferred stock is issued on
or prior to December 31, 2000, or would be less than or equal to 6.50 to 1.0, if
such Debt is incurred or such Disqualified Stock or preferred stock is issued
thereafter; provided that this covenant shall not apply to the incurrence of
Debt by the Company so long as all of the proceeds of such Debt are applied to
the repurchase of outstanding Notes by the Company pursuant to an offer to
purchase Notes pursuant to (x) the provisions of the Indenture described under
the first paragraph of "-- Optional Redemption" or "Repurchase at the Option of
Holders -- Special Repurchase Offer" or (y) a tender offer made to all Holders
of the Notes effected in accordance with all federal and state securities laws,
including, without limitation, Rule 14e-1 under the Exchange Act and any other
applicable federal or state regulations.
The provisions of the first paragraph of this covenant do not apply to the
incurrence of any of the following items of Debt (collectively, "Permitted
Debt"):
(i) the incurrence by the Company of Debt and letters of credit (with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and its Subsidiaries thereunder)
under Credit Agreements; provided that the aggregate principal amount of
all revolving credit Debt outstanding under all Credit Agreements after
giving effect to such incurrence, including all Permitted Refinancing Debt
incurred to refund, refinance or
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replace any other Debt incurred pursuant to this clause (i), does not
exceed an amount equal to $100.0 million less the aggregate amount of all
Net Cash Proceeds of Asset Sales applied to repay any such Debt pursuant to
the covenant described above under the caption "-- Asset Sales";
(ii) the incurrence by the Company and its Subsidiary of Existing
Debt;
(iii) the incurrence by the Company of Debt represented by the Notes;
(iv) the incurrence by the Company or any of its Subsidiaries of Debt
represented by Capital Lease Obligations, mortgage financings or purchase
money obligations, in each case incurred for the purpose of financing all
or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Subsidiary, in an aggregate principal amount not to exceed $3.0 million at
any time outstanding;
(v) the incurrence by the Company or any Subsidiary of Permitted
Refinancing Debt in exchange for, or the net proceeds of which are used to
refund, refinance or replace Debt that was permitted by the Indenture to be
incurred;
(vi) the incurrence by the Company or any Subsidiary of intercompany
Debt between or among the Company and any of its Wholly Owned Subsidiaries;
provided, however, that (i) if the Company is the obligor on such Debt,
such Debt is expressly subordinated to the prior payment in full in cash of
all Obligations with respect to the Notes and (ii)(A) any subsequent
issuance or transfer of Equity Interests that results in any such Debt
being held by a Person other than the Company or a Wholly Owned Subsidiary
and (B) any sale or other transfer of any such Debt to a Person that is not
either the Company or a Wholly Owned Subsidiary shall be deemed, in each
case, to constitute an incurrence of such Debt by the Company or such
Subsidiary, as the case may be;
(vii) the incurrence by the Company or any Subsidiary of Hedging
Obligations that are incurred for the purpose of fixing or hedging interest
rate risk with respect to any floating rate Debt that is permitted by the
terms of this Indenture to be outstanding;
(viii) the guarantee by the Company of Debt of a Subsidiary of the
Company that was permitted to be incurred by another provision of this
covenant;
(ix) the guarantee by the Company or any of the Guarantors of Debt of
the Company or a Subsidiary of the Company that was permitted to be
incurred by another provision of this covenant; and
(x) the incurrence by the Company or any Subsidiary of additional Debt
in an aggregate principal amount (or accreted value, as applicable) at any
time outstanding, including all Permitted Refinancing Debt incurred to
refund, refinance or replace any other Debt incurred pursuant to this
clause (x), not to exceed $5.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Debt meets the criteria of more than one of the categories of
Permitted Debt described in clauses (i) through (x) above or is entitled to be
incurred pursuant to the first paragraph of this covenant, the Company shall, in
its sole discretion, classify such item of Debt in any manner that complies with
this covenant and such item of Debt will be treated as having been incurred
pursuant to only one of such clauses or pursuant to the first paragraph hereof.
Accrual of interest and the accretion of accreted value will not be deemed to be
an incurrence of Debt for purposes of this covenant.
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
Subsidiary to, directly or indirectly: (i) declare or pay any dividend or make
any other payment or distribution on account of the Company's or any
Subsidiary's Equity Interests (including, without limitation, any payment in
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connection with any merger or consolidation involving the Company) or to the
direct or indirect holders of the Company's or any Subsidiary's Equity Interests
in their capacity as such (other than dividends or distributions made to the
Company or a Wholly Owned Subsidiary of the Company and dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
Company); (ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company or other Affiliate of the Company (other than any
such Equity Interests owned by the Company or any Wholly Owned Subsidiary of the
Company); (iii) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Debt that is subordinated
to the Notes (other than Notes), except a payment of interest or principal at
Stated Maturity; (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company, immediately after giving effect to such Restricted
Payment, would have been permitted to incur at least $1.00 of additional
Debt pursuant to the Debt to Operating Cash Flow Ratio test set forth in
the first paragraph of the covenant described above under caption
"-- Incurrence of Debt and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Subsidiaries after
the Issue Date (excluding Restricted Payments permitted by clause (ii) of
the next succeeding paragraph), is less than the sum of (i) the difference
between (x) 100% of cumulative Consolidated Operating Cash Flow for the
period (taken as one accounting period) from the end of the first fiscal
quarter during which the Issue Date occurs to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available and (y) 140% of cumulative Consolidated Interest Expense for the
period (taken as one accounting period) from the end of the first fiscal
quarter during which the Issue Date occurs to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available, plus (ii) 100% of the aggregate net cash proceeds received by
the Company from the issue or sale since the Issue Date of Equity Interests
of the Company (other than Disqualified Stock) or of Disqualified Stock or
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the Issue Date is sold for cash
or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment.
The foregoing provisions do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Debt or Equity Interests of the Company in
exchange for, or out of the net cash proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of, other Equity Interests of
the Company (other than any Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause
(c)(ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase
or other acquisition of subordinated Debt with the net cash proceeds from an
incurrence of Permitted Refinancing Debt; (iv) the payment of any dividend by a
Subsidiary of the Company to the holders of its Equity Interests on a pro rata
basis; (v) the payment for services rendered by affiliates, in the ordinary
course of the
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Company's business and consistent with past practices, pursuant to the terms of
those arrangements currently in effect on the Issue Date (including extensions
of such arrangements on terms substantially the same as those in existence on
the Issue Date), (vi) for such time that none of the officers of the Company
receive direct compensation for services rendered to, for or on behalf of the
Company other than as provided under the Management Agreement as currently in
effect on the Issue Date (including any extensions of such agreement on terms
substantially the same as those in existence on the Issue Date), the payment of
annual fees for management services to NTC not to exceed in any fiscal year 5%
of the Company's annual total revenues pursuant to the terms of the Management
Agreement as currently in effect on the Issue Date (including any extensions of
such agreement on terms substantially the same as those in existence on the
Issue Date); and (vii) the making and consummation of (A) a Asset Sale Offer in
accordance with the provisions of the Indenture with any Excess Proceeds or (B)
a Change of Control Offer with respect to the Notes in accordance with the
provisions of the Indenture as in effect on the date of the Indenture.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or such Subsidiary, as the
case may be, pursuant to the Restricted Payment. The fair market value of any
non-cash Restricted Payment shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $1.0 million. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments" were
computed, together with a copy of any fairness opinion or appraisal required by
the Indenture.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien that secures obligations under any Pari Passu Debt or
Subordinated Debt on any asset or property of the Company or such Subsidiary, or
any income or profits therefrom, or assign or convey any right to receive income
therefrom, unless the Notes are equally and ratably secured with the obligations
so secured or until such time as such obligations are no longer secured by a
Lien.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and the Indenture pursuant to a supplemental indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction, no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Subsidiary of the
Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) would have Consolidated Net Worth immediately after giving effect to
the transaction equal to or greater than the
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Consolidated Net Worth of the Company immediately preceding the transaction and
(B) immediately after giving pro forma effect thereto, would be permitted to
incur at least $1.00 of additional Debt pursuant to the Debt to Operating Cash
Flow Ratio test set forth in the first paragraph of the covenant described above
under the caption "-- Incurrence of Debt and Issuance of Preferred Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
Subsidiary to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction taken as a whole is on terms that are no less
favorable to the Company or the relevant Subsidiary than those that would have
been obtained in a comparable transaction by the Company or such Subsidiary with
an unrelated Person; (ii) such Affiliate Transaction relates to and is in
furtherance of the lines of business the Company was engaged in on the Issue
Date or as the Company's business has thereafter evolved in the fields of cable
television systems, enhanced video services and advanced telecommunications
services, such as Internet access and network data services, and telephony; and
(iii) the Company delivers to the Trustee (A)(1) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $1.0 million prior to a Public Equity Offering, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clauses (i) and (ii)
above and that such Affiliate Transaction has been approved by the Board of
Directors and (2) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $1.0
million after the consummation of a Public Equity Offering, a resolution of the
Board of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clauses (i) and (ii) above and that such
Affiliate Transaction has been approved by a majority of the disinterested
members of the Board of Directors and (B) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $5.0 million, an opinion as to the fairness to the
Holders of the Notes of such Affiliate Transaction from a financial point of
view issued by an accounting, appraisal or investment banking firm of national
standing.
The provisions described in the foregoing paragraph do not apply to (u) the
payment for services rendered by affiliates, in the ordinary course of the
Company's business and consistent with past practices, pursuant to the terms of
those arrangements currently in effect on the Issue Date (including extensions
of such arrangements on terms substantially the same as those in existence on
the Issue Date), (v) customary directors' fees, indemnification and similar
arrangements with directors and officers, (w) for such time that none of the
officers of the Company receive direct compensation for services rendered to,
for or on behalf of the Company other than as provided under the Management
Agreement as currently in effect on the Issue Date (including any extensions of
such agreement on terms substantially the same as those in existence on the
Issue Date), the payment of annual fees for management services to NTC not to
exceed in any fiscal year 5% of the Company's annual total revenues pursuant to
the terms of the Management Agreement as currently in effect on the Issue Date
(including any extensions of such agreement on terms substantially the same as
those in existence on the Issue Date); (x) any employment agreement entered into
by the Company or any Subsidiary in the ordinary course of business and
consistent with the past practice of the Company or such Subsidiary, (y)
transactions between or among the Company and/or its Subsidiaries and (z)
Restricted Payments that are permitted by the provisions of the Indenture
described above under the caption " -- Restricted Payments."
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Additional Subsidiary Guarantees
The Indenture provides that if the Company or any Subsidiary shall acquire
or create another Subsidiary after the date of the Indenture, then such newly
acquired or created Subsidiary shall execute a Subsidiary Guarantee and deliver
an opinion of counsel, in accordance with the terms of the Indenture.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Subsidiary to (i)(a) pay dividends or make any other distributions to the
Company or any Subsidiary (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay any
indebtedness owed to the Company or any Subsidiary, (ii) make loans or advances
to the Company or any Subsidiary or (iii) transfer any of its properties or
assets to the Company or any Subsidiary, except for such encumbrances or
restrictions existing under or by reason of (a) existing Debt as in effect on
the Issue Date, (b) the Senior Credit Facility as in effect as of the Issue
Date, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive with respect to
such dividend and other payment restrictions than those contained in the Senior
Credit Facility as in effect on the Issue Date, (c) the Indenture and the Notes,
(d) applicable law, (e) any instrument governing Debt or Capital Stock of a
Person acquired by the Company or any Subsidiary as in effect at the time of
such acquisition (except to the extent such Debt was incurred in connection with
or in contemplation of such acquisition), which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired, provided
that, in the case of Debt, such Debt was permitted by the terms of the Indenture
to be incurred, (f) customary non-assignment provisions in leases entered into
in the ordinary course of business and consistent with past practices, (g)
Capital Lease Obligations and purchase money obligations for property acquired
in the ordinary course of business that impose restrictions of the nature
described in clause (iii) above on the property so acquired, or (h) Permitted
Refinancing Debt, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Debt are no more restrictive than those
contained in the agreements governing the Debt being refinanced.
Restrictions on Preferred Stock of Subsidiaries
The Indenture provides that the Company will not permit any Subsidiary to
issue any preferred stock (except preferred stock to the Company or a
Subsidiary), or permit any Person (other than the Company or a Subsidiary) to
own or hold an interest in any preferred stock unless the Company or such
Subsidiary would be entitled to incur Debt (other than Permitted Debt) under the
Debt to Operating Cash Flow Ratio test set forth in the first paragraph of the
covenant described above under the caption "-- Incurrence of Debt and Issuance
of Preferred Stock" in the aggregate principal amount equal to the aggregate
liquidation value of the preferred stock to be issued.
Limitation on Incurrence of Senior Subordinated Debt
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Debt that is subordinate or
junior in right of payment to any Senior Debt and senior in any respect in right
of payment to the Notes and (ii) no Guarantor will incur, create, issue, assume,
guarantee or otherwise become liable for any Debt that is subordinate or junior
in right of payment to any senior guarantees and senior in any respect in right
of payment to the Subsidiary Guarantees.
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Payments for Consent
The Indenture provides that neither the Company nor any Subsidiary will,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any Holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of the Indenture or the Notes unless such consideration is offered to be paid or
is paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish or caused to be
furnished promptly to the Holders of the Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, the Company has agreed that, for so long as any Notes
remain outstanding, it will furnish to the Holders of the Notes and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) default in payment when due of the principal of or premium, if
any, on the Notes (whether or not prohibited by the subordination provisions of
the Indenture); (iii) failure by the Company to comply with the provisions
described under the captions "-- Repurchase at the Option of Holders -- Change
of Control," "-- Asset Sales," "-- Special Repurchase Offer," "-- Certain
Covenants -- Restricted Payments" or "-- Incurrence of Debt and Issuance of
Preferred Stock"; (iv) failure by the Company for 60 days after notice to comply
with any of its other agreements in the Indenture or the Notes; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Debt for money borrowed by the
Company or any Subsidiary (or the payment of which is guaranteed by the Company
or any Subsidiary) whether such Debt or guarantee now exists, or is created
after the Issue Date, which default results in the acceleration of such Debt
prior to its express maturity and the principal amount of any such Debt,
together with the principal amount of any other such Debt or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) failure by
the Company or any Subsidiary to pay final judgments aggregating in excess of
$5.0 million, which judgments are not paid, discharged or stayed for a period of
60 days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor shall deny or disaffirm its obligations
under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or
insolvency with respect to the Company or any Subsidiary.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable
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immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency, with respect to the
Company, any Significant Subsidiary or any group of Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Notes will
become due and payable without further action or notice. Holders of the Notes
may not enforce the Indenture or the Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium payable that the Company would
have had to pay if the Company then had elected to redeem the Notes on November
15, 2002 pursuant to the optional redemption provisions of the Indenture, an
equivalent premium shall also become and be immediately due and payable to the
extent permitted by law upon the acceleration of the Notes. If an Event of
Default occurs prior to November 15, 2002 by reason of any willful action (or
inaction) taken (or not taken) by or on behalf of the Company with the intention
of avoiding the prohibition on redemption of the Notes prior to November 15,
2002, then the premium specified in the Indenture shall also become immediately
due and payable to the extent permitted by law upon the acceleration of the
Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of the Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of the outstanding Notes to
receive payments in respect of the principal, premium, if any, and interest on
such Notes when such payments are due from the trust referred to below, (ii) the
Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy,
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receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal, premium, if any, and interest on the outstanding Notes on
the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the Issue Date, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance will not result in a breach or violation
of, or constitute a default under any material agreement or instrument (other
than the Indenture) to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound; (vi) the Company must have
delivered to the Trustee an opinion of counsel to the effect that after the 91st
day following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of the Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder of the Notes may transfer or exchange Notes in accordance with the
Indenture. The Trustee may require a Holder of the Notes, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder of the Notes to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Note selected for redemption. Also, the Company is not required to transfer
or exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount
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of the Notes then outstanding (including, without limitation, consents obtained
in connection with a purchase of, or tender offer or exchange offer for, Notes),
and any existing default or compliance with any provision of the Indenture or
the Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder of the Notes affected, an amendment or
waiver may not (with respect to any Notes held by a non-consenting Holder of the
Notes): (i) reduce the principal amount of Notes whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Note or alter the provisions with respect to the
redemption of the Notes (other than provisions relating to the covenants
described above under the caption "-- Repurchase at the Option of Holders"),
(iii) reduce the rate of or change the time for payment of interest on any Note,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the Notes (except a rescission of acceleration
of the Notes by the Holders of at least a majority in aggregate principal amount
of the Notes and a waiver of the payment default that resulted from such
acceleration), (v) make any Note payable in money other than that stated in the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of the Notes to receive
payments of principal of or premium, if any, or interest on the Notes, (vii)
waive a redemption payment with respect to any Note (other than a payment
required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders") or (viii) make any change in the
foregoing amendment and waiver provisions. In addition, any amendment to the
provisions of Article 10 of the Indenture (which relate to subordination) will
require the consent of the Holders of at least 75% in aggregate principal amount
of the Notes then outstanding if such amendment would adversely affect the
rights of Holders of the Notes.
Without the consent of at least 75% in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Notes), no waiver or amendment to the Indenture may make any
change in the provisions described above under the caption "-- Repurchase at the
Option of Holders" that adversely affect the rights of any Holder of the Notes.
Notwithstanding the foregoing, without the consent of any Holder of the
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to Holders of the Notes
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the
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Indenture at the request of any Holder of the Notes, unless such Holder shall
have offered to the Trustee security and indemnity satisfactory to it against
any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture
without charge by writing to Northland Cable Television, Inc., 1201 Third
Avenue, Suite 3600, Seattle, Washington 98101, Attention: Vice President and
General Counsel.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of
any other Person existing at the time such other Person is merged with or into
or became a Subsidiary of such specified Person, including, without limitation,
Debt incurred in connection with, or in contemplation of, such other Person
merging with or into or becoming a Subsidiary of such specified Person, and (ii)
Debt secured by a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Subsidiary in any other Person, or any acquisition or purchase of Equity
Interests of any other Person by the Company or any Subsidiary, in either case
pursuant to which such Person shall become a Subsidiary or shall be
consolidated, merged with or into the Company or any Subsidiary or (ii) any
acquisition by the Company or any Subsidiary of the assets of any Person which
constitute substantially all of an operating unit or line of business of such
Person or which is otherwise outside of the ordinary course of business.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business consistent with past
practices (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company and its Subsidiaries taken as
a whole will be governed by the provisions of the Indenture described above
under the caption "-- Repurchase at the Option of Holders -- Change of Control"
and/or the provisions described above under the caption "-- Certain
Covenants -- Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant), and (ii) the issue or sale by the Company or any
Subsidiary of Equity Interests of any of the Company's Subsidiaries, in the case
of either clause (i) or (ii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $1.0 million
or (b) for net proceeds in excess of $1.0 million. Notwithstanding the
foregoing: (i) a transfer of assets by the Company to a Wholly Owned Subsidiary
or by a Wholly Owned Subsidiary to the Company or to another Wholly Owned
Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Subsidiary to
the Company or to another Wholly Owned Subsidiary and (iii) a Restricted Payment
that is permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments" will not be deemed to be Asset Sales.
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"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million and a Keefe Bank Watch Rating of
"B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above and (v) commercial paper having the highest
rating obtainable from Moody's Investors Service, Inc. or Standard & Poor's
Corporation and in each case maturing within six months after the date of
acquisition.
"Change of Control" means the occurrence of any of the following: (i) any
Person other than a Related Party or any Person owned or controlled, directly or
indirectly, by any Related Party (an "Unrelated Person"), together with any
Affiliates thereof that are also Unrelated Persons, (A) acquires or acquire
(whether through legal or beneficial ownership, by contract or otherwise),
directly or indirectly, the right to vote more than 45% of the total voting
power of all classes of Voting Stock of the either the Company or NTC or (B)
shall have elected, or caused to be elected, a sufficient number of its or their
nominees to the Board of Directors of the Company or NTC such that the nominees
so elected (regardless of when elected) shall collectively constitute a majority
of the Board of Directors of either the Company or NTC; (ii) the first day on
which NTC ceases to own a majority of the outstanding Equity Interests of the
Company, (iii) the adoption of a plan relating to the liquidation or dissolution
of the Company; (iv) the Company consolidates with, or merges with or into, any
Person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, the Company, in any such event pursuant to a
transaction in which any of the outstanding Voting Stock of the Company is
converted into or exchanged for cash, securities or other property, other than
any such transaction where the Voting Stock of the Company outstanding
immediately prior to such transaction is converted into or exchanged for Voting
Stock (other than Disqualified Stock) of the surviving or transferee Person
constituting a majority of the outstanding shares of such Voting Stock of such
surviving or transferee Person (immediately after giving effect to such
issuance). The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Company and its Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of the Notes to
require the Company to repurchase such Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Subsidiaries taken as a whole to another Person or group may be
uncertain. For purposes of this definition, "Person" includes any "group" as
that term is used in Section 13(d)(3) or 14(d)(2) of the Exchange Act, and
"beneficial ownership" shall have the meaning provided in Rule 13d-3 under the
Exchange Act.
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"Consolidated Interest Expense" means, for any given period and Person, the
aggregate of the interest expense in respect of all Debt of such Person and its
Subsidiaries for such period, on a consolidated basis, whether paid or accrued
and whether or not capitalized (including, without limitation, amortization of
debt issuance costs and original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; provided
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting shall be included only
to the extent of the amount of dividends or distributions paid in cash to such
Person or a Wholly Owned Subsidiary thereof, (ii) the Net Income of any
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that Net Income is not
at the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
shareholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common shareholders of such Person
and its consolidated Subsidiaries as of such date plus (ii) the respective
amounts reported on such Person's balance sheet as of such date with respect to
any series of preferred stock (other than Disqualified Stock) that by its terms
is not entitled to the payment of dividends unless such dividends may be
declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Subsidiary of such Person, (y) all
investments as of such date in unconsolidated Subsidiaries and in Persons that
are not Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Consolidated Operating Cash Flow" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period: plus (i)
an amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale (to the extent such losses were deducted in
computing such Consolidated Net Income); plus (ii) provision for taxes based on
income or profits of such Person and its Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such Consolidated
Net Income; plus (iii) Consolidated Interest Expense of such Person and its
Subsidiaries for such period, to the extent that any such expense was deducted
in computing such Consolidated Net Income; plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other noncash expenses of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash expenses were
deducted in computing such Consolidated Net Income; minus (v) non-cash items
increasing such Consolidated Net Income for such period, in each case, on a
consolidated basis and determined in accordance with GAAP.
"Credit Agreements" means, with respect to the Company, one or more debt
facilities (including, without limitation, the Senior Credit Facility) or
commercial paper facilities with banks or other
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institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
Debt under Credit Agreements outstanding on the date on which Notes are first
issued and authenticated under the Indenture shall be deemed to have been
incurred on such date in reliance on the exception provided by clause (i) of the
definition of Permitted Debt.
"Debt" means, with respect to any Person, any indebtedness of such Person,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures or similar instruments or letters of credit (or reimbursement
agreements in respect thereof) or banker's acceptances or representing Capital
Lease Obligations or the balance deferred and unpaid of the purchase price of
any property or representing any Hedging Obligations, except any such balance
that constitutes an accrued expense (including any deferred management fees
pursuant to the Management Agreement) or trade payable, if and to the extent any
of the foregoing indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, as well as all indebtedness of others secured
by a Lien on any asset of such Person (whether or not such indebtedness is
assumed by such Person) and, to the extent not otherwise included, the Guarantee
by such Person of any indebtedness of any other Person. The amount of any Debt
outstanding as of any date shall be (i) the accreted value thereof, in the case
of any Debt that does not require current payments of interest, and (ii) the
principal amount thereof, together with any interest thereon that is more than
30 days past due, in the case of any other Debt.
"Debt to Operating Cash Flow Ratio" means the ratio of (i) the Total
Consolidated Debt as of the date of calculation (the "Determination Date") to
(ii) four times the Pro Forma Consolidated Operating Cash Flow for the latest
fiscal quarter for which financial information is available immediately
preceding such Determination Date (the "Measurement Period"). For purposes of
calculating Consolidated Operating Cash Flow for the Measurement Period
immediately prior to the relevant Determination Date, if the Company or any
Subsidiary shall have in any manner (a) acquired (including through an Asset
Acquisition or the commencement of activities constituting such operating
business) or (b) disposed of (including by way of an Asset Sale or the
termination or discontinuance of activities constituting such operating
business) any operating business during such Measurement Period or after the end
of such period and on or prior to such Determination Date, such calculation will
be made on a pro forma basis in accordance with GAAP as if, in the case of an
Asset Acquisition or the commencement of activities constituting such operating
business, all such transactions had been consummated on the first day of such
Measurement Period and, in the case of an Asset Sale or termination or
discontinuance of activities constituting such operating business, all such
transactions had been consummated prior to the first day of such Measurement
Period.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) any Debt outstanding under the Senior
Credit Facility, (ii) any other Senior Debt permitted under the Indenture the
principal amount of which is $5.0 million or more and that has been designated
by the Company as "Designated Senior Debt."
"Disqualified Equity Interest" means any Equity Interest which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder thereof), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof, in
whole or in part, or exchangeable into Debt on or prior to the earlier of the
maturity date of the Notes or the date on which no Notes remain outstanding.
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"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date on which the Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Debt" means up to $1.0 million in aggregate principal amount of
Debt of the Company and its Subsidiaries (other than Debt under the Senior
Credit Facility) in existence on the Issue Date, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any Debt.
"Guarantors" means (i) Northland Cable News, Inc., a Washington
corporation, and (ii) any other Subsidiary that executes a Subsidiary Guarantee
in accordance with the provisions of the Indenture, and their respective
successors and assigns.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Debt or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Debt, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the Company
or any Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any direct or indirect Subsidiary of the Company such that, after
giving effect to any such sale or disposition, such Person is no longer a
Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments."
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
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"Management Agreement" means that certain agreement dated as of August 23,
1994, as the same may from time to time be amended, by and between the Company
and NTC, relating to the retention by the Company of NTC as its managing agent
in connection with the overall affairs and operations of the Company's systems.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (A) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (B) the
disposition of any securities by such Person or any Subsidiary or the
extinguishment of any Debt of such Person or any Subsidiary and (ii) any
extraordinary or nonrecurring gain (but not loss), together with any related
provision for taxes on such extraordinary or nonrecurring gain (but not loss).
"Net Cash Proceeds" means the aggregate cash proceeds received by the
Company or any Subsidiary in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any Asset Sale), net of (i) the direct costs relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, (ii) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements), amounts required to be applied to the repayment of Debt
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
"NTC" means Northland Telecommunications Corporation, a Washington
corporation and parent company of the Company.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"Pari Passu Debt" means (i) any Debt of the Company that is pari passu in
right of payment to the Notes and (ii) with respect to any Guarantee of the
Notes, Debt which ranks pari passu in right of payment to such Guarantee.
"Permitted Investments" means (a) any Related Business Investment; (b) any
Investment in Cash Equivalents; (c) any Investment by the Company or any
Subsidiary of the Company in a Person, if as a result of such Investment (i)
such Person becomes a Wholly Owned Subsidiary of the Company that is engaged in
the same or a similar line of business as the Company and its Subsidiaries were
engaged in on the Issue Date or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Subsidiary of
the Company that is engaged in the same or a similar line of business as the
Company and its Subsidiaries were engaged in on the Issue Date; (d) any
Restricted Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the covenant
described above under the caption "-- Repurchase at the Option of
Holders -- Asset Sales"; (e) any acquisition of assets solely in exchange for
the issuance of Equity Interests (other than Disqualified Stock) of the Company;
and (f) other Investments in any Person (other than NTC or an Affiliate of NTC
that is not also a Subsidiary of the Company) having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (f) that are at the time outstanding,
not to exceed $2.0 million.
"Permitted Junior Securities" means Equity Interests in the Company or debt
securities that are subordinated to all Senior Debt (and any debt securities
issued in exchange for Senior Debt) to
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substantially the same extent as, or to a greater extent than, the Notes are
subordinated to Senior Debt pursuant to Article 10 of the Indenture.
"Permitted Refinancing Debt" means any Debt of the Company or any
Subsidiary issued in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund other Debt of the Company
or any Subsidiary; provided that: (i) the principal amount (or accreted value,
if applicable) of such Permitted Refinancing Debt does not exceed the principal
amount of (or accreted value, if applicable), plus accrued interest on, the Debt
so extended, refinanced, renewed, replaced, defeased or refunded (plus the
amount of reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Debt has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Debt being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Debt being
extended, refinanced, renewed, replaced, defeased or refunded is subordinated in
right of payment to the Notes, such Permitted Refinancing Debt has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Notes on terms at least as favorable to the Holders of
the Notes as those contained in the documentation governing the Debt being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Debt is incurred either by the Company or by the Subsidiary who is the obligor
on the Debt being extended, refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Principal" means John S. Whetzell.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indenture, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act.
"Pro Forma Consolidated Operating Cash Flow" of any Person means for any
period the Consolidated Operating Cash Flow of such Person for such period
calculated on a pro forma basis to give effect to any Asset Sale or acquisition
of assets not in the ordinary course of business (including acquisitions of
other Persons by merger, consolidation or purchase of Capital Stock) during such
period as if such Asset Sale or acquisition of assets had taken place on the
first day of such period. For purposes of making the computations referred to
pursuant to the provisions of the Indenture described under "Certain
Covenants -- Incurrence of Debt and Issuance of Preferred Stock," any Asset Sale
or acquisition of assets not in the ordinary course of business made by the
Company, including all mergers and acquisitions subsequent to the last full
fiscal quarter, shall be calculated on a pro forma basis as if such Asset Sale
or acquisition of assets had taken place on the first day of such fiscal
quarter.
"Public Equity Offering" means a public offering of any Equity Interests
(other than Disqualified Stock) of (i) the Company or (ii) NTC to the extent the
net proceeds thereof are contributed to the Company as a capital contribution,
that, in each case, results in the net proceeds to the Company of at least $25.0
million.
"Related Business Investment" means (i) any capital expenditure or
Investment, in each case related to the business of the Company and its
Subsidiary as conducted on the Issue Date and as such business may thereafter
evolve in the fields of cable television systems, enhanced video services and
advanced telecommunications services, such as Internet access and network data
services, and telephony; and (ii) any Investment in any other Person primarily
engaged in the same business as provided in the foregoing subparagraph (i).
"Related Party" with respect to the Principal means (A) any controlling
shareholder, 80% (or more) owned Subsidiary, or spouse or immediate family
member (in the case of an individual) of such Principal or (B) or trust,
corporation, partnership or other entity, the beneficiaries, sharehold-
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ers, partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Credit Facility" means that certain Credit Agreement dated November
12, 1997, by and among the Company and The First National Bank of Chicago, as
lender and managing agent and the other lenders party thereto, providing for up
to $100.0 million of credit borrowings, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, and in each case as amended, modified, renewed, refunded, replaced or
refinanced from time to time.
"Senior Debt" means (i) all Debt outstanding under Credit Agreements and
all Hedging Obligations with respect thereto, (ii) any other Debt permitted to
be incurred by the Company under the terms of the Indenture, unless the
instrument under which such Debt is incurred expressly provides that it is on a
parity with or subordinated in right of payment to the Notes and (iii) all
Obligations with respect to the foregoing. Notwithstanding anything to the
contrary in the foregoing, Senior Debt will not include (w) any liability for
federal, state, local or other taxes owed or owing by the Company, (x) any Debt
of the Company to any Subsidiary or other Affiliate, (y) any trade payables or
Capital Lease Obligations or (z) any Debt that is incurred in violation of the
Indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the Issue Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Debt, the date on which such payment of interest or
principal was scheduled to be paid in the original documentation governing such
Debt, and shall not include any contingent obligations to repay, redeem or
repurchase any such interest or principal prior to the date originally scheduled
for the payment thereof.
"Subordinated Debt" means any Debt of the Company which is by its terms
subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (A) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (B)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"Supplemental Credit Facility" means that certain Senior Credit Facility
described in a commitment letter from The First National Bank of Chicago dated
October 15, 1997, as lead agent and a lender, to the Company setting forth a
commitment for up to $115.0 of revolving credit borrowings, including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
renewed, refunded, replaced or refinanced from time to time, to which Facility
the Company may elect to convert the Senior Credit Facility (in which case, all
references in this Offering Memorandum to the "Senior Credit Facility," from and
after the date of such election by the Company, shall be deemed to refer to the
Supplemental Credit Facility). The Company permitted the commitment under the
Supplemental Senior Credit Facility to expire subsequent to the consummation of
the Acquisition.
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"Total Consolidated Debt" means, as at the date of determination, an amount
equal to the aggregate amount of all such Debt and Disqualified Equity Interests
of the Company and its Subsidiaries outstanding as of such date of
determination.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing (i) the sum of the products
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Debt.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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ORIGINAL NOTES REGISTRATION RIGHTS
Pursuant to a registration rights agreement (the "Registration Rights
Agreement"), the Company and the Guarantor have agreed with the Initial
Purchasers, for the benefit of the Holders, that the Company and the Guarantors
will, at their cost, (i) not later than 75 days after the Issue Date file a
registration statement (the "Exchange Offer Registration Statement") with the
Commission with respect to a registered offer to exchange the Original Notes for
new notes of the Company (the "Exchange Notes") having terms substantially
identical in all material respects to the Original Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions) and
(ii) use their respective best efforts to cause the Exchange Offer Registration
Statement to be declared effective under the Securities Act not later than 150
days after the Issue Date. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will promptly offer the Exchange Notes in
exchange for surrender of the Original Notes (the "Registered Exchange Offer").
The Company will keep the Registered Exchange Offer open for not less than 30
days (or longer if required by applicable law) after the date notice of the
Registered Exchange Offer is mailed to the Holders of the Original Notes. For
each Original Note surrendered to the Company pursuant to the Registered
Exchange Offer, the Holder of such Original Note will receive an Exchange Note
having a principal amount equal to that of the surrendered Note. Interest on
each Exchange Note will accrue from the last interest payment date on which
interest was paid on the Note surrendered in exchange thereof or, if no interest
has been paid on such Note, from the date of its original issue.
A Holder of Original Notes (other than certain specified holders) who
wishes to exchange such Notes for Exchange Notes in the Registered Exchange
Offer will be required to represent that any Exchange Notes to be received by it
will be acquired in the ordinary course of its business, and that at the time of
the commencement of the Registered Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and that it is not an
"affiliate" of the Company, as defined in Rule 405 of the Securities Act, or if
it is an affiliate, that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
In the event that applicable laws, regulations or interpretations of the
staff of the Commission do not permit the Company to effect such a Registered
Exchange Offer, or if for any reason the Registered Exchange Offer is not
consummated within 180 days after the Issue Date, or if the Initial Purchasers
so request with respect to Notes not eligible to be exchanged for Exchange Notes
in the Registered Exchange Offer, or if any Holder of the Notes is not eligible
to participate in the Registered Exchange Offer or participates in but does not
receive freely tradable (except for prospectus delivery requirements) Exchange
Notes in the Registered Exchange Offer, the Company will, at its cost, (i) as
promptly as practicable, file a shelf registration statement ("Shelf
Registration Statement") covering resales of the Notes or the Exchange Notes, as
the case may be, (ii) use its best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act within 180 days
after the Issue Date; and (iii) keep the Shelf Registration Statement effective
until two years after its effective date (or such shorter period that will
terminate when all Notes or Exchange Notes, as the case may be, covered by the
Shelf Registration Statement have been sold pursuant to the Shelf Registration
Statement). The Company will, in the event a Shelf Registration Statement is
filed, among other things, provide to each holder for whom such Shelf
Registration Statement was filed copies of the prospectus which is part of the
Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Notes or the Exchange Notes,
as the case may be. A holder selling such Notes or Exchange Notes pursuant to
the Shelf Registration Statement generally will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
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If (i) within 75 days after the Issue Date, neither the Exchange Offer
Registration Statement nor the Shelf Registration Statement has been filed with
the Commission; (ii) within 150 days after the Issue Date, the Exchange Offer
Registration Statement has not been declared effective; (iii) within 180 days
after the Issue Date, the Registered Exchange Offer has not been consummated;
(iv) within 180 days after the Issue Date, the Shelf Registration Statement has
not been declared effective if a Shelf Registration Statement is required to be
filed; or (v) after either the Exchange Offer Registration Statement or the
Shelf Registration Statement has been declared effective, such Registration
Statement thereafter ceases to be effective or usable (subject to certain
exceptions) in connection with resales of Notes or Exchange Notes in accordance
with and during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (i) through (v), a "Registration Default"),
interest ("Additional Interest") will accrue on the Notes and the Exchange Notes
(in addition to the stated interest on the Notes and the Exchange Notes) from
and including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured.
Additional Interest will accrue at a rate of 0.50% per annum during the 90-day
period immediately following the occurrence of any Registration Default and
shall increase by 0.25% per annum at the end of each subsequent 90-day period,
but in no event shall such rate exceed 2.00% per annum.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of Notes by a beneficial owner of Notes that, for United States federal income
tax purposes, is not a "United States person" (a "Non-United States Holder").
This discussion is based upon the United States federal tax law now in effect,
which is subject to change, possibly retroactively. For purposes of this
discussion, a "United States person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof, an estate whose income is includible in gross income for
United States federal income tax purposes regardless of its source or a trust,
if a U.S. court is able to exercise primary supervision over the administration
of the trust and one or more U.S. persons have the authority to control all
substantial decisions of the trust. The tax treatment of the holders of the
Notes may vary depending upon their particular situations. U.S. persons
acquiring the Notes are subject to different rules than those discussed below.
In addition, certain other holders (including insurance companies, tax exempt
organizations, financial institutions and broker-dealers) may be subject to
special rules not discussed below. PROSPECTIVE INVESTORS ARE URGED TO CONSULT
THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF NOTES, AS WELL AS ANY TAX CONSEQUENCES THAT
MAY ARISE UNDER THE LAWS OF ANY FOREIGN, STATE, LOCAL OR OTHER TAXING
JURISDICTION.
Interest
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and such Non-United States
Holder: (i) does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company; (ii) is not a
controlled foreign corporation with respect to which the Company is a "related
person" within the meaning of the United States Internal Revenue Code of 1986,
as amended (the "Code"); and (iii) certifies, under penalties of perjury, that
such holder is not a United States person and provides such holder's name and
address.
Gain on Disposition
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, redemption or other disposition
of a Note unless (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder or
(ii) in the case of a Non-United States Holder who is a nonresident alien
individual and holds the Note as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year and certain other
requirements are met.
Federal Estate Taxes
If interest on the Notes is exempt from withholding of United States
federal income tax under the rules described above, the Notes will not be
included in the estate of a deceased Non-United States Holder for United States
federal estate tax purposes.
Information Reporting and Backup Withholding
The Company will, where required, report to the holders of the Notes and
the Internal Revenue Service the amount of any interest paid on the Notes in
each calendar year and the amounts of tax withheld, if any, with respect to such
payments.
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In the case of payments of interest to Non-United States Holders, temporary
Treasury regulations provide that the 31% backup withholding tax and certain
information reporting will not apply to such payments with respect to which
either the requisite certification, as described above, has been received or an
exemption has otherwise been established; provided that neither the Company not
its payment agents has actual knowledge that the holder is a United States
person or that the conditions of any other exemption are not in fact satisfied.
Under temporary Treasury regulations, these information reporting and backup
withholding requirements will apply, however, to the gross proceeds paid to a
Non-United States Holder on the disposition of the Notes by or through a United
States office of a United States or foreign broker, unless the holder certifies
to the broker under penalties of perjury as to its name, address and status as a
foreign person or the holder otherwise establishes an exemption. Information
reporting requirements, but not backup withholding, will also apply to a payment
of the proceeds of a disposition of the Notes by or through a foreign office of
a United States broker or foreign brokers will certain types of relationships to
the United States unless such broker has documentary evidence in its file that
the holder of the Notes is not a United States person, and such broker has not
actual knowledge to the contrary, or the holder establishes an exception.
Neither information reporting nor backup withholding generally will apply to a
payment of the proceeds or a disposition of the Notes by or through a foreign
office of a foreign broker not subject to the preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules discussed above. In general, the
final regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The final regulations are
generally effective for payments made after December 31, 1998, subject to
certain transition rules. NON-UNITED STATES HOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW FINAL REGULATIONS.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The summary is based on current law and certain proposed regulations and is
for general information only. Forthcoming legislative, regulatory, judicial or
administrative changes or interpretations could affect the federal income tax
consequences to holders of Notes. The tax treatment of a holder may vary
depending upon whether the holder is a cash-method or accrual-method taxpayer
and upon the holder's particular status. For example, certain holders, including
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers and foreign persons may be subject to special rules not discussed
below.
EXCHANGE OFFER
The exchange of Exchange Notes for Original Notes pursuant to the Exchange
Offer will not be treated as a taxable exchange for federal income tax purposes
because, other than the fact that the Exchange Notes will be registered, the
terms of the Exchange Notes will be identical in all material respects to the
terms of the Original Notes. The holder must continue to include stated interest
in income as if the exchange had not occurred.
SALE OR OTHER DISPOSITION OF NOTES
A holder of a Note will have a tax basis in the Note equal to the holder's
purchase price for the Note. A holder of a Note will generally recognize gain or
loss on the sale, exchange, redemption or retirement of the Note equal to the
difference (if any) between the amount realized from such sale,
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exchange, redemption or retirement and the holder's basis in the Note. Such gain
or loss will generally be long-term capital gain (except to the extent
attributable to market discount) or loss if the Note has been held more than one
year.
BACKUP WITHHOLDING
A noncorporate holder of Notes that either (a) is (i) a citizen or resident
of the United States, (ii) a partnership or other entity created or organized in
or under the laws of the United States or of any political subdivision thereof
or (iii) an estate or trust the income of which is subject to United States
federal income taxation regardless of its source or (b) is not described in the
preceding clause (a), but whose income from interest with respect to the Notes
or proceeds from the disposition of the Notes is effectively connected with such
holder's conduct of a United States trade or business, and that receive interest
with respect to the Notes or proceeds from the disposition of the Notes will
generally not be subject to backup withholding on such payments or distributions
if it certifies, under penalty of perjury, that it has furnished a correct
Taxpayer Identification Number ("TIN") and it is not subject to backup
withholding either because it has not been notified by the Service that is
subject to backup withholding or because the Service has notified it that it is
no longer subject to backup withholding. Such certification may be made on an
Internal Revenue Service Form W-9 or substantially similar form. However, backup
withholding will apply to such a holder if the holder (i) fails to furnish its
TIN, (ii) furnishes an incorrect TIN, (iii) is notified by the Service that it
has failed to properly report payments of interest or dividends or (iv) under
certain circumstances, fails to make such certification. The Company will
withhold (at a rate of 31%) all amounts required by law to be withheld from
reportable payments made and with respect to the Notes. Any amounts withheld
from a payment to a holder under the backup withholding rules will be allowed as
a credit against such holder's United States federal income tax liability and
may entitle such holder to a refund, provided that the required information is
furnished to the Service. Holders of the Notes should consult their tax advisors
regarding the application of backup withholding in their particular situations,
the availability of an exemption therefrom, and the procedure for obtaining such
an exemption, if available.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF
NOTES SHOULD CONSULT ITS OWN TAX ADVISOR AS TO PARTICULAR TAX CONSEQUENCES OF
HOLDING, EXCHANGING OR SELLING THE NOTES INCLUDING THE APPLICATION AND EFFECT OF
ANY FEDERAL, STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY CHANGES IN APPLICABLE
TAX LAWS.
ORIGINAL NOTES TRANSFER RESTRICTIONS
Because the following restrictions will apply to any Original Notes held by
holders who do not participate in the Exchange Offer, holders of Original Notes
are advised to consult legal counsel prior to making any offer, resale, pledge
or transfer of any of the Original Notes.
None of the Original Notes have been registered under the Securities Act
and they may not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except pursuant to an exemption from, or in
a transaction not subject to, the registration requirements of the Securities
Act. Accordingly, the Original Notes were sold only (A) to a limited number of
"qualified institutional buyers" (as defined in Rule 144A) ("QIBs") in
compliance with Rule 144A, (B) to a limited number of other institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) ("Accredited Investors") that, prior to their purchase of any
Original Notes, delivered to the Initial Purchasers a letter containing certain
representations and agreements, and (C) outside the United States to person
other than U.S. persons ("foreign purchasers," which term shall include dealers
or other professional fiduciaries in the United States acting on a discretionary
basis for foreign beneficial owners (other than an estate or trust)) in
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reliance upon Regulation S under the Securities Act ("Regulation S"). As used
herein, the terms "United States" and "U.S. person" have the meanings given to
them in Regulation S.
Each purchaser of Original Notes has been deemed to have represented and
agreed as follows:
1. It purchased the Original Notes for its own account or an account
with respect to which it exercises sole investment discretion and that it
and any such account is either (A) a QIB, and is aware that the sale to it
was made in reliance on Rule 144A, (B) an Accredited Investor, or (C) a
foreign purchaser that is outside the United States (or a foreign purchaser
that is a dealer or other fiduciary as referred to above).
2. It acknowledged that the Original Notes (and the related
guarantees) have not been registered under the Securities Act and that they
may not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except as set forth below.
3. It shall not resell or otherwise transfer any of such Original
Notes within three years after the original issuance of the Original Notes
except (A) to the Company or any of its subsidiaries, (B) inside the United
States to a QIB in compliance with Rule 144A, (C) inside the United States
to an Accredited Investor that, prior to such transfer, furnishes (or has
furnished on its behalf by a U.S. broker dealer) to the Trustee a signed
letter containing certain representations and agreements relating to the
restrictions on transfer of the Original Notes (the form of which letter
can be obtained from the Trustee), (D) outside the United States in
compliance with Rule 904 under the Securities Act, (E) pursuant to the
exemption from registration provided by Rule 144 under the Securities Act
(if available), or (F) pursuant to an effective registration statement
under the Securities Act.
4. It agreed that it will give to each person to whom it transfers the
Original Notes notice of any restrictions on transfer of such Original
Notes.
5. It understands that all of the Original Notes bear, and if not
exchanged pursuant to the Exchange Offer will continue to bear, a legend
substantially to the following effect unless otherwise agreed by the
Company and the holder thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF,
U.S. PERSONS EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER"
(AS DEFINED IN RULE 501(a)(1), (2), (3), OR (7) UNDER THE ACT) (AN
"ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING
THIS SECURITY IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT
WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL
OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED
INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE ACT, (C)
INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR
TO SUCH TRANSFER FURNISHES (OR HAS FURNISHED ON ITS BEHALF BY A
U.S. BROKER DEALER) TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER
OF THIS SECURITY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE
TRUSTEE FOR THIS SECURITY), (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE ACT, (E) PURSUANT TO
THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE ACT (IF
AVAILABLE), OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS
SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO
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THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS
SECURITY WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF THIS
SECURITY, IF THE PROPOSED TRANSFEREE IS AN ACCREDITED INVESTOR, THE
HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE
COMPANY SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS
EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS
BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE ACT. AS USED HEREIN,
THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE
THE MEANING GIVEN TO THEM BY REGULATION S UNDER THE ACT.
6. It shall not sell or otherwise transfer such Original Notes to, and
each purchaser represented and covenanted that it did not acquire the
Original Notes for or on behalf of, and will not transfer the Original
Notes to, any pension or welfare plan (as defined in Section 3 of the
Employee Retirement Income Security Act of 1974 ("ERISA"), except that such
a purchase for or on behalf of a pension or welfare plan shall be
permitted:
a. to the extent such purchase is made by or on behalf of a bank
collective investment fund maintained by the purchaser in which, at any
time while the Original Notes are held by the purchaser, no plan
(together with any other plans maintained by the same employer or
employee organization) has an interest in excess of 10% of the total
assets in such collective investment fund and the conditions of Section
III of Prohibited Transaction Class Exemption 91-38 issued by the
Department of Labor are satisfied;
b. to the extent such purchase is made by or on behalf of an
insurance company pooled separate account maintained by the purchaser in
which, at any time while the Original Notes are held by the purchaser,
no plan (together with any other plans maintained by the same employer
or employee organization) has an interest in excess of 10% of the total
of all assets in such pooled separate account and the conditions of
Section III of Prohibited Transaction Class Exemption 90-1 issued by the
Department of Labor are satisfied;
c. to the extent such purchase is made on behalf of a plan by (i)
an investment adviser registered under the Investment Advisers Act of
1940 that had as of the last day of its most recent fiscal year total
assets under its management and control in excess of $50,000,000 and had
stockholders' or partners' equity in excess of $750,000, as shown in its
most recent balance sheet prepared in accordance with generally accepted
accounting principles, (ii) a bank as defined in Section 202(a)(2) of
the Investment Advisers Act of 1940 with equity capital in excess of
$1,000,000 as of the last day of its most recent fiscal year, (iii) an
insurance company which is qualified under the laws of more than one
state to manage, acquire or dispose of any assets of a plan, which
insurance company has, as of the last day of its most recent fiscal
year, net worth in excess of $1,000,000 and which is subject to
supervision and examination by a state authority having supervision over
insurance companies, or (iv) a savings and loan association, the
accounts of which are insured by the Federal Savings and Loan Insurance
Corporation, that has made application for and been granted trust powers
to manage, acquire or dispose of assets of a plan by a State or Federal
authority having supervision over savings and loan associations, which
savings and loan association has, as of the last day of its most recent
fiscal year, equity capital or net worth in excess of $1,000,000 and, in
any case, such investment adviser, bank, insurance company or savings
and loan is otherwise a qualified professional asset manager, as such
term is used in Prohibited Transaction Exception 84-14 issued by the
Department of Labor, and the assets of such plan when combined with the
assets of other plans established or maintained by the same employer (or
affiliate thereof) or employee organization and managed by such
investment adviser, bank, insurance company or savings and loan do not
represent more than 20% of the total client assets managed by
104
<PAGE> 107
such investment adviser, bank, insurance company or savings and loan and
the conditions of Section I of such exemption are otherwise satisfied;
or
d. to the extent such plan is a governmental plan (as defined in
Section 3 of ERISA) which is not subject to the provisions of Title I of
ERISA or Section 4975 of the Internal Revenue Code.
7. It acknowledged that the Trustee for the Original Notes will not be
required to accept for registration of transfer any Original Notes acquired
by it, except upon presentation of evidence satisfactory to the Company and
the Trustee that the restrictions set forth herein have been complied with.
8. It acknowledged that the Company, the Initial Purchasers and others
will rely upon the truth and accuracy of the foregoing acknowledgements,
representations and agreements and agreed that if any of the
acknowledgements, representations or agreements deemed to have been made by
its purchase of the Original Notes are no longer accurate, it shall
promptly notify the Company and the Initial Purchasers. If it acquired the
Original Notes as a fiduciary or agent for one or more investor accounts,
it represented that it has sole investment discretion with respect to each
such account and it has full power to make the foregoing acknowledgements,
representations and agreements on behalf of each account.
105
<PAGE> 108
PLAN OF DISTRIBUTION
Based on interpretation by the Staff set forth in no-action letters issued
to third parties, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for the Original Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is (i) an affiliate of the Company, (ii) a broker-dealer who acquired Original
Notes directly from the Company or (iii) a broker-dealer who acquired Original
Notes as a result of market-making or other trading activities) without
compliance with the registration and prospectus delivery provisions of the
Securities Act provided that such Exchange Notes are acquired in the ordinary
course of such holders' business, and such holders are not engaged in, and do
not intend to engage in, and have no arrangement or understanding with any
person to participate in, a distribution of such Exchange Notes; provided that
broker-dealers ("Participating Broker-Dealers") receiving Exchange Notes in the
Exchange Offer will be subject to a prospectus delivery requirement with respect
to resales of such Exchange Notes. To date, the Staff has taken the position
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to transactions involving an exchange of securities
such as the exchange pursuant to the Exchange Offer (other than a resale of an
unsold allotment from the sale of the Original Notes to the Initial Purchasers)
with the prospectus contained in the Registration Statement. Pursuant to the
Registration Rights Agreement, the Company have agreed to permit Participating
Broker Dealers and other persons, if any, subject to similar prospectus delivery
requirements to use this Prospectus in connection with the resale of such
Exchange Notes. The Company have agreed that, for a period of 180 days after the
Exchange Date, they will make this Prospectus, and any amendment or supplement
to this Prospectus, available to any broker-dealer that requests such documents
in the Letter of Transmittal.
Each holder of the Original Notes who wishes to exchange its Original Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer -- Terms and
Conditions of the Letter of Transmittal." In addition, each holder who is a
broker-dealer and who receives Exchange Notes for its own account in exchange
for Original Notes that were acquired by it as a result of market-making
activities or other trading activities will be required to acknowledge that it
will deliver a prospectus in connection with any resale by it of such Exchange
Notes.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or at negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The Company have agreed to pay all expenses incidental to the Exchange
Offer other than commissions and concession of any brokers or dealers and will
indemnify holders of the Notes (including any brokers-dealers) against certain
liabilities, including liabilities under the Securities Act, as set forth in the
Registration Rights Agreement.
106
<PAGE> 109
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon on
behalf of the Company by Haythe & Curley, New York, New York.
EXPERTS
The audited consolidated financial statements of the Company as of July 31,
1997, December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996 and for the seven months ended July 31, 1997, included
in this Offering Memorandum to the extent and for the periods in their reports
have been audited by Arthur Andersen LLP, independent public accountants and are
included herein upon the authority of said firm as experts in giving said
reports.
The financial statements of (i) Aiken II Cable Systems (a component of
Robin Cable Systems, L.P.) and (ii) Greenwood Cable System (a component of
InterMedia Partners of Carolina, L.P.) as of December 31, 1995 and 1996 and for
the three years in the period ended December 31, 1996 included in this Offering
Memorandum, have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
107
<PAGE> 110
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE COMPANY:
Northland Cable Television, Inc. and subsidiary
Report of Independent Public Accountants........................................... F-2
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and as of December
31, 1996 and 1995............................................................... F-3
Consolidated Statements of Operations for the nine-month periods ended September
30, 1997 and 1996 (unaudited) and for the years ended December 31, 1996, 1995
and 1994........................................................................ F-4
Consolidated Statements of Changes in Shareholder's Deficit for the nine-month
period ended September 30, 1997 (unaudited) and for the years ended December 31,
1996, 1995 and 1994............................................................. F-5
Consolidated Statements of Cash Flows for the nine-month periods ended September
30, 1997 and 1996 (unaudited) and for the years ended December 31, 1996, 1995
and 1994........................................................................ F-6
Notes to Consolidated Financial Statements......................................... F-7
Northland Cable Television, Inc. and subsidiary
Report of Independent Public Accountants........................................... F-19
Consolidated Balance Sheet as of July 31, 1997..................................... F-20
Consolidated Statement of Operations for the seven-month period ended July 31,
1997............................................................................ F-21
Consolidated Statement of Changes in Shareholder's Deficit for the seven-month
period ended July 31, 1997...................................................... F-22
Consolidated Statement of Cash Flows for the seven-month period ended July 31,
1997............................................................................ F-23
Notes to Consolidated Financial Statements......................................... F-24
ACQUISITION SYSTEMS:
Aiken II Cable Systems (a component of Robin Cable Systems, L.P.)
Report of Independent Accountants.................................................. F-32
Balance Sheet as of December 31, 1996 and 1995 and as of September 30, 1997
(unaudited)..................................................................... F-33
Statement of Operations for the years ended December 31, 1996, 1995 and 1994 and
for the nine-month periods ended September 30, 1997 and 1996 (unaudited)........ F-34
Statement of Changes in Equity for the years ended December 31, 1996, 1995 and 1994
and for the nine-month period ended September 30, 1997 (unaudited).............. F-35
Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and
for the nine-month periods ended September 30, 1997 and 1996 (unaudited)........ F-36
Notes to Financial Statements...................................................... F-37
Greenwood Cable System (a component of InterMedia Partners of Carolina, L.P.)
Report of Independent Accountants.................................................. F-44
Balance Sheet as of December 31, 1996 and 1995 and as of September 30, 1997
(unaudited)..................................................................... F-45
Statement of Operations for the years ended December 31, 1996, 1995 and 1994 and
for the nine-month periods ended September 30, 1997 and 1996 (unaudited)........ F-46
Statement of Changes in Equity for the years ended December 31, 1996, 1995 and 1994
and for the nine-month period ended September 30, 1997 (unaudited).............. F-47
Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and
for the nine-month periods ended September 30, 1997 and 1996 (unaudited)........ F-48
Notes to Financial Statements...................................................... F-49
</TABLE>
F-1
<PAGE> 111
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,
1996 and 1995, 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, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northland Cable Television,
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
March 31, 1997
F-2
<PAGE> 112
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30, -----------------------------
1997 1996 1995
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash............................................. $ 1,156,123 $ 2,486,237 $ 982,295
Due from limited partnerships.................... 26,487 36,129 82,940
Accounts receivable.............................. 1,161,814 1,289,840 906,780
Prepaid expenses................................. 499,070 273,246 306,968
------------ ------------ ------------
Total current assets...................... 2,843,494 4,085,452 2,278,983
------------ ------------ ------------
UNSECURED ADVANCES TO PARENT....................... -- 1,003,457 1,003,457
------------ ------------ ------------
INVESTMENT IN MANAGED LIMITED PARTNERSHIP.......... -- -- 7,778
------------ ------------ ------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost.................. 67,174,497 61,891,985 55,241,912
Less -- Accumulated depreciation................. (27,495,056) (23,167,487) (18,444,806)
------------ ------------ ------------
39,679,441 38,724,498 36,797,106
Franchise agreements (net of accumulated
amortization of $27,985,880, $23,222,978 and
$18,334,932, respectively).................. 37,255,505 38,553,555 27,374,524
Goodwill (net of accumulated amortization of
$1,830,883, $1,701,050 and $1,527,939,
respectively)............................... 5,093,550 5,223,383 5,396,494
Other intangible assets (net of accumulated
amortization of $1,856,962, $1,196,286 and
$641,346, respectively)..................... 3,556,248 4,008,918 2,896,248
Fund deposited in escrow for purchase of cable
television system........................... 690,000 -- --
------------ ------------ ------------
86,274,744 86,510,354 72,464,372
------------ ------------ ------------
Total assets.............................. $ 89,118,238 $ 91,599,263 $75,754,590
============ ============ ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable................................. $ 81,219 $ 779,724 $ 597,427
Subscriber prepayments........................... 1,028,998 868,030 680,513
Other current liabilities........................ 4,249,697 3,056,425... 1,906,574
Due to affiliates................................ 1,421,844 407,692 863,477
Current portion of notes payable................. 7,538,444 5,550,314 3,928,263
------------ ------------ ------------
Total current liabilities................. 14,320,202 10,662,185 7,976,254
NOTES PAYABLE...................................... 95,429,971 96,604,418 79,216,648
UNSECURED ADVANCES FROM AFFILIATES................. -- 10,341,650 10,341,650
------------ ------------ ------------
Total liabilities......................... 109,750,173 117,608,253 97,534,552
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDER'S DEFICIT:
Common stock (par value $1.00 per share,
authorized 50,000 shares; 10,000 shares issued
and outstanding) and additional paid-in
capital........................................ 11,560,527 2,222,334 2,222,334
Accumulated deficit.............................. (32,192,462) (28,231,324) (24,002,296)
------------ ------------ ------------
Total shareholder's deficit............... (20,631,935) (26,008,990) (21,779,962)
------------ ------------ ------------
Total liabilities and shareholder's
deficit................................. $ 89,118,238 $ 91,599,263 $75,754,590
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 113
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUES
Service revenues.................. $28,700,196 $23,442,978 $32,560,981 $26,395,398 $15,344,842
Programming and production
revenues from affiliates........ 559,026 462,366 619,466 602,263 342,462
----------- ----------- ----------- ----------- -----------
Total Revenues............. 29,259,222 23,905,344 33,180,447 26,997,661 15,687,304
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cable system operations (including
$155,647 (unaudited), $203,197
(unaudited) $284,896, $177,976
and $111,401, net paid to
affiliates, respectively)....... 9,496,527 7,659,762 10,499,947 8,541,989 4,479,605
General and administrative
(including $1,701,082
(unaudited), $1,452,906
(unaudited), $1,902,405,
$1,665,688 and $692,066 paid to
affiliates, respectively)....... 5,331,900 4,230,072 5,955,139 4,709,765 2,782,381
Management fees paid to
affiliate....................... 1,432,783 1,169,963 1,625,118 1,320,492 331,602
Depreciation and amortization..... 9,652,832 7,591,399 10,727,032 9,022,367 5,307,010
----------- ----------- ----------- ----------- -----------
Total operating expenses... 25,914,042 20,651,196 28,807,236 23,594,613 12,900,598
----------- ----------- ----------- ----------- -----------
Income from operations..... 3,345,180 3,254,148 4,373,211 3,403,048 2,786,706
OTHER INCOME (EXPENSE):
Interest expense.................. (7,377,783) (5,884,442) (8,263,318) (7,214,737) (3,225,721)
Other, net (Note 7)............... 71,465 104,284 (338,921) 53,572 54,500
----------- ----------- ----------- ----------- -----------
Loss before provision for
income taxes............. (3,961,138) (2,526,010) (4,229,028) (3,758,117) (384,515)
PROVISION FOR INCOME TAXES.......... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
NET LOSS............................ $(3,961,138) $(2,526,010) $(4,229,028) $(3,758,117) $ (384,515)
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 114
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK AND
ADDITIONAL PAID-IN
CAPITAL
---------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 10,000 $ 2,222,334 $(19,859,664) $(17,637,330)
Net loss........................... -- -- (384,515) (384,515)
------ ----------- ------------ ------------
BALANCE, December 31, 1994........... 10,000 2,222,334 (20,244,179) (18,021,845)
Net loss........................... -- -- (3,758,117) (3,758,117)
------ ----------- ------------ ------------
BALANCE, December 31, 1995........... 10,000 2,222,334 (24,002,296) (21,779,962)
Net loss........................... -- -- (4,229,028) (4,229,028)
------ ----------- ------------ ------------
BALANCE, December 31, 1996........... 10,000 2,222,334 (28,231,324) (26,008,990)
Net loss (unaudited)............... -- -- (3,961,138) (3,961,138)
Capital contribution (unaudited)... -- 9,338,193 -- 9,338,193
------ ----------- ------------ ------------
BALANCE, September 30, 1997
(unaudited)........................ 10,000 $11,560,527 $(32,192,462) $(20,631,935)
====== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 115
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
------------ ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (3,961,138) $(2,526,010) $(4,229,028) $(3,758,117) $ (384,515)
Adjustments to reconcile net loss
to net cash provided by operating
activities --
Depreciation and
amortization................ 9,907,077 7,747,093 10,967,474 9,224,474 5,373,480
Other.......................... (72,177) (51,831) 320,513 79,295 153,083
Decrease (increase) in
operating assets:
Due from limited
partnerships.............. 15,195 69,642 116,164 (57,956) 12,641
Accounts receivable......... 128,026 (61,460) (383,060) (302,663) (108,056)
Prepaid expenses............ (225,824) (144,912) 33,722 (62,597) (94,231)
(Decrease) increase in
operating liabilities:
Accounts payable............ (246,561) (443,606) (120,904) 328,781 (41,897)
Subscriber prepayments...... 160,968 125,249 187,517 98,394 269,268
Other current liabilities... 1,193,272 168,243 1,149,851 1,231 643,484
------------ ----------- ------------ ------------ ------------
Net cash provided by
operating activities...... 6,898,838 4,882,408 8,042,249 5,550,842 5,823,257
------------ ----------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems....... (6,203,141) (637,737) (22,180,347) (21,717,081) (26,362,691)
Investment in cable television
properties....................... (3,230,270) (2,023,538) (2,843,391) (2,731,117) (1,824,681)
Funds deposited in escrow for
purchase of cable television
system........................... (690,000) -- -- -- --
Insurance proceeds................. 72,177 100,000 372,280 -- --
Franchise fees and other
intangibles...................... -- (103,387) (183,211) (41,279) (11,785)
Other.............................. -- -- 4,350 9,582 4,727
------------ ----------- ------------ ------------ ------------
Net cash used in investing
activities................ (10,051,234) (2,664,662) (24,830,319) (24,479,895) (28,194,430)
------------ ----------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable........ 5,000,000 -- 21,995,000 19,655,298 65,500,000
Principal payments on notes
payable.......................... (4,186,317) (2,582,673) (2,589,354) (2,437,231) (38,696,796)
Loan fees.......................... -- (50,000) (1,063,118) (55,573) (1,811,295)
Advances from (payments to)
affiliates....................... 1,008,599 50,406 (50,516) 201,358 (1,116,682)
------------ ----------- ------------ ------------ ------------
Net cash provided by (used in)
financing activities........... 1,822,282 (2,582,267) 18,292,012 17,363,852 23,875,227
------------ ----------- ------------ ------------ ------------
(DECREASE) INCREASE IN CASH.......... (1,330,114) (364,521) 1,503,942 (1,565,201) 1,504,054
CASH, beginning of year.............. 2,486,237 982,295 982,295 2,547,496 1,043,442
------------ ----------- ------------ ------------ ------------
CASH, end of period.................. $ 1,156,123 $ 617,774 $ 2,486,237 $ 982,295 $ 2,547,496
============ =========== ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest......................... $ 6,986,059 $ 5,845,741 $ 7,673,330 $ 7,360,315 $ 2,986,799
============ =========== ============ ============ ============
Cash paid (received) during the
period for state income taxes.... $ 10,601 $ 23,745 $ 21,592 $ 5,610 $ (19,443)
============ =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 116
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
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 September 30, 1997,
NCTV had 65 nonexclusive franchises to operate cable television systems. These
franchises expire at various dates through 2020.
Northland Cable News, Inc. (NCN), a Washington corporation which was formed
to develop and distribute programming to certain of the Company's affiliated
entities, is a wholly owned subsidiary of NCTV. NCTV and NCN are collectively
referred to as the Company.
RELATED COMPANIES
The Company and its affiliates, Northland Communications Corporation and
subsidiary (NCC); Northland Cable Services Corporation and subsidiaries (NCSC);
and Northland Media, Inc. and subsidiary (NMI) are wholly owned subsidiaries of
Northland Telecommunications Corporation (NTC or Parent). NCC is the managing
general partner of six limited partnerships, which own and operate cable
television systems. Additionally, NCC owns and operates cable systems through
Northland Cable Properties, Inc. (NCP, Inc.), its wholly owned subsidiary. NCSC
is the parent company for Cable Television Billing, Inc. (CTB) and Cable
Ad-Concepts, Inc. (CAC). CTB provides billing services to cable systems owned by
managed limited partnerships of NCC and wholly owned systems of the Company and
NCC. CAC develops and produces video commercial advertisements to be cablecast
on Northland affiliated cable systems. NMI was formed as a holding company to
own certain noncable related assets.
BASIS OF INTERIM FINANCIAL STATEMENT PRESENTATION
The financial statements as of and for the nine-month periods ended
September 30, 1997 and September 30, 1996 have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto.
The financial information included herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary to a fair presentation of the results of interim periods.
The results of operations for the nine-month period ended September 30, 1997 are
not necessarily indicative of the results to be expected for the full year.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -- The consolidated financial statements of the
Company include the accounts of the Company and its wholly owned subsidiary,
NCN. Significant intercompany accounts and transactions have been eliminated.
The Company merged Cal-Nor Cableview, Inc., a former subsidiary, into the
Company during 1994.
F-7
<PAGE> 117
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
Acquisition of Cable Television Systems -- Cable television system
acquisitions are accounted for as purchase transactions and their cost is
allocated to the estimated fair market value of net tangible assets acquired and
to the franchise and other determinable 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:
<TABLE>
<S> <C>
Buildings............................................... 20 years
Distribution plant...................................... 10 years
Other equipment and leasehold improvements.............. 5-20 years
</TABLE>
The Company periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized.
Intangible Assets -- Costs assigned to goodwill, franchise agreements and
loan fees and other intangible assets are amortized using the straight-line
method over the following estimated useful lives:
<TABLE>
<S> <C>
Goodwill............................................... 40 years
Franchise agreements................................... 10-20 years
Loan fees and other intangible assets.................. 1-10 years
</TABLE>
Revenue Recognition -- Cable television service revenue is recognized in
the month service is provided to customers. Advance payments on cable services
to be rendered are recorded as subscriber prepayments. Revenues resulting from
the sale of local spot advertising are recognized when the related
advertisements or commercials appear before the public. Local spot advertising
revenues earned were $1,827,251, $1,340,938, and $652,195 respectively, in 1996,
1995 and 1994. Revenue from management services provided to Clemson-Seneca
during 1995 and 1994 was recorded on the accrual method in the month service was
provided. License fee revenue is recognized in the period service is provided.
Derivatives -- The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes. They are used
to manage well-defined interest rate risks. As discussed in Note 6, the Company
enters into interest rate swap agreements with major banks or financial
institutions (typically its bank) in which the Company pays a fixed rate and
receives a floating rate with the interest payments being calculated on a
notional amount. Gains or losses associated with changes in fair values of these
swaps and the underlying notional principal amounts are deferred and recognized
against interest expense over the term of the agreements in the Consolidated
Statements of Operations.
F-8
<PAGE> 118
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
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. The Company deals only
with highly rated counterparties, and usually only its bank. The notional
amounts of these interest rate swaps is $85,715,000 at December 31, 1996. These
notional amounts do not represent amounts exchanged by the parties and, thus,
are not a measure of exposure to the company through its use of derivatives. The
exposure in a derivative contract is the net difference between what each party
is required to pay based on the contractual terms against the notional amount of
the contract, which in the Company's case are interest rates. The use of
derivatives does not have a significant effect on the company's result of
operations or its financial position.
Estimates Used in Financial Statement Presentation -- The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. TRANSACTIONS WITH MANAGED LIMITED PARTNERSHIP AND OTHER RELATED PARTIES:
Management Fees -- Prior to the acquisition of the assets of Clemson-Seneca
(see Note 9), the Company received a fee for its services equal to 6.75% of
Clemson-Seneca's gross revenues, excluding revenues from the sale of cable
television systems or franchises.
In August 1994, NCTV began paying management fees to NTC equal to 5% of
NCTV's gross revenues, excluding revenues from the sale of cable television
systems or franchises. The Company paid $1,625,118, $1,320,492 and $331,603 to
NTC in 1996, 1995 and 1994, respectively.
Program License Fees -- In July 1994, NCN began receiving monthly program
license fees from affiliated entities for programming produced by NCN. Total
license fees earned from affiliates during 1996, 1995 and 1994 were $619,466,
$602,263 and $342,462, respectively.
Unsecured Advances to Parent and Advances from Affiliates -- The Company's
advances from affiliates are intended to be repaid through future cash flow
generated by the Company. Under the terms of an intercompany borrowing
arrangement, the Company had agreed to repay all outstanding advances due to
affiliates by December 31, 2002; effective June 30, 1997, the Company received a
non-cash capital contribution of $9,338,193 from NTC which replaced the net
unsecured advances that had previously been owed to NTC and other affiliates of
the Company.
Reimbursements -- NTC provides or causes to be provided certain centralized
services to the Company and other affiliated entities. NTC is entitled to
reimbursement from the Company for various expenses incurred by it or its
affiliates on behalf of the Company allocable to its management of the Company,
including travel expenses, pole and site rental, lease payments, legal expenses,
billing expenses, insurance, governmental fees and licenses, headquarters
supplies and expenses, pay television expenses, equipment and vehicle charges,
operating salaries and expenses, administrative salaries and expenses, postage
and office maintenance. NTC has historically assigned its reimbursement rights
to NCC.
F-9
<PAGE> 119
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
The amounts billed to the Company are based on costs incurred by affiliates
in rendering the services. The costs of certain services are charged directly to
the Company, based upon the personnel time spent by the employees rendering the
service. The cost of other services is allocated to the Company and affiliates
based upon relative size and revenue. Management believes that the methods used
to allocate services to the Company are reasonable. Amounts charged for these
services were $1,670,409, $1,425,316 and $622,486 for 1996, 1995 and 1994,
respectively.
In 1996, 1995 and 1994, the Company was charged billing service fees by CTB
of $231,756, $175,632 and $105,779, respectively. CAC billed the Company
$196,491, $161,627 and $33,790, respectively, for advertising services in 1996,
1995 and 1994.
The Company has operating management agreements with limited partnerships
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 $84,151, $65,921 and $25,087, net, under the terms of these
agreements during 1996, 1995 and 1994, respectively.
Accumulated Deficit in Managed Limited Partnership -- NCTV was a general
partner in Clemson-Seneca, which owned and operated a cable television system.
During 1995, NCTV purchased the assets of Clemson-Seneca. All items of income,
loss, deduction and credit generated by this limited partnership were allocated
99% to the limited partners and 1% to NCTV as managing general partner until the
limited partners had received aggregate cash distributions in an amount equal to
aggregate capital contributions. Thereafter, the general partners received 25%
and the limited partners were allocated 75% of partnership income, losses and
distributions. Distributions from the sale of the system have been determined
according to its partnership agreement.
3. NORTHLAND CABLE NEWS:
As discussed in Note 1, NCN was formed to develop and distribute local
news, sports and information programming to the Company and certain of the
Company's affiliates and is a wholly owned subsidiary of the Company. The
Company's payment obligations under the $100 million of privately placed notes
discussed in Note 12 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
September 30, 1997 NCN had no senior debts outstanding) and the amounts for
which NCN will be liable under the guarantee issued from time to time with
respect to Senior Debt. Separate financial statements of NCN have not been
presented
F-10
<PAGE> 120
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
because management has determined that they would not be material to investors.
Summary financial information of NCN is presented below.
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
----------------------- -----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT INFORMATION:
Revenues from affiliates...... $1,130,958 $1,028,000 $1,372,211 $1,438,359 $ 629,324
Less: intercompany
revenue.................. (571,932) (565,634) (752,745) (836,096) (286,862)
---------- ---------- ---------- ---------- ---------
Total revenues................ 559,026 462,366 619,466 602,263 342,462
Operating expenses............ 870,651 776,299 1,051,556 1,026,501 296,778
Other, net.................... (7,243) 3,409 3,827 (15,926) (9,579)
---------- ---------- ---------- ---------- ---------
Net Income (loss)............. $ (318,868) $ (310,524) $ (428,263) $ (440,164) $ 36,105
========== ========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET INFORMATION:
Current assets......................... $1,351,149 $ 1,090,461 $ 781,525
Less: intercompany elimination...... (912,106) (913,669) (385,409)
---------- ---------- ---------
Total current assets................... 439,043 176,792 396,116
Non-current assets..................... 447 190 265
---------- ---------- ---------
Total Assets........................... $ 439,490 $ 176,982 $ 396,381
========== ========== =========
Current liabilities.................... $ 54,151 $ 46,270 $ 61,893
Other liabilities...................... -- -- --
---------- ---------- ---------
Total liabilities...................... $ 54,151 $ 46,270 $ 61,893
========== ========== =========
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------------
1997 1996 1995
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings...... $ 2,053,834 $ 1,803,610 $ 1,935,828
Distribution plant...... 60,753,567 56,471,372 50,293,667
Other equipment......... 3,637,927 3,360,770 2,940,600
Leasehold
improvements.......... 39,805 39,805 38,451
Construction-in-
progress.............. 689,364 216,428 33,366
------------ ------------ ------------
$ 67,174,497 $ 61,891,985 $ 55,241,912
Less: Accumulated
Depreciation....... (27,495,056) (23,167,487) (18,444,806)
------------ ------------ ------------
$ 39,679,441 $ 38,724,498 $ 36,797,106
============ ============ ============
</TABLE>
F-11
<PAGE> 121
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
5. OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------
1997 1996 1995
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Programmer license fees...... $ 1,363,486 $1,000,147 $ 455,348
Accrued franchise fees....... 607,868 647,619 548,503
Accrued interest............. 702,783 565,704 222,908
Other........................ 1,575,560 842,955 679,815
---------- ---------- ----------
$ 4,249,697 $3,056,425 $1,906,574
========== ========== ==========
</TABLE>
6. NOTES PAYABLE:
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30, ----------------------------
1997 1996 1995
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit and term
loan................... $102,821,769 $101,999,998 $82,569,998
Other.................... 146,646 154,734 574,913
------------ ------------ -----------
$102,968,415 $102,154,732 $83,144,911
============ ============ ===========
</TABLE>
The revolving credit and term loan 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; 8.91% as of October 22, 1997
(weighted average). Graduated principal and interest payments are due quarterly
until maturity on September 30, 2004.
Annual maturities of notes payable are as follows:
<TABLE>
<S> <C>
1997 (October 1 through December 31)........... $ 1,363,996
1998........................................... 8,232,650
1999........................................... 9,900,000
2000........................................... 12,600,000
2001........................................... 15,300,000
2002........................................... 23,000,000
Thereafter..................................... 32,571,769
------------
102,968,415
Less -- Current portion........................ (7,538,444)
------------
$ 95,429,971
============
</TABLE>
Under the revolving credit and term loan agreement, the Company has agreed
to restrictive covenants which require the maintenance of certain ratios,
including a Pro Forma Debt Service Ratio of 1.15 to 1 and a Leverage Ratio of
5.50 to 1 as of September 30, 1997, among other restrictions. The Company
submits quarterly debt compliance reports to its creditor under this
arrangement.
The Company has entered into interest-rate swap agreements to reduce the
impact of changes in interest rates. At December 31, 1996, the Company had seven
interest-rate swap agreements
F-12
<PAGE> 122
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
with its bank, having a notional principal amount outstanding of $85,715,000.
These agreements effectively change the Company's interest rate exposure on the
swapped portion of the loan to a fixed rate of 6.24% (weighted average), plus an
applicable margin based on certain financial covenants (the margin at December
31, 1996, was 2.75%). The maturity date, the fixed interest rate and the
notional amount of each swap are as follows:
<TABLE>
<CAPTION>
MATURITY DATE FIXED RATE AMOUNT
-------------------------------------------------- ---------- -----------
<S> <C> <C>
June 12, 1997..................................... 5.63% $13,500,000
June 30, 1997..................................... 5.97% 12,900,000
August 23, 1997................................... 6.65% 25,115,000
September 30, 1997................................ 6.00% 4,200,000
October 15, 1997.................................. 6.15% 21,000,000
March 9, 1998..................................... 7.25% 5,500,000
November 6, 1998.................................. 5.89% 3,500,000
-----------
$85,715,000
===========
</TABLE>
At December 31, 1996, the Company would have been required to pay
approximately $410,000 to settle these agreements based on fair value estimates
received from financial institutions. The carrying value of the Company's notes
payable approximate fair value due to their variable interest rate nature.
7. OTHER, NET:
Other, net in other income (expense) in the consolidated statements of
operations consists of:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------- -------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
MANAGEMENT OPERATIONS:
Management fees from
affiliate................. $ -- $ -- $ -- $ 120,618 $ 226,043
General and administrative
expense................... -- -- -- (27,683) (45,872)
GAIN (LOSS) ON DISPOSAL OF
ASSETS....................... 72,177 51,831 (365,614) (80,045) (23,876)
INTEREST INCOME................ 17,038 36,225 54,331 65,158 33,038
OTHER.......................... (17,750) 16,228 (27,638) (24,476) (134,833)
--------- --------- ----------- ----------- ---------
$ 71,465 $ 104,284 $ (338,921) $ 53,572 $ 54,500
========= ========= =========== =========== =========
</TABLE>
8. INCOME TAXES:
The operations of the Company and its affiliates are included for federal
income tax purposes in a consolidated federal income tax return filed by NTC.
For financial reporting purposes, the provision (benefit) 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.
F-13
<PAGE> 123
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
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:
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30, ---------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforward................ $12,410,000 $11,035,000 $ 8,762,000
Valuation allowance............ (8,123,000) (6,686,000) (5,230,000)
----------- ----------- -----------
4,287,000 4,349,000 3,532,000
Deferred tax liabilities:
Property and equipment......... 4,287,000 4,349,000 3,532,000
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
The federal income tax net operating loss carryforward of approximately
$36,500,000 (unaudited) as of September 30, 1997 expires beginning in the years
2003 through 2012. Management believes that the available objective evidence
creates sufficient uncertainty regarding the realization of the net deferred tax
assets due to the recurring operating losses being incurred by the Company.
Accordingly, a valuation allowance has been provided for the net deferred tax
assets of the Company. The change in the valuation allowance was $1,437,000
(unaudited) for the nine-month period ended September 30, 1997 and $1,456,000,
$1,250,000 and $185,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The difference between the statutory tax rate of approximately 40% (34%
federal and 6% state, net of federal benefits) and the tax benefit of zero
recorded by the Company is primarily due to the Company's full valuation
allowance against its net deferred tax asset.
F-14
<PAGE> 124
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
9. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements -- The Company leases certain tower sites, office
facilities and pole attachments under leases accounted for as operating leases.
Rental expense (including month-to-month leases) was $439,261, $434,101 and
$214,401 in 1996, 1995 and 1994, respectively. Minimum lease payments to the end
of the lease terms are as follows:
<TABLE>
<S> <C>
1997 (October 1 through December 31)..................... $ 18,352
1998..................................................... 51,455
1999..................................................... 36,209
2000..................................................... 19,299
2001..................................................... 17,571
2002..................................................... 15,997
Thereafter............................................... 79,299
--------
$238,182
========
</TABLE>
EFFECTS OF REGULATION:
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted. This act dramatically changed federal telecommunications laws and the
future competitiveness of the industry. Many of the changes called for by the
1996 Act will not take effect until the Federal Communications Commission (FCC)
issues new regulations which, in some cases, may not be completed for a few
years. Because of this, the full impact of the 1996 Act on NCTV's operations
cannot be determined at this time. A summary of the provisions affecting the
cable television industry, more specifically those affecting NCTV's operations,
follows.
Cable Programming Service Tier Regulation -- FCC regulation of rates for
cable programming service tiers has been eliminated for small cable systems
owned by small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000). NCTV qualifies as a small cable company and
all of the Company's cable systems qualify as small cable systems. Basic tier
rates remain subject to regulations by the local franchising authority under
most circumstances until effective competition exists. The 1996 Act expands the
definition of effective competition to include the offering of video programming
services directly to subscribers in a franchised area served by a local
telephone exchange carrier, its affiliates or any multichannel video programming
distributor which uses the facilities of the local exchange carrier. The FCC has
not yet determined the penetration criteria that will trigger the presence of
effective competition under these circumstances.
Telephone Companies -- The 1996 Act allows telephone companies to offer
video programming services directly to customers in their service areas
immediately upon enactment. They may provide video programming as a cable
operator fully subject to any provision of the 1996 Act; a radio-based
multichannel programming distributor not subject to any provisions of the 1996
Act; or through nonfranchised "open video systems" offering nondiscriminatory
capacity to unaffiliated programmers, subject to select provisions of the 1996
Act. Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize. The 1996 Act encompasses
F-15
<PAGE> 125
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
many other aspects of providing cable television service including prices for
equipment, discounting rates to multiple dwelling units, lifting of
anti-trafficking restrictions, cable-telephone cross ownership provisions, pole
attachment rate formulas, rate uniformity, program access, scrambling and
censoring of Public Educational and Governmental and leased access channels.
Self-Insurance:
The Company began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, NCTV began making monthly contributions into an insurance
fund maintained by NTC which covers all Northland entities and would defray a
portion of any loss should the Company be faced with a significant uninsured
loss. To the extent the Company's losses exceed the fund's balance, the Company
would absorb any such loss. If the Company were to sustain a material uninsured
loss, such reserves could be insufficient to fully fund such a loss. The
resulting reduction in cash flow caused by interrupted service, together with
the capital cost of replacing such equipment and physical plant, could have a
material adverse effect on the Company, 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 nine-month period ended September 30, 1997, the Company made
payments of $41,469 to the fund. As of September 30, 1997, the fund had a
balance of $96,445.
10. ACQUISITION OF SYSTEMS:
On October 11, 1996, the Company acquired substantially all of the
operating assets and franchise rights of cable systems serving approximately
12,500 basic subscribers in or around the communities of Moses Lake, Othello,
Ephrata and certain unincorporated areas of Grant and Adams counties, all in the
state of Washington from Marcus Cable Associates, L.P. (Marcus). The purchase
price of the system was $21,031,760, which Marcus received at closing.
During 1995, the Company purchased the assets of Clemson-Seneca and the
operating assets of cable television systems in Oconee County, South Carolina;
Madera County, California; and communities in and around Mexia, Texas, adding
approximately 15,000 basic subscribers.
The aggregate purchase price of the assets was approximately $21,600,000.
As of December 31, 1995, the Company had paid approximately $20,582,000 of the
aggregate purchase price through borrowings under its revolving credit and term
loan and cash on hand. As of December 31, 1995, $870,447 remained payable under
the holdback provisions of the respective purchase agreements, which reflect
reductions for certain postclosing adjustments. At December 31, 1995, $474,622
of this amount was included in due to limited partnership on the consolidated
balance sheet. During 1996, the amount outstanding pursuant to the holdback
provisions of the purchase agreement was paid.
F-16
<PAGE> 126
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
Pro forma operating results of the Company for 1996 and 1995, assuming the
acquisitions described above had been made at the beginning of 1995, follow:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Service revenues....................... $36,275,438 $34,185,193
----------- -----------
Net loss............................... $(5,986,181) $(7,379,377)
=========== ===========
</TABLE>
During 1994, the Company purchased the assets of three partnerships which
were managed by NCC, an affiliate of the Company, adding approximately 24,000
basic subscribers, or an increase of 59%. The aggregate purchase price of the
partnerships was $30,100,000. As of December 31, 1994, the Company had paid
approximately $26,400,000 of the aggregate purchase price through borrowings
under its term loan, had outstanding approximately $900,000 of amounts to be
paid under the holdback provisions of the purchase agreements and had an
outstanding payable to an affiliate of approximately $2,800,000. For purposes of
the consolidated statement of cash flows, amounts due under the holdback and
amounts due to the Company's affiliate have been treated as noncash
transactions. During 1995, the amounts outstanding pursuant to the holdback
provisions of the purchase agreements were paid.
11. TRANSACTIONS FROM DECEMBER 31, 1996 TO SEPTEMBER 30, 1997 (UNAUDITED):
On January 31, 1997, the Company acquired substantially all of the
operating assets and franchise rights of the cable television system in and
around the community of Waterwood, Texas. This system serves approximately 400
basic subscribers. The total purchase price was approximately $580,000.
On March 31, 1997, the Company acquired substantially all operating assets
and franchise rights of the cable television systems in or around the
communities of Marlin, Madisonville and Buffalo, Texas. These systems serve
approximately 3,600 subscribers. The total purchase price was approximately
$5,269,000 of which approximately $5,019,000 was paid on the closing date. The
balance of $250,000 was deposited into an escrow account which will be released
to the seller, net of any purchase price adjustments. The acquisition was
financed by borrowings under the Company's term-loan facility.
In April 1997, the Company acquired substantially all of the operating
assets and franchise rights of the cable television system serving approximately
300 basic subscribers in Oconee County, South Carolina. The aggregate purchase
price of the assets was $370,000. As of September 1997, the Company owed
approximately $8,000 under the holdback provision of the purchase agreement.
Pro forma operating results of the Company for the nine-month period ended
September 1997, assuming the acquisitions described above had been made at the
beginning of 1997, would not be materially different than reported results.
F-17
<PAGE> 127
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
----------------------------------------------------
(AMOUNTS AS OF AND FOR THE PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996 ARE UNAUDITED)
12. EVENT SUBSEQUENT TO SEPTEMBER 30, 1997 (UNAUDITED):
In October 1997, the Company executed a definitive agreement to acquire six
cable television systems for an aggregate purchase price of $69,975,000. The
systems are located in South Carolina and serve approximately 35,300 basic
subscribers. The Company privately placed $100 million of senior subordinated
notes and renegotiated the terms of its bank credit facility to provide up to
$115 million of borrowing capacity, subject to certain borrowing conditions.
Management intends that proceeds from the notes and initial bank borrowings of
approximately $76 million will be utilized to fund the acquisitions, repay
amounts outstanding under the existing bank credit facility and pay transaction
costs. The unused capacity under the renegotiated bank credit facility will be
utilized for future acquisitions and working capital.
F-18
<PAGE> 128
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Northland Cable Television, Inc.:
We have audited the accompanying consolidated balance sheet of Northland
Cable Television, Inc. (a Washington corporation and a wholly owned subsidiary
of Northland Telecommunications Corporation) and subsidiary as of July 31, 1997,
and the related consolidated statements of operations, changes in shareholder's
deficit and cash flows for the seven-month period ended July 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 July 31, 1997, and the results of their operations and
their cash flows for the seven-month period ended July 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
September 29, 1997
F-19
<PAGE> 129
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
CONSOLIDATED BALANCE SHEET
JULY 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash....................................................................... $ 1,887,808
Due from limited partnerships.............................................. 68,356
Accounts receivable........................................................ 1,033,593
Prepaid expenses........................................................... 455,218
------------
Total current assets............................................... 3,444,975
------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost............................................ 66,647,343
Less -- Accumulated depreciation........................................... (26,518,444)
------------
40,128,899
Franchise agreements (net of accumulated amortization of $26,954,988)...... 38,286,397
Goodwill (net of accumulated amortization of $1,802,032)................... 5,122,401
Loan fees and other intangible assets (net of accumulated amortization of
$1,704,664)............................................................. 3,702,969
------------
87,240,666
------------
Total assets....................................................... $ 90,685,641
============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable........................................................... $ 113,489
Subscriber prepayments..................................................... 1,127,190
Other current liabilities.................................................. 4,028,735
Due to affiliates.......................................................... 969,224
Current portion of notes payable........................................... 6,834,351
------------
Total current liabilities.......................................... 13,072,989
NOTES PAYABLE................................................................ 97,488,094
------------
Total liabilities.................................................. 110,561,083
------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S DEFICIT:
Common stock (par value $1.00 per share, authorized 50,000 shares; 10,000
shares issued and outstanding) and additional paid-in capital........... 11,560,527
Accumulated deficit........................................................ (31,435,969)
------------
Total shareholder's deficit........................................ (19,875,442)
------------
Total liabilities and shareholder's deficit........................ $ 90,685,641
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-20
<PAGE> 130
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1997
<TABLE>
<S> <C>
REVENUES
Service revenues.............................................................. $22,056,434
Programming and production revenues from affiliates........................... 430,378
-----------
Revenues............................................................ 22,486,812
-----------
OPERATING EXPENSES:
Operating (including $143,358, net paid to affiliates)...................... 7,300,299
General and administrative (including $1,279,674, paid to affiliates)....... 4,141,012
Management fees paid to affiliate........................................... 1,101,085
Depreciation and amortization............................................... 7,520,495
-----------
Total operating expenses............................................ 20,062,891
-----------
Income from operations.............................................. 2,423,921
OTHER EXPENSE:
Interest expense............................................................ (5,697,240)
Other, net (Note 6)......................................................... 68,674
-----------
Loss before provision for income taxes.............................. (3,204,645)
PROVISION FOR INCOME TAXES.................................................... --
-----------
NET LOSS...................................................................... $(3,204,645)
===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-21
<PAGE> 131
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S DEFICIT
FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK AND
ADDITIONAL PAID-IN
CAPITAL
-------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996................ 10,000 $ 2,222,334 $(28,231,324) $(26,008,990)
Net loss................................ -- -- (3,204,645) (3,204,645)
Capital contribution.................... -- 9,338,193 -- 9,338,193
------ ----------- ------------ ------------
BALANCE, July 31, 1997.................... 10,000 $11,560,527 $(31,435,969) $(19,875,442)
====== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-22
<PAGE> 132
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SEVEN-MONTH PERIOD ENDED JULY 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................... $(3,204,645)
Adjustments to reconcile net loss to net cash provided by operating
activities-
Depreciation and amortization............................................ 7,718,241
Other.................................................................... (1,559)
(Increase) decrease in operating assets:
Due from limited partnerships.......................................... 40,619
Accounts receivable.................................................... 256,247
Prepaid expenses....................................................... (181,972)
Increase (decrease) in operating liabilities:
Accounts payable....................................................... (214,291)
Subscriber prepayments................................................. 259,160
Other current liabilities.............................................. 972,310
-----------
Net cash provided by operating activities........................... 5,644,110
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems................................................ (6,203,141)
Investment in cable television properties................................... (2,685,729)
Other....................................................................... (24,717)
-----------
Net cash used in investing activities............................... (8,913,587)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable................................................. 5,000,000
Principal payments on notes payable......................................... (2,839,646)
Advances from affiliates.................................................... 510,694
-----------
Net cash provided by financing activities........................... 2,671,048
-----------
NET DECREASE IN CASH.......................................................... (598,429)
CASH, beginning of year....................................................... 2,486,237
-----------
CASH, end of period........................................................... $ 1,887,808
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest................................. $ 5,221,108
===========
Cash paid during the period for state income taxes....................... $ 6,010
===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-23
<PAGE> 133
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
FORMATION AND BUSINESS
Northland Cable Television, Inc. (NCTV), a Washington corporation, was
formed to own and operate cable television systems. As of July 31, 1997, NCTV
had 65 nonexclusive franchises to operate cable television systems. These
franchises expire at various dates through 2020.
In 1997, the Madera County, California and Anderson County, South Carolina
franchises expired. Less than 1% of NCTV's basic subscribers are in these
franchise areas at July 31, 1997. The Company has undertaken the franchise
renewal process in accordance with the Telecommunications Act of 1996 (the 1996
Act) and expects that these franchises will be renewed; however, there are no
assurances that the franchises will be renewed.
During fourth quarter 1997, the franchises for Adams county and Soap Lake,
Washington are due to expire. Approximately 1% of NCTV's basic subscribers at
July 31, 1997, are in these franchise areas. NCTV has undertaken the franchise
renewal process in accordance with the 1996 Act and expects that the franchise
will be renewed; however, there are no assurances that the franchises will be
renewed.
Northland Cable News, Inc. (NCN), a Washington corporation which was formed
to develop and distribute programming to certain of the Company's affiliated
entities, is a wholly owned subsidiary of NCTV. NCTV and NCN are collectively
referred to as the Company.
The Company and its affiliates, Northland Communications Corporation and
subsidiary (NCC); Northland Cable Services Corporation and subsidiaries (NCSC);
and Northland Media, Inc. and subsidiary (NMI) are wholly owned subsidiaries of
Northland Telecommunications Corporation (NTC or Parent). NCC is the managing
general partner of six limited partnerships, which own and operate cable
television systems. Additionally, NCC owns and operates cable systems through
Northland Cable Properties, Inc. (NCP, Inc.), its wholly owned subsidiary. NCSC
is the parent company for Cable Television Billing, Inc. (CTB) and Cable
Ad-Concepts, Inc. (CAC). CTB provides billing services to cable systems owned by
managed limited partnerships of NCC and wholly owned systems of the Company and
NCC. CAC develops and produces video commercial advertisements to be cablecast
on Northland affiliated cable systems. NMI was formed as a holding company to
own certain noncable related assets.
These financial statements are presented for purposes of complying with the
Securities and Exchange Commission's rules and regulations relating to the
acquisition of significant businesses. On October 11, 1996, the Company acquired
substantially all of the operating assets and franchise rights of cable systems
in or around the communities of Moses Lake, Othello, Ephrata and certain
unincorporated areas of Grant and Adams County, all in the state of Washington.
See Note 9.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation -- The consolidated financial statements of the
Company include the accounts of the Company 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
F-24
<PAGE> 134
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
tangible assets acquired and to the franchise agreements and other determinable
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:
<TABLE>
<S> <C>
Buildings............................................. 20 years
Distribution plant.................................... 10 years
Other equipment and leasehold improvements............ 5 - 20 years
</TABLE>
The Company periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized.
Intangible Assets -- Costs assigned to franchise agreements, goodwill and
organization costs and other intangible assets are amortized using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Goodwill............................................. 40 years
Franchise agreements................................. 10 - 20 years
Loan fees and other intangible assets................ 1 - 10 years
</TABLE>
Revenue Recognition -- Cable television service revenue is recognized in
the month service is provided to customers. Advance payments on cable services
to be rendered are recorded as subscriber prepayments. License fee revenue and
production revenue are recognized in the period service is provided. Revenues
resulting from the sale of local spot advertising are recognized when the
related advertisements or commercials appear before the public. Local spot
advertising revenue was $943,980, for the period ended July 31, 1997.
Derivatives -- The Company has only limited involvement with derivative
financial instruments and does not use them for trading purposes. They are used
to manage well-defined interest rate risks. As discussed in Note 5, the Company
enters into interest rate swaps agreements with major banks or financial
institutions (typically its bank) in which the Company pays a fixed rate and
receives a floating rate with the interest payments being calculated on a
notional amount. Gains or losses associated with changes in fair values of these
swaps and the underlying notional principal amounts are deferred and recognized
against interest expense over the term of the agreements in the Consolidated
Statements of Operations.
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. The Company deals only
with highly rated counterparties, and usually only its bank. The notional
amounts of these interest rate swaps is $83,307,500 at July 31, 1997. 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
F-25
<PAGE> 135
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
the notional amount of the contract, which in the Company's case are interest
rates. The use of derivatives does not have a significant effect on the
company's results of operations or its financial position.
Estimates Used in Financial Statement Presentation -- The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. TRANSACTIONS WITH MANAGED LIMITED PARTNERSHIP AND OTHER RELATED PARTIES:
Management Fees -- In August 1994, NCTV began paying management fees to NTC
equal to 5% of NCTV's gross revenues, excluding revenues from programming,
production and the sale of cable television systems or franchises. The Company
paid $1,101,085 to NTC for the seven-month period ended July 31, 1997.
Program License Fees -- In July 1994, NCN began receiving monthly program
license fees from affiliated entities for programming produced by NCN. Total
license fees earned from affiliates for the seven-month period ended July 31,
1997 were $331,044.
Production Fees -- In January 1997, NCN began receiving monthly production
fees from affiliated entities for production of advertising run tapes. Total
production fees earned from affiliates for the seven-month period ended July 31,
1997 were $99,334.
Unsecured Advances to Parent and Advances from Affiliates -- The Company's
advances from affiliates are intended to be repaid through future cash flow
generated by the Company. Under the terms of an intercompany borrowing
arrangement, the Company had agreed to repay all outstanding advances due to
affiliates by December 31, 2002; effective June 30, 1997, however, the Company
received a non-cash capital contribution of $9,338,193 from NTC which replaced
the net unsecured advances that had previously been owed to NTC and other
affiliates of the Company. Under the terms of a separate intercompany borrowing
arrangement, NTC has similarly agreed to repay all outstanding advances due to
the Company by December 31, 2002.
Reimbursements -- NTC provides or causes to be provided certain centralized
services to the Company and other affiliated entities. NTC is entitled to
reimbursement from the Company for various expenses incurred by it or its
affiliates on behalf of the Company allocable to its management of the Company,
including travel expenses, pole and site rental, lease payments, legal expenses,
billing expenses, insurance, governmental fees and licenses, headquarters
supplies and expenses, pay television expenses, equipment and vehicle charges,
operating salaries and expenses, administrative salaries and expenses, postage
and office maintenance. NTC has historically assigned its reimbursement rights
to NCC.
The amounts billed to the Company are based on costs incurred by affiliates
in rendering the services. The costs of certain services are charged directly to
the Company, based upon the personnel time spent by the employees rendering the
service. The cost of other services is allocated to the Company and affiliates
based upon relative size and revenue. Management believes that the methods used
to allocate services to the Company are reasonable. Amounts charged for these
services were $1,131,118 for the seven-month period ended July 31, 1997.
F-26
<PAGE> 136
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
For the seven-month period ended July 31, 1997, the Company was charged
billing service fees by CTB of $148,556. CAC billed the Company $146,230 for
advertising services for the seven-month period ended July 31, 1997.
The Company has operating management agreements with affiliates managed by
NCC. Under the terms of these agreements, the Company or an affiliate serves as
the managing agent for certain cable television systems and is reimbursed for
certain operating, administrative and programming expenses. The Company received
$1,472, net under the terms of these agreements for the seven-month period ended
July 31, 1997.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<S> <C>
Land and buildings.................................... $ 2,053,833
Distribution plant.................................... 60,576,687
Other equipment....................................... 3,637,927
Leasehold improvements................................ 39,805
Construction-in-progress.............................. 339,091
-----------
$66,647,343
===========
</TABLE>
4. OTHER CURRENT LIABILITIES:
<TABLE>
<S> <C>
Programmer license fees............................... $ 1,695,365
Accrued franchise fees................................ 421,400
Accrued interest...................................... 844,090
Other................................................. 1,067,880
-----------
$ 4,028,735
============
</TABLE>
5. NOTES PAYABLE:
Notes payable consists of:
<TABLE>
<S> <C>
Revolving credit and term loan, collateralized by a first lien
position on all present and future assets and stock of the Company.
Interest rates vary based on certain financial covenants; currently
9.17% (weighted average). Graduated principal and interest payments
are due quarterly until maturity on September 30, 2004............. $104,171,769
Other................................................................ 150,676
------------
$104,322,445
============
</TABLE>
Annual maturities of notes payable for the years ending December 31, are as
follows:
<TABLE>
<S> <C>
1997 (August 1 through December 31).................. $ 2,718,026
1998................................................. 8,232,650
1999................................................. 9,900,000
2000................................................. 12,600,000
2001................................................. 15,300,000
2002................................................. 23,000,000
Thereafter........................................... 32,571,769
-----------
104,322,445
Less -- Current portion.............................. (6,834,351)
-----------
$ 97,488,094
===========
</TABLE>
F-27
<PAGE> 137
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
Under the revolving credit and term loan agreement, the Company has agreed
to restrictive covenants which require the maintenance of certain ratios,
including a Pro Forma Debt Service Ratio of 1.15 to 1 and a Leverage Ratio of
6.00 to 1, among other restrictions. The Company submits quarterly debt
compliance reports to its creditor under this arrangement.
The Company has entered into interest-rate swap agreements to reduce the
impact of changes in interest rates. At July 31, 1997, the Company had seven
interest-rate swap agreements with its bank, having a notional principal amount
outstanding of $83,307,500. These agreements effectively change the Company's
interest rate exposure on the swapped portion of the loan to a fixed rate of
6.26% (weighted average), plus an applicable margin based on certain financial
covenants (the margin at July 31, 1997, was 2.75%). The Company has entered into
an additional interest rate swap that becomes effective August 25, 1997, and
expires August 25, 1998, that locks in a fixed rate of 5.765% on a notional
principal of $22,700,000. The maturity date, the fixed interest rate and the
notional amount of each swap at July 31, 1997, are as follows:
<TABLE>
<CAPTION>
MATURITY DATE FIXED RATE AMOUNT
-------------------------------------------------- ---------- -----------
<S> <C> <C>
August 23, 1997................................... 6.65% $22,707,500
September 30, 1997................................ 6.00% 4,200,000
October 15, 1997.................................. 6.15% 21,000,000
March 9, 1998..................................... 7.25% 5,500,000
June 12, 1998..................................... 5.90% 13,500,000
June 30, 1998..................................... 5.90% 12,900,000
November 6, 1998.................................. 5.89% 3,500,000
-----------
$83,307,500
===========
</TABLE>
At July 31, 1997, the Company would have been required to pay approximately
$148,000 to settle these agreements based on fair value estimates received from
financial institutions. The carrying value of the Company's notes payable
approximates fair value due to the variable interest rate nature of the notes.
6. OTHER, NET:
Other, net in other expense in the consolidated statements of operations
consists of the following:
<TABLE>
<CAPTION>
FOR THE SEVEN-
MONTH PERIOD
ENDED
JULY 31,
1997
--------------
<S> <C>
INTEREST INCOME............................................... $ 13,540
OTHER......................................................... 55,134
---------
$ 68,674
=========
</TABLE>
7. 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.
F-28
<PAGE> 138
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
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, as of July 31, 1997 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward..................... $12,138,000
Valuation allowance................................. (7,877,000)
-----------
4,261,000
Deferred tax liabilities:
Property and equipment.............................. 4,261,000
-----------
$ --
===========
</TABLE>
The federal income tax net operating loss carryforward of approximately
$35,700,000 expires beginning in the years 2003 through 2012. Management
believes that the available objective evidence creates sufficient uncertainty
regarding the realization of the net deferred tax assets due to the recurring
operating losses being incurred by the Company. Accordingly, a valuation
allowance has been provided for the net deferred tax assets of the Company. The
change in the valuation allowance is $1,191,000 for the seven-month period ended
July 31, 1997.
The difference between the statutory tax rate of approximately 40% (34%
federal and 6% state, net of federal benefits) and the tax benefit of zero
recorded by the Company is primarily due to the Company's full valuation
allowance against its net deferred tax asset.
8. 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) is $330,057 for the seven-month
period ended July 31, 1997. Minimum lease payments to the end of the lease terms
are as follows:
<TABLE>
<S> <C>
1997 (August 1 through December 31).............. $ 30,587
1998............................................. 51,455
1999............................................. 36,209
2000............................................. 19,299
2001............................................. 17,571
2002............................................. 15,997
Thereafter....................................... 79,299
--------
$250,417
========
</TABLE>
EFFECTS OF REGULATION
On February 8, 1996, the 1996 Act was enacted. This act dramatically
changed federal telecommunications laws and the future competitiveness of the
industry. Many of the changes called for by the 1996 Act will not take effect
until the Federal Communications Commission (FCC) issues new regulations which,
in some cases, may not be completed for a few years. Because of this, the
F-29
<PAGE> 139
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
full impact of the 1996 Act on NCTV's operations cannot be determined at this
time. A summary of the provisions affecting the cable television industry, more
specifically those affecting NCTV's operations, follows.
Cable Programming Service Tier Regulation -- FCC regulation of rates for
cable programming service tiers has been eliminated for small cable systems
owned by small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000). NCTV qualifies as a small cable company and
all of the Company's cable systems qualify as small cable systems. Basic tier
rates remain subject to regulations by the local franchising authority under
most circumstances until effective competition exists. The 1996 Act expands the
definition of effective competition to include the offering of video programming
services directly to subscribers in a franchised area served by a local
telephone exchange carrier, its affiliates or any multichannel video programming
distributor which uses the facilities of the local exchange carrier. The FCC has
not yet determined the penetration criteria that will trigger the presence of
effective competition under these circumstances.
Telephone Companies -- The 1996 Act allows telephone companies to offer
video programming services directly to customers in their service areas
immediately upon enactment. They may provide video programming as a cable
operator fully subject to any provision of the 1996 Act; a radio-based
multichannel programming distributor not subject to any provisions of the 1996
Act; or through nonfranchised "open video systems" offering nondiscriminatory
capacity to unaffiliated programmers, subject to select provisions of the 1996
Act. Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize. The 1996 Act encompasses
many other aspects of providing cable television service including prices for
equipment, discounting rates to multiple dwelling units, lifting of
anti-trafficking restrictions, cable-telephone cross ownership provisions, pole
attachment rate formulas, rate uniformity, program access, scrambling and
censoring of Public Educational and Governmental and leased access channels.
SELF-INSURANCE
The Company began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, NCTV began making monthly contributions into an insurance
fund maintained by NTC which covers all Northland entities and would defray a
portion of any loss should the Company be faced with a significant uninsured
loss. To the extent the Company's losses exceed the fund's balance, the Company
would absorb any such loss. If the Company were to sustain a material uninsured
loss, such reserves could be insufficient to fully fund such a loss. The
resulting reduction in cash flow caused by interrupted service, together with
the capital cost of replacing such equipment and physical plant, could have a
material adverse effect on the Company, its financial condition, prospects and
debt service ability.
Amounts to be 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 seven-month period ended July 31, 1997, the Company made payments
of $32,226 to the fund. As of July 31, 1997, the fund had a balance of $74,964.
F-30
<PAGE> 140
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF NORTHLAND TELECOMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 31, 1997
9. ACQUISITION OF SYSTEMS:
On January 31, 1997, the Company acquired substantially all of the
operating assets and franchise rights of the cable television system in and
around the community of Waterwood, Texas. This system serves approximately 400
basic subscribers. The total purchase price was approximately $580,000.
On March 31, 1997, the Company acquired substantially all of the operating
assets and franchise rights of the cable television systems in and around the
communities of Marlin, Madisonville and Buffalo, Texas. These systems serve
approximately 3,600 subscribers. The total purchase price was approximately
$5,250,000 of which approximately $5,000,000 was paid on the closing date. The
balance of $250,000 was deposited into an escrow account which will be released
to the seller, net of any purchase prices adjustments. The acquisition was
financed by borrowings under the Company's term-loan facility.
In April 1997, the Company acquired substantially all of the operating
assets and franchise rights of the cable television system serving approximately
300 basic subscribers in Oconee County, South Carolina. The aggregate purchase
price of the assets was $370,000. As of July 31, 1997, the Company owed
approximately $8,000 under the holdback provision of the purchase agreement.
Pro forma operating results (unaudited) of the Company for the seven-month
period ended July 31, 1997, assuming the acquisitions described above had been
made at the beginning of 1997, are not materially different than reported
results.
10. SUBSEQUENT EVENT (UNAUDITED):
In October 1997, the Company executed a definitive agreement to acquire six
cable television systems for an aggregate purchase price of $69,975,000. The
systems are located in South Carolina and serve approximately 35,300 basic
subscribers. The Company is currently in the process of privately placing $100
million of senior subordinated notes and negotiating the terms of its bank
credit facility to provide $100 million of borrowing capacity. Management
intends that proceeds from the notes and initial bank borrowings of
approximately $77 million will be utilized to fund the acquisitions, repay
amounts outstanding under the existing bank credit facility and pay transaction
costs. The Company expects to have approximately $25 million of unused capacity
under the renegotiated bank credit facility for future acquisitions and working
capital.
F-31
<PAGE> 141
REPORT OF INDEPENDENT ACCOUNTANTS
To The Partners of
Robin Cable Systems, L.P.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in equity and of cash flows present fairly, in all
material respects, the financial position of Aiken II Cable Systems, a component
of Robin Cable Systems, L.P., at December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Robin Cable
Systems, L.P.'s management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
October 10, 1997
F-32
<PAGE> 142
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1997 1996 1995
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net of allowance for doubtful
accounts
of $12 (unaudited), $37 and $20....................... $ 286 $ 262 $ 278
Receivables from related parties........................ -- -- 127
Prepaid expenses........................................ 45 19 4
------- ------- -------
Total current assets.......................... 331 281 409
Intangible assets, net.................................. 1,336 1,799 2,599
Property and equipment, net............................. 9,547 11,812 13,577
Other assets............................................ 9 26 24
------- ------- -------
Total assets.................................. $11,223 $13,918 $16,609
======= ======= =======
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities................ $ 912 $ 1,028 $ 877
Deferred revenue........................................ 189 144 130
Payables to related parties............................. 8 37 --
------- ------- -------
Total current liabilities..................... 1,109 1,209 1,007
Non-current liabilities................................. 142 1 --
------- ------- -------
Total liabilities............................. 1,251 1,210 1,007
------- ------- -------
Commitments and contingencies (Note 8)
Equity.................................................. 9,972 12,708 15,602
------- ------- -------
Total liabilities and equity.................. $11,223 $13,918 $16,609
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 143
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ----------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Basic and cable services................... $4,889 $4,589 $6,126 $5,690 $5,333
Pay services............................... 588 590 783 870 930
Other services............................. 890 762 1,042 1,033 1,154
------ ------ ------ ------ ------
6,367 5,941 7,951 7,593 7,417
------ ------ ------ ------ ------
OPERATING EXPENSES
Program fees............................... 1,318 1,119 1,528 1,314 1,145
Other direct expenses...................... 731 665 882 822 986
Depreciation and amortization.............. 2,384 2,801 3,736 3,429 3,771
Selling, general and administrative
expenses................................. 1,362 1,464 1,974 1,957 1,787
Management and consulting fees............. 248 249 331 334 239
------ ------ ------ ------ ------
6,043 6,298 8,451 7,856 7,928
------ ------ ------ ------ ------
Income (loss) from operations.............. 324 (357) (500) (263) (511)
------ ------ ------ ------ ------
OTHER INCOME (EXPENSE)
Other income............................... 15 9 12 -- --
Other expense.............................. (7) (5) (7) (81) (102)
------ ------ ------ ------ ------
8 4 5 (81) (102)
------ ------ ------ ------ ------
NET INCOME (LOSS).......................... $ 332 $ (353) $ (495) $ (344) $ (613)
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 144
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
STATEMENT OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY
-------
<S> <C>
Balance at December 31, 1993...................................................... $14,697
Net loss........................................................................ (613)
Net distributions to parent..................................................... (399)
-------
Balance at December 31, 1994...................................................... 13,685
Net loss........................................................................ (344)
Net contributions from parent................................................... 2,261
-------
Balance at December 31, 1995...................................................... 15,602
Net loss........................................................................ (495)
Net distributions to parent..................................................... (2,399)
-------
Balance at December 31, 1996...................................................... 12,708
Net income (unaudited).......................................................... 332
Net distributions to parent (unaudited)......................................... (3,068)
-------
Balance at September 30, 1997 (unaudited)......................................... $ 9,972
=======
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 145
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------- -------------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 332 $ (353) $ (495) $ (344) $ (613)
Adjustments to reconcile net income
(loss) to cash flows from
operating activities:
Depreciation and amortization... 2,384 2,801 3,736 3,429 3,771
Gain (loss) on disposal of fixed
assets........................ 6 -- -- (56) (79)
Changes in assets and
liabilities:
Accounts receivable........... (24) 3 16 (106) 55
Receivables from related
parties.................... -- 107 127 (127) 8
Prepaid expenses.............. (26) (48) (15) 6 (3)
Other assets.................. 17 (2) (2) -- 8
Accounts payable and accrued
liabilities................ (116) (7) 151 77 114
Deferred revenue.............. 45 13 14 20 15
Payables to related parties... (29) -- 37 (78) 78
Non-current liabilities....... 141 2 1 -- --
------- ------- ------- ------- -------
Cash flows from operating
activities...................... 2,730 2,516 3,570 2,821 3,354
------- ------- ------- ------- -------
CASH FLOWS PROVIDED BY/(USED BY)
INVESTING ACTIVITIES --
Sales (purchases) of property and
equipment....................... 338 (562) (1,171) (5,082) (2,955)
------- ------- ------- ------- -------
CASH FLOWS (USED BY)/PROVIDED BY
FINANCING ACTIVITIES --
Net (distributions) contributions
to/from parent.................. (3,068) (1,954) (2,399) 2,261 (399)
------- ------- ------- ------- -------
Net change in cash................... -- -- -- -- --
Cash at beginning of period.......... -- -- -- -- --
------- ------- ------- ------- -------
Cash at end of period................ $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 146
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BASIS OF PRESENTATION
TRANSACTION
On August 27, 1997, Robin Cable Systems, L.P. ("RCS") and InterMedia
Partners of Carolina, L.P. ("IP of Carolina"), together referred to as the
"Partnerships," entered into an Asset Purchase and Sale Agreement (the
"Agreement") with Northland Cable Television, Inc. ("NCTV"), which provides for
the sale of certain of the Partnerships' cable television systems located in
South Carolina. The sale is expected to be consummated prior to December 31,
1997. The Partnerships are affiliated through common ownership and management by
the Partnerships' parent company, InterMedia Partners ("IP"). None of the
systems, either individually or collectively, comprise a separate legal entity,
but rather comprise three distinct operating units within the Partnerships. RCS
is selling its cable television systems serving subscribers located in
Allendale, Barnwell, Bamberg, Aiken, Edgefield, McCormick, Saluda and Ware
Shoals (the "Aiken Systems"). IP of Carolina is selling its cable television
systems serving subscribers in Bennetsville (the "Bennetsville Cable System")
and Greenwood (the "Greenwood Cable System").
NCTV has entered into an assignment agreement (the "Assignment Agreement")
with an affiliate, Northland Cable Properties Six Limited Partnership ("NCP
Six"). The Assignment Agreement assigns, immediately upon the close of the asset
purchase described above, certain assets of the Aiken Systems serving
subscribers in Allendale, Barnwell and Bamberg (the "Aiken I Cable Systems") and
the Bennetsville Cable System to NCP Six. NCTV will retain the remaining assets
of the Aiken Systems serving subscribers in Aiken, Edgefield, McCormick, Saluda
and Ware Shoals (the "Aiken II Cable Systems") and the Greenwood Cable System.
NCTV and NCP Six require separate financial statements for each of these
businesses being acquired. Accordingly, these carve-out financial statements of
the Aiken II Cable Systems have been prepared.
PRESENTATION
The accompanying financial statements represent the results of operations
of the business associated with the Aiken II Cable Systems and the related
assets used and liabilities incurred in the business. Throughout the periods
covered by the financial statements, the operations of the Aiken II Cable
Systems were conducted and accounted for as part of the Aiken Systems. These
financial statements have been carved-out from the historical accounting records
of RCS.
CARVE-OUT METHODOLOGY
Service revenues, program fees, depreciation and amortization can be
directly attributed to the Aiken II Cable Systems, while other direct expenses,
selling, general and administrative expenses and management and consulting fees
have been allocated to the Aiken II Cable Systems as described below. RCS
management believes the bases used for the allocations are reasonable. However,
these allocations are not necessarily indicative of the costs and expenses that
would have resulted if the Aiken II Cable Systems had been operated as a
separate entity and are not necessarily indicative of future operating results.
Other direct expenses and selling, general and administrative expenses are
directly incurred by the Aiken Systems and have been allocated based principally
on relative basic subscriber percentages between the Aiken I Cable Systems and
the Aiken II Cable Systems. Such expenses include employee and related employee
benefit costs, professional services, supplies, occupancy costs, repair and
maintenance and other costs included in other direct expenses and marketing,
communi-
F-37
<PAGE> 147
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
cations, data processing, professional services and overhead expenses included
in selling, general and administrative expenses. As more fully described in Note
6, certain administrative services are provided by a related party and are
charged to all affiliates based on relative basic subscriber percentages.
Management and consulting fees represent an allocation of management fees
charged by InterMedia Capital Management, a California limited partnership
("ICM") and the former general partner of RCS's parent company, IP, a California
limited partnership (see Note 10 -- "Subsequent Events"). These fees are charged
at a fixed amount pursuant to a management agreement, initially determined by
reference to IP's total contributed capital. These fees are allocated based upon
the allocated contributed capital of the Aiken II Cable Systems as compared to
total contributed capital of all of the RCS systems.
Generally, assets and liabilities can be directly attributed to the Aiken
II Cable Systems. Certain prepaids, other assets and accrued liabilities were
allocated based on relative basic subscriber percentages; such amounts will be
retained by RCS.
CASH AND INTERCOMPANY ACCOUNTS
Under RCS's centralized cash management system, cash requirements of its
individual operating units were generally provided directly by RCS and the cash
generated or used by the Aiken II Cable Systems was transferred to/from RCS, as
appropriate, through intercompany accounts. The intercompany account balances
between RCS and the individual operating units are not intended to be settled.
Accordingly, the balances are included in equity and all net cash generated from
operations, investing activities and financing activities has been included in
the Aiken II Cable Systems' "net (distributions) contributions to/from parent"
in the statement of cash flows.
RCS maintains all debt which is used to fund and manage all of its
operations on a centralized basis. Debt, unamortized debt issue costs and
related interest expense have not been allocated to the Aiken II Cable System.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Cable television service revenue is recognized in the period in which
services are provided to customers. Deferred revenue represents revenue billed
in advance and deferred until cable service is provided.
PROPERTY AND EQUIPMENT
Additions to property and equipment, including new customer installations,
are recorded at cost. Self-constructed fixed assets include materials, labor and
overhead. Costs of disconnecting and reconnecting cable service are expensed.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and improvements are capitalized. Gains and
losses from disposals and retirements are included in earnings. Capitalized
fixed assets are written down to recoverable values whenever recoverability
through operations or sale of the systems becomes doubtful.
F-38
<PAGE> 148
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
Depreciation is computed using the double-declining balance method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Cable television plant.............................. 5 - 10
Buildings and improvements.......................... 10
Furniture and fixtures.............................. 3 - 7
Equipment and other................................. 3 - 10
</TABLE>
INTANGIBLE ASSETS
The Aiken II Cable System has franchise rights to operate cable television
systems in various towns and political subdivisions. Franchise rights are being
amortized over the lesser of the remaining franchise lives or the base ten-year
term of IP. The remaining lives of the franchises range from one to four years.
Goodwill represents the excess of acquisition costs over the fair value of
net tangible and franchise assets acquired, and liabilities assumed, and is
being amortized on a straight-line basis over the base ten-year term of IP.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the systems assets becomes
doubtful. The recoverability of the carrying value of intangible assets is
reviewed on an annual basis to determine whether the projected cash flows,
including projected cash flows from sale of the systems assets are sufficient to
recover the unamortized cost of these assets.
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Aiken II Cable System has adopted Statement of Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Property and equipment and intangible
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. No
impairment losses have been recognized for the years presented.
INCOME TAXES
No provision or benefit for income taxes is reported in the accompanying
financial statements because the tax effects of the Aiken II Cable Systems'
results of operations accrue to the partners of RCS.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-39
<PAGE> 149
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables, payables, deferred revenue and accrued
liabilities approximates fair value due to their short maturity.
INTERIM FINANCIAL DATA (UNAUDITED)
The interim financial data for the nine months ended September 30, 1997 and
1996 is unaudited; however, in the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Franchise rights..................................... $ 22,778 $ 22,778
Goodwill............................................. 3,351 3,351
-------- --------
26,129 26,129
Accumulated amortization............................. (24,330) (23,530)
-------- --------
$ 1,799 $ 2,599
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Land................................................. $ 53 $ 53
Cable television plant............................... 24,838 24,398
Building and improvements............................ 241 242
Furniture and fixtures............................... 200 179
Equipment and other.................................. 793 773
Construction-in-progress............................. 1,113 537
-------- --------
27,238 26,182
Accumulated depreciation............................. (15,426) (12,605)
-------- --------
$ 11,812 $ 13,577
======== ========
</TABLE>
F-40
<PAGE> 150
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------ ----
<S> <C> <C>
Accounts payable........................................... $ 161 $ 65
Accrued program costs...................................... 140 112
Accrued franchise fees..................................... 135 139
Accrued copyright fees..................................... 106 97
Accrued payroll costs...................................... 53 63
Accrued property and other taxes........................... 311 270
Other accrued liabilities.................................. 122 131
------ ----
$1,028 $877
====== ====
</TABLE>
6. RELATED PARTY TRANSACTIONS
ICM provides certain management services to RCS (see Note 10 -- "Subsequent
Events") for a per annum fixed fee, of which 20% per annum is deferred and is
payable in each following year. Due to the fixed nature of the fee, changes in
the operating units' allocated contributed capital resulting from acquisitions
or dispositions within RCS result in changes in the allocation of the fee to
constituent operating units, including the Aiken II Cable Systems. The total
fixed, annual fee payable by RCS is $863 of which $331, $334 and $239 has been
charged to Aiken II Cable Systems in each of the years ended December 31, 1996,
1995 and 1994, respectively.
InterMedia Management, Inc. ("IMI") is wholly-owned by the managing general
partner of ICM (see Note 10 -- "Subsequent Events"). IMI entered into an
agreement with RCS to provide accounting and administrative services at cost.
Under the terms of the agreement, the expenses associated with rendering these
services are charged to RCS and other affiliates based upon relative basic
subscriber percentages. Management believes this method to be reflective of the
actual cost. The costs charged to RCS have been charged to the Aiken II Cable
Systems on the same basis. During 1996, 1995 and 1994, related IMI
administrative fees charged to the Aiken II Cable Systems totaled $234, $249 and
$223, respectively. The accounting and administrative expenses charged are not
necessarily indicative of the costs that would have been incurred if the Aiken
II Cable Systems had been a separate entity.
RCS's parent is owned, in part, by Tele-Communications, Inc. ("TCI"). As an
affiliate of TCI, RCS is able to purchase programming services from a subsidiary
of TCI. Management believes that the overall programming rates made available
through this relationship are lower than the Aiken II Cable Systems could obtain
separately. The TCI subsidiary is under no obligation to continue to offer such
volume rates. Further, such rates are not available to any entity in which TCI
does not have a substantial investment. Accordingly, program fees expense
recognized is not necessarily indicative of the cost that would have been
incurred if the Aiken II Cable Systems had been a separate entity. During 1996,
1995 and 1994, program fees expense includes services purchased from the TCI
subsidiary of $1,121, $976, and $884, respectively. Accounts payable and accrued
liabilities include programming fees payable to the TCI subsidiary of $96 and
$81 at December 31, 1996 and 1995, respectively.
F-41
<PAGE> 151
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
7. CABLE TELEVISION REGULATION
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past, and
may in the future, materially affect RCS and the cable television industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the
Telecommunications Act of 1996 ("the 1996 Act") and regulations issued by the
Federal Communications Commission ("FCC") in response to the 1992 Act. FCC
regulations govern the determination of rates charged for basic, expanded basic
and certain ancillary services, and cover a number of other areas including
customer service and technical performance standards, the required transmission
of certain local broadcast stations and the requirement to negotiate
retransmission consent from major network and certain local television stations.
Among other provisions, the 1996 Act will eliminate rate regulation on the
expanded basic tier effective March 31, 1999.
Current regulations issued in conjunction with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates which
exceed the maximum permitted levels and to require refunds measured from the
date a complaint is filed in some circumstances or retroactively for up to one
year in other circumstances. Management believes it has made a fair
interpretation of the 1992 Act and related FCC regulations in determining
regulated cable television rates and other fees based on the information
currently available. However, complaints have been filed with the FCC on rates
for certain franchises and certain local franchise authorities have challenged
existing and prior rates. Further complaints and challenges could be
forthcoming, some of which could apply to revenue recorded in 1996 and prior
years. Management believes, however, that the effect, if any, of these
complaints and challenges will not be material to the Aiken II Cable Systems'
financial position or results of operations.
Many aspects of regulation at the federal and local levels are currently
the subject of judicial review and administrative proceedings. In addition, the
FCC is required to conduct rulemaking proceedings during 1997 to implement
various provisions of the 1996 Act. It is not possible at this time to predict
the ultimate outcome of these reviews or proceedings or their effect on Aiken II
Cable Systems.
8. COMMITMENTS AND CONTINGENCIES
The Aiken II Cable System is committed to provide cable television services
under franchise agreements with the State of South Carolina for the remaining
terms of the franchises. Franchise fees of up to 5% of gross basic and cable
service revenues are payable under these agreements.
The 1992 Act and related FCC regulations require that cable television
operators obtain permission to retransmit major network and certain local
television station signals. RCS has entered into long-term retransmission
agreements with all applicable stations in exchange for in-kind and/or other
consideration.
The Aiken II Cable System is subject to litigation and other claims in the
ordinary course of business. In the opinion of management, the ultimate outcome
of any existing litigation or other claims will not have a material adverse
effect on the Aiken II Cable Systems' financial position or results of
operations.
F-42
<PAGE> 152
AIKEN II CABLE SYSTEMS
(A COMPONENT OF ROBIN CABLE SYSTEMS, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
RCS has entered into pole rental agreements and leases certain of its
facilities and equipment under non-cancelable operating leases. Minimum rental
commitments for the next five years and thereafter under non-cancelable
operating leases related to the Aiken II Cable Systems are as follows:
<TABLE>
<S> <C>
1997.................................................. $ 7
1998.................................................. 7
1999.................................................. 4
2000.................................................. 4
2001.................................................. 3
Thereafter............................................ --
---
$25
===
</TABLE>
Rent expense, including operating rentals under cancelable and short-term
lease arrangements, for the years ended December 31, 1996, 1995 and 1994 was
$153, $145 and $157, respectively.
9. EMPLOYEE BENEFIT PLANS
RCS participates in the InterMedia Partners Tax Deferred Savings Plan which
covers all full-time employees who have completed at least one year of
employment. The plan provides for a base employee contribution of 1% and a
maximum of 15% of compensation. RCS's matching contributions under the plan are
at the rate of 50% of the employee's contribution, up to a maximum of 3% of
compensation. The Aiken II Cable Systems' allocated portion is included in the
statement of operations.
10. SUBSEQUENT EVENTS
PARTNERSHIP MODIFICATIONS
Effective June 10, 1997, InterMedia Capital Management I, LLC ("ICM-I
LLC"), a newly formed limited liability company, became the general partner of
IP, and ICM no longer holds an equity interest in IP. ICM-I LLC is owned by IMI,
the 95% managing member, and Robert J. Lewis, a 5% member, who is also the sole
shareholder of IMI. Also effective June 10, 1997, InterMedia Capital Management,
L.P. ("ICM-I"), a newly formed limited partnership, became a 1.1% limited
partner in IP, and now provides to RCS the management services that were
previously provided by ICM for a per annum fixed fee of $863.
ADVERTISING REVENUE (UNAUDITED)
During 1997, Aiken II Cable Systems was credited $298 representing its
share of payments received by IP from certain programmers to launch and promote
their channels. Of the total amount received, the Aiken II Cable Systems has
recognized advertising revenue of $71 during the nine months ended September 30,
1997 for advertising provided to promote the new channels. The remaining
payments received from the programmers will be amortized over the respective
terms of the launch agreements which range between five and ten years.
F-43
<PAGE> 153
REPORT OF INDEPENDENT ACCOUNTANTS
To The Partners of
InterMedia Partners of Carolina, L.P.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in equity and of cash flows present fairly, in all
material respects, the financial position of the Greenwood Cable System, a
component of InterMedia Partners of Carolina, L.P., at December 31, 1996 and
1995, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of InterMedia Partners of Carolina, L.P.'s management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
October 10, 1997
F-44
<PAGE> 154
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30, ------------------
1997 1996 1995
----------- ------ -------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net of allowance for doubtful accounts
of $16 (unaudited), $13 and $13........................... $ 199 $ 141 $ 148
Prepaid expenses............................................ 25 15 6
Receivables from related parties............................ 18 -- --
------ ------ -------
Total current assets.............................. 242 156 154
Intangible assets, net...................................... 3,979 5,978 8,735
Property and equipment, net................................. 2,734 2,649 2,788
------ ------ -------
Total assets...................................... $ 6,955 $8,783 $11,677
====== ====== =======
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities.................... $ 611 $ 614 $ 713
Deferred revenue............................................ 155 107 93
Payables to related parties................................. -- 22 133
------ ------ -------
Total current liabilities......................... 766 743 939
Non-current liabilities..................................... 136 7 7
------ ------ -------
Total liabilities................................. 902 750 946
------ ------ -------
Commitments and contingencies (Note 8)
Equity...................................................... 6,053 8,033 10,731
------ ------ -------
Total liabilities and equity...................... $ 6,955 $8,783 $11,677
====== ====== =======
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE> 155
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED SEPTEMBER FOR THE YEAR ENDED
30, DECEMBER 31,
------------------ -------------------------------
1997 1996 1996 1995 1994
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Basic and cable services................ $3,591 $ 3,292 $ 4,408 $ 4,099 $ 3,572
Pay services............................ 475 481 638 686 682
Other services.......................... 538 457 622 517 523
------ ------- ------- ------- -------
4,604 4,230 5,668 5,302 4,777
------ ------- ------- ------- -------
OPERATING EXPENSES
Program fees............................ 982 876 1,184 984 809
Other direct expenses................... 390 410 563 632 526
Depreciation and amortization........... 2,393 2,585 3,459 3,310 3,399
Selling, general and administrative
expenses.............................. 798 807 1,081 1,089 1,052
Management and consulting fees.......... 378 378 504 504 504
------ ------- ------- ------- -------
4,941 5,056 6,791 6,519 6,290
------ ------- ------- ------- -------
Loss from operations.................... (337) (826) (1,123) (1,217) (1,513)
------ ------- ------- ------- -------
OTHER INCOME (EXPENSE)
Other income............................ 16 1 13 -- --
Other expense........................... (4) (3) (20) (14) (17)
------ ------- ------- ------- -------
12 (2) (7) (14) (17)
------ ------- ------- ------- -------
NET LOSS................................ $ (325) $ (828) $(1,130) $(1,231) $(1,530)
====== ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 156
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
STATEMENT OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY
-------
<S> <C>
Balance at December 31, 1993...................................................... $16,807
Net loss........................................................................ (1,530)
Net distributions to parent..................................................... (1,484)
-------
Balance at December 31, 1994...................................................... 13,793
Net loss........................................................................ (1,231)
Net distributions to parent..................................................... (1,831)
-------
Balance at December 31, 1995...................................................... 10,731
Net loss........................................................................ (1,130)
Net distributions to parent..................................................... (1,568)
-------
Balance at December 31, 1996...................................................... 8,033
Net loss (unaudited)............................................................ (325)
Net distributions to parent (unaudited)......................................... (1,655)
-------
Balance at September 30, 1997 (unaudited)......................................... $ 6,053
=======
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 157
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ -------------------------------
1997 1996 1996 1995 1994
------- ------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (325) $ (828) $(1,130) $(1,231) $(1,530)
Adjustments to reconcile net loss to cash flows
from operating activities:
Depreciation and amortization................ 2,393 2,585 3,459 3,310 3,399
(Gain) loss on disposal of fixed assets...... -- (1) 4 3 2
Changes in assets and liabilities:
Accounts receivable.......................... (58) (22) 7 (53) (12)
Prepaid expenses............................. (10) (20) (9) 4 15
Receivables from related parties............. (18) -- -- 14 (29)
Other assets................................. -- -- -- 4 4
Accounts payable and accrued liabilities..... (3) (89) (99) 208 63
Deferred revenue............................. 48 13 14 14 17
Payables to related parties.................. (22) (8) (111) 133 --
Non-current liabilities...................... 129 -- -- 7 --
--------- --------- --------- ---------
-- -- -- --
-------
----
Cash flows from operating activities......... 2,134 1,630 2,135 2,413 1,929
--------- --------- --------- ---------
-- -- -- --
-------
----
CASH FLOWS USED BY INVESTING ACTIVITIES --
Purchases of property and equipment............ (479) (474) (567) (582) (445)
--------- --------- --------- ---------
-- -- -- --
-------
----
CASH FLOWS USED BY FINANCING ACTIVITIES --
Net distributions to parent.................... (1,655) (1,156) (1,568) (1,831) (1,484)
--------- --------- --------- ---------
-- -- -- --
-------
----
Net change in cash............................... -- -- -- -- --
Cash at beginning of period...................... -- -- -- -- --
--------- --------- --------- ---------
-- -- -- --
-------
----
Cash at end of period............................ $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 158
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BASIS OF PRESENTATION
TRANSACTION
On August 27, 1997, Robin Cable Systems, L.P. ("RCS") and InterMedia
Partners of Carolina, L.P. ("IP of Carolina"), together referred to as the
"Partnerships," entered into an Asset Purchase and Sale Agreement (the
"Agreement") with Northland Cable Television, Inc. ("NCTV") which provides for
the sale of certain of the Partnerships' cable television systems located in
South Carolina. The sale is expected to be consummated prior to December 31,
1997. The Partnerships are affiliated through common ownership and management by
InterMedia Partners ("IP"). None of the systems, either individually or
collectively, comprise a separate legal entity, but rather comprise three
distinct operating units within the Partnerships. RCS is selling its cable
television systems serving subscribers located in Allendale, Barnwell, Bamberg,
Aiken, Edgefield, McCormick, Saluda and Ware Shoals, (the "Aiken Systems"). IP
of Carolina is selling its systems serving subscribers in Bennetsville (the
"Bennetsville Cable System") and Greenwood (the "Greenwood Cable System" or
"Greenwood").
NCTV has entered into an assignment agreement (the "Assignment Agreement")
with an affiliate, Northland Cable Properties Six Limited Partnership ("NCP
Six"). The Assignment Agreement assigns immediately upon the close of the asset
purchase described above, certain assets of the Aiken Systems serving
subscribers in Allendale, Barnwell and Bamberg (the "Aiken I Cable Systems") and
the Bennetsville Cable System to NCP Six. NCTV will retain the remaining assets
of the Aiken Systems serving subscribers located in Aiken, Edgefield, McCormick,
Saluda and Ware Shoals (the "Aiken II Cable Systems") and the Greenwood Cable
System. NCTV and NCP Six require separate financial statements for each of these
businesses being acquired. Accordingly, these carve-out financial statements of
the Greenwood Cable System have been prepared.
CARVE-OUT METHODOLOGY
The accompanying financial statements represent the results of operations
of the business associated with the Greenwood Cable System and the related
assets used and liabilities incurred in the business. Throughout the periods
covered, operating statements of the Greenwood Cable System were separately
maintained. However, as the Greenwood Cable System was not a separate legal
entity, these financial statements are carved-out from the historical accounting
records of IP of Carolina. Management of IP of Carolina believes the bases used
for the carved-out financial statements are reasonable. Therefore, the results
of operations are not necessarily indicative of the costs and expenses which
would have resulted if Greenwood was a separate legal entity and are not
necessarily indicative of future operating results.
Management and consulting fees primarily represent an allocation of
management fees charged by InterMedia Capital Management, a California limited
partnership ("ICM") and the former general partner of IP of Carolina's parent
company, IP, a California limited partnership (see Note 10 -- "Subsequent
Events"). These fees are charged at a fixed amount pursuant to a management
agreement, initially determined by reference to IP's total contributed capital.
These fees are allocated based upon the allocated contributed capital of
Greenwood as compared to total contributed capital of all of the IP of Carolina
systems. Also, as more fully described in Note 6, certain administrative
services are provided by a related party at cost and are charged to all
affiliates based on relative basic subscriber percentages.
F-49
<PAGE> 159
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
CASH AND INTERCOMPANY ACCOUNTS
Under IP of Carolina's centralized cash management system, cash
requirements of its individual operating units were generally provided directly
by IP of Carolina and the cash generated or used by the Greenwood Cable System
was transferred to/from IP of Carolina, as appropriate, through intercompany
accounts. The intercompany account balances between IP of Carolina and the
individual operating units are not intended to be settled. Accordingly, the
balances are included in equity and all net cash generated from operations,
investing activities and financing activities has been included in Greenwood's
"net distributions to parent" in the statement of cash flows.
IP of Carolina maintains all debt which is used to fund and manage all of
its operations on a centralized basis. Debt, unamortized debt issue costs and
related interest expense have not been allocated to Greenwood.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Cable television service revenue is recognized in the period in which
services are provided to customers. Deferred revenue represents revenue billed
in advance and deferred until cable service is provided.
PROPERTY AND EQUIPMENT
Additions to property and equipment, including new customer installations,
are recorded at cost. Self-constructed fixed assets include materials, labor and
overhead. Costs of disconnecting and reconnecting cable service are expensed.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and improvements are capitalized. Gains and
losses from disposals and retirements are included in earnings. Capitalized
fixed assets are written down to recoverable values whenever recoverability
through operations or sale of the system assets becomes doubtful.
Depreciation is computed using the double-declining balance method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Cable television plant...................................... 5 - 10
Buildings and improvements.................................. 10
Furniture and fixtures...................................... 3 - 7
Equipment and other......................................... 3 - 10
</TABLE>
INTANGIBLE ASSETS
Greenwood has franchise rights granted to operate cable television systems
in various towns and political subdivisions. Franchise rights are being
amortized over the lesser of the remaining franchise lives or the base ten-year
term of IP. The remaining lives of the franchises range from one to four years.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the system assets becomes doubtful.
The recoverability of the carrying value of intangible assets is reviewed on an
annual basis to determine whether the projected cash flows,
F-50
<PAGE> 160
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
including projected cash flows from sale of the system assets, are sufficient to
recover the unamortized cost of these assets.
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Greenwood has adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Property and equipment and intangible assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. No impairment losses have
been recognized for the years presented.
INCOME TAXES
No provision or benefit for income taxes is reported in the accompanying
financial statements because the tax effects of Greenwood's results of
operations accrue to the partners of IP of Carolina.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables, payables, deferred revenue and accrued
liabilities approximates fair value due to their short maturity.
INTERIM FINANCIAL DATA (UNAUDITED)
The interim financial data for the nine months ended September 30, 1997 and
1996 is unaudited; however, in the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Franchise rights............................. $ 23,996 $ 23,996
Accumulated amortization..................... (18,018) (15,261)
-------- --------
$ 5,978 $ 8,735
======== ========
</TABLE>
F-51
<PAGE> 161
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
Cable television plant.................... $ 6,549 $ 6,234
Building and improvements................. 1 1
Furniture and fixtures.................... 68 67
Equipment and other....................... 355 298
Construction-in-progress.................. 318 180
------- -------
7,291 6,780
Accumulated depreciation.................. (4,642) (3,992)
------- -------
$ 2,649 $ 2,788
======= =======
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
---- ----
<S> <C> <C>
Accounts payable................................ $ 14 $ 65
Accrued program costs........................... 110 93
Accrued franchise fees.......................... 172 156
Accrued copyright fees.......................... 52 52
Accrued payroll costs........................... 30 38
Accrued property and other taxes................ 114 130
Other accrued liabilities....................... 122 179
---- ----
$614 $713
==== ====
</TABLE>
6. RELATED PARTY TRANSACTIONS
ICM provides certain management services to IP of Carolina (see Note
10 -- "Subsequent Events") for a fixed fee of which 20% per annum is deferred
and is payable in each following year. The total fixed annual fee payable by IP
of Carolina is $930 of which $504 has been charged to Greenwood in each of the
years ended December 31, 1996, 1995 and 1994.
InterMedia Management, Inc. ("IMI") is wholly-owned by the managing general
partner of ICM (see Note 10 -- "Subsequent Events"). IMI has entered into an
agreement with IP of Carolina to provide accounting and administrative services
at cost. Under the terms of the agreement, the expenses associated with
rendering these services are charged to IP of Carolina and other affiliates
based upon relative basic subscriber percentages. Management believes this
method to be reflective of the actual cost. The costs charged to IP of Carolina
have been charged to Greenwood on the same basis. During 1996, 1995 and 1994,
related IMI administrative fees charged to Greenwood totaled $193, $201 and
$173, respectively. The accounting and administrative expenses charged are not
necessarily indicative of the costs that would have been incurred if Greenwood
had been a separate entity.
F-52
<PAGE> 162
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
IP of Carolina's parent is owned, in part, by Tele-Communications, Inc.
("TCI"). As an affiliate of TCI, IP of Carolina is able to purchase programming
services from a subsidiary of TCI. Management believes that the overall
programming rates made available through this relationship are lower than
Greenwood could obtain separately. The TCI subsidiary is under no obligation to
continue to offer such volume rates. Further, such rates are not available to an
entity in which TCI does not have a substantial investment. Accordingly, program
fees expense recognized is not necessarily indicative of the cost that would
have been incurred if Greenwood had been a separate entity. During 1996, 1995
and 1994, program fees expense includes services purchased from the TCI
subsidiary of $925, $803, and $700, respectively. Accounts payable and accrued
liabilities include programming fees payable to the TCI subsidiary of $81 and
$68 at December 31, 1996 and 1995, respectively.
7. CABLE TELEVISION REGULATION
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past, and
may in the future, materially affect IP of Carolina and the cable television
industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the
Telecommunications Act of 1996 ("the 1996 Act") and regulations issued by the
Federal Communications Commission ("FCC") in response to the 1992 Act. FCC
regulations govern the determination of rates charged for basic, expanded basic
and certain ancillary services, and cover a number of other areas including
customer service and technical performance standards, the required transmission
of certain local broadcast stations and the requirement to negotiate
retransmission consent from major network and certain local television stations.
Among other provisions, the 1996 Act will eliminate rate regulation on the
expanded basic tier effective March 31, 1999.
Current regulations issued in conjunction with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates which
exceed the maximum permitted levels and to require refunds measured from the
date a complaint is filed in some circumstances or retroactively for up to one
year in other circumstances. Management believes it has made a fair
interpretation of the 1992 Act and related FCC regulations in determining
regulated cable television rates and other fees based on the information
currently available. However, complaints have been filed with the FCC on rates
for certain franchises and certain local franchise authorities have challenged
existing and prior rates. Further complaints and challenges could be
forthcoming, some of which could apply to revenue recorded in 1996 and prior
years. Management believes, however, that the effect, if any, of these
complaints and challenges will not be material to Greenwood's financial position
or results of operations.
Many aspects of regulation at the federal and local levels are currently
the subject of judicial review and administrative proceedings. In addition, the
FCC is required to conduct rulemaking proceedings during 1997 to implement
various provisions of the 1996 Act. It is not possible at this time to predict
the ultimate outcome of these reviews or proceedings or their effect on
Greenwood.
8. COMMITMENTS AND CONTINGENCIES
Greenwood is committed to provide cable television services under franchise
agreements for the remaining terms of the franchises. Franchise fees of up to 5%
of gross basic and cable service revenues are payable under these agreements.
F-53
<PAGE> 163
GREENWOOD CABLE SYSTEM
(A COMPONENT OF INTERMEDIA PARTNERS OF CAROLINA, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
The 1992 Act and related FCC regulations require that cable television
operators obtain permission to retransmit major network and certain local
television station signals. IP of Carolina has entered into long-term
retransmission agreements with all applicable stations in exchange for in-kind
and/or other consideration.
Greenwood is subject to litigation and other claims in the ordinary course
of business. In the opinion of management, the ultimate outcome of any existing
litigation or other claims will not have a material adverse effect on
Greenwood's financial position or results of operations.
IP of Carolina has entered into pole rental agreements and leases certain
of its facilities and equipment under noncancelable operating leases. Minimum
rental commitments for the next five years and thereafter under non-cancelable
operating leases related to Greenwood are as follows:
<TABLE>
<S> <C>
1997....................................... $ 49
1998....................................... 49
1999....................................... 50
2000....................................... 50
2001....................................... 50
Thereafter................................. 151
----
$ 399
====
</TABLE>
Rent expense, including operating rentals under cancelable and short-term
lease arrangements, for the years ended December 31, 1996, 1995 and 1994 was
$53, $53 and $71, respectively.
9. EMPLOYEE BENEFIT PLANS
IP of Carolina participates in the InterMedia Partners Tax Deferred Savings
Plan which covers all full-time employees who have completed at least one year
of employment. The plan provides for a base employee contribution of 1% and a
maximum of 15% of compensation. IP of Carolina's matching contributions under
the plan are at the rate of 50% of the employee's contribution, up to a maximum
of 3% of compensation. Greenwood's allocated portion is included in the
statement of operations.
10. SUBSEQUENT EVENTS
PARTNERSHIP MODIFICATIONS
Effective June 10, 1997, InterMedia Capital Management I, LLC ("ICM-I
LLC"), a newly formed limited liability company, became the general partner of
IP, and ICM no longer holds an equity interest in IP. ICM-I LLC is owned by IMI,
the 95% managing member, and Robert J. Lewis, a 5% member, who is also the sole
shareholder of IMI. Also effective June 10, 1997, InterMedia Capital Management,
L.P. ("ICM-I"), a newly formed limited partnership, became a 1.1% limited
partner in IP, and now provides to IP of Carolina the management services that
were previously provided by ICM for a per annum fixed fee of $930.
ADVERTISING REVENUE (UNAUDITED)
During 1997, Greenwood Cable Systems was credited $164 representing its
share of payments received by IP from certain programmers to launch and promote
their channels. The payments received from the programmers have been deferred
and will be amortized over the respective terms of the launch agreements which
range between five and ten years.
F-54
<PAGE> 164
INDEX TO PRO FORMA UNAUDITED CONSOLIDATED
COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Unaudited Consolidated Combined Statement of Operations for the nine months
ended September 30, 1997............................................................. P-3
Pro Forma Unaudited Consolidated Combined Balance Sheet as of September 30, 1997....... P-4
Pro Forma Unaudited Consolidated Combined Statement of Operations for the year ended
December 31, 1996.................................................................... P-5
Notes to Pro Forma Unaudited Consolidated Combined Financial Statements................ P-6
</TABLE>
P-1
<PAGE> 165
PRO FORMA UNAUDITED CONSOLIDATED COMBINED
FINANCIAL STATEMENTS
The Pro Forma Unaudited Consolidated Combined Statements of Operations data
for the nine months ended September 30, 1997 give effect to the Offering, and
the application of the net proceeds therefrom, and the Acquisition as if they
had occurred on the first day of such period. The Pro Forma Unaudited
Consolidated Combined Balance Sheet data as of September 30, 1997 give effect to
the Offering, and the application of the net proceeds therefrom, and the
Acquisition as if they had occurred on that date. The Pro Forma Unaudited
Consolidated Combined Statements of Operations data for the year ended December
31, 1996 give effect to the Moses Lake Acquisition, the Offering, and the
application of the net proceeds therefrom, and the Acquisition as if they had
occurred on the first day of such period. The pro forma information is based
upon (i) the Company's and (ii) Aiken II Cable Systems' and Greenwood Cable
System's, together, (the "Acquisition Systems") Statements of Operations for the
year ended December 31, 1996 and for the nine months ended September 30, 1997,
and the Company's and the Acquisition Systems' Balance Sheet as of September 30,
1997, after giving effect to the Acquisition under the purchase method of
accounting and the assumptions and adjustments in the accompanying notes to the
Pro Forma Unaudited Consolidated Combined Financial Statements.
The following information should be read in conjunction with and is
qualified in its entirety by "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and accompanying notes of the Company and the Acquisition Systems. The Pro Forma
Unaudited Consolidated Combined Financial Statements have not been audited by
the independent auditors of the Company or the Sellers, are intended for
informational purposes only and are not necessarily indicative of the future
financial position or future results of operations of the combined company or of
the financial position or the results of operations of the combined company that
would have been realized had the Moses Lake Acquisition, the Offering, and the
application of the net proceeds therefrom, and the Acquisition occurred as of
the dates or for the periods presented.
P-2
<PAGE> 166
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
PRO FORMA UNAUDITED CONSOLIDATED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMBINED
PRO FORMA
COMPANY FOR THE
PRO FORMA OFFERING
OFFERING FOR THE ACQUISITION ACQUISITION AND THE
COMPANY ADJUSTMENTS OFFERING SYSTEMS ADJUSTMENTS ACQUISITION
------- ----------- --------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service revenues............. $29,259 $ -- $29,259 $10,971 $ -- $ 40,230
Operating expenses:
Operating.................. 9,497 -- 9,497 3,421 -- 12,918
General and
administrative........... 5,332 -- 5,332 2,160 -- 7,492
Management fees............ 1,433 -- 1,433 626 (77)(a) 1,982
Depreciation and
amortization............. 9,653 -- 9,653 4,777 (1,811)(b) 15,028
2,409(c)
-------- ------ -------- -------- -------- --------
Total operating
expenses............... 25,915 -- 25,915 10,984 521 37,420
-------- ------ -------- -------- -------- --------
Income from operations....... 3,344 -- 3,344 (13) (521) 2,810
Interest expense........... (7,378) (1,077)(d) (8,853) -- (4,547)(e) (13,400)
(398)(f)
Other income (expense),
net...................... 72 -- 72 20 -- 92
-------- ------ -------- -------- -------- --------
Net income (loss)............ $(3,962) $(1,475) $(5,437) $ 7 $(5,068) $(10,498)
======== ====== ======== ======== ======== ========
</TABLE>
P-3
<PAGE> 167
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
PRO FORMA UNAUDITED CONSOLIDATED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMBINED
PRO FORMA
COMPANY FOR THE
PRO FORMA OFFERING
OFFERING FOR THE ACQUISITION ACQUISITION AND THE
COMPANY ADJUSTMENTS OFFERING SYSTEMS ADJUSTMENTS ACQUISITION
-------- ----------- --------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash............................... $ 1,156 $ 75(g) $ 1,231 $ -- $ 69,285(e) $ 1,090
(69,426)(h)
Accounts receivable................ 1,162 -- 1,162 485 -- 1,647
Prepaids and other................. 525 -- 525 88 (88)(h) 525
-------- ------ -------- -------- -------- --------
Total current assets........... 2,843 75 2,918 573 (229) 3,262
Property and equipment, net........ 39,679 -- 39,679 12,281 6,509(h) 58,469
Intangibles, net................... 45,906 4,925(g) 50,831 5,315 45,870(h) 102,016
Other assets....................... 690 -- 690 9 (699)(h) --
-------- ------ -------- -------- -------- --------
Total assets................... $89,118 $ 5,000 $ 94,118 $18,178 $ 51,451 $163,747
======== ====== ======== ======== ======== ========
Accounts payable and other current
liabilities...................... $ 4,331 $ -- $ 4,331 $ 1,523 $ (1,523)(h) $ 4,331
Subscriber prepayments............. 1,029 -- 1,029 344 -- 1,373
Due to affiliates.................. 1,422 -- 1,422 8 (8)(h) 1,422
Current portion of notes payable... 7,538 (6,454)(g) 1,084 -- -- 1,084
-------- ------ -------- -------- -------- --------
Total current liabilities...... 14,320 (6,454) 7,866 1,875 (1,531) 8,210
Notes payable...................... 95,430 11,454(g) 106,884 -- 69,285(e) 176,169
Other liabilities.................. -- -- -- 278 (278)(h) --
-------- ------ -------- -------- -------- --------
Total liabilities.............. 109,750 5,000 114,750 2,153 67,476 184,379
Shareholder's equity (deficit)..... (20,632) -- (20,632) 16,025 (16,025)(h) (20,632)
-------- ------ -------- -------- -------- --------
Total liabilities and
shareholder's equity
(deficit).................... $89,118 $ 5,000 $ 94,118 $18,178 $ 51,451 $163,747
======== ====== ======== ======== ======== ========
</TABLE>
P-4
<PAGE> 168
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
PRO FORMA UNAUDITED CONSOLIDATED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMBINED
COMPANY PRO FORMA
COMPANY PRO FORMA FOR THE
----------------------- OFFERING FOR THE ACQUISITION ACQUISITION OFFERING AND
ACTUAL MOSES LAKE(I) ADJUSTMENTS OFFERING SYSTEMS ADJUSTMENTS THE ACQUISITION
------- ------------- ----------- --------- ----------- ----------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Service revenues..... $33,181 $ 3,190 $ -- $ 36,371 $13,619 $ -- $ 49,990
Operating expenses:
Operating.......... 10,500 894 -- 11,394 4,157 -- 15,551
General and
administrative... 5,955 643 -- 6,598 3,055 -- 9,653
Management fees.... 1,625 160 -- 1,785 835 (154)(j) 2,466
Depreciation and
amortization..... 10,727 2,183 -- 12,910 7,195 (1,732)(k) 20,076
1,703(l)
------- ------- ------- -------- -------- ------- -------
Total operating
expenses......... 28,807 3,880 -- 32,687 15,242 (183) 47,746
------- ------- ------- -------- -------- ------- -------
Income (loss) from
operations......... 4,374 (690) -- 3,684 (1,623) 183 2,244
Interest expense... (8,263) (1,502) (2,159)(m) (11,924) -- (6,062)(n) (17,986)
Other income
(expenses), net.. (340) -- -- (340) (2) -- (342)
------- ------- ------- -------- -------- ------- -------
Net loss............. $(4,229) $(2,192) $(2,159) $ (8,580) $(1,625) $(5,879) $(16,084)
======= ======= ======= ======== ======== ======= =======
</TABLE>
P-5
<PAGE> 169
NOTES TO THE PRO FORMA UNAUDITED CONSOLIDATED COMBINED
FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(a) To eliminate historical management fees of the Acquisition Systems and
record management fees based on the Company's Management Agreement of 5.0% of
gross revenues.
(b) To eliminate the Acquisition Systems' historical depreciation expense
and record depreciation expense, for the nine months ended September 30, 1997,
based upon the allocation of purchase price to various categories of property
and equipment using methods and terms consistent with those utilized by the
Company. Depreciation expense, on a pro-forma basis, related to the Acquisition
Systems is less than historical depreciation recorded by the Acquisition
Systems. The Company utilizes the straight-line depreciation method while the
Acquisition Systems have historically utilized accelerated methods. In addition,
the useful lives for depreciation purposes used by the Company exceed those
historically used by the Acquisition Systems. These two factors combine to lower
depreciation expense despite the step-up in asset values as a result of the
Acquisition. Adjustments for each of the Acquisition Systems are as follows:
<TABLE>
<CAPTION>
ELIMINATE RECORD
--------- ------
<S> <C> <C>
Aiken II Cable Systems........................... $ 1,868 $ 901
Greenwood Cable System........................... 1,373 529
------- ------
$ 3,241 $1,430
======= ======
</TABLE>
(c) To eliminate the Acquisition Systems' historical amortization expense
and record amortization expense, for the nine months ended September 30, 1997,
based upon the allocation of purchase price to various categories of intangible
assets using methods and terms consistent with those utilized by the Company.
Amortization expense, on a pro-forma basis, increased over historical amounts as
a result of the Company's recording additional intangible assets associated with
the purchase of the Acquisition Systems. Adjustments for each of the Acquisition
Systems are as follows:
<TABLE>
<CAPTION>
ELIMINATE RECORD
--------- ------
<S> <C> <C>
Aiken II Cable Systems........................... $ 516 $2,189
Greenwood Cable System........................... 1,020 1,756
------- ------
$ 1,536 $3,945
======= ======
</TABLE>
(d) To eliminate historical interest expense totaling $7,378 and record
estimated interest expenses of $8,455, for the nine months ended September 30,
1997, based upon the Offering and amounts outstanding under the Senior Credit
Facility of $7,822.
(e) To record borrowings under the Senior Credit Facility of $69,285 in
connection with the Acquisition and the related interest expense.
(f) To record amortization of debt issue costs for the nine months ended
September 30, 1997. Total issuance costs are estimated at $3,375 in conjunction
with the Offering and loan fees and costs are estimated at $1,550 in conjunction
with the Senior Credit Facility.
(g) To record the gross proceeds from the Offering of $100,000, repayments
of outstanding indebtedness totaling $95,000 and payment of debt issuance costs
and fees incurred in conjunction with the Offering and the Senior Credit
Facility estimated at $4,925.
(h) To record the cost of the Acquisition Systems totaling $69,975,
including step-ups in historical property and equipment basis to $18,790, and
franchise and other intangible costs to $51,185, based upon the Company's
allocation of purchase price. An Escrow deposit of $690 is released as partial
payment for the Acquisition Systems. Net accounts receivable over subscriber
prepayments are assumed to be acquired for an additional $141. The Acquisition
Systems' historical
P-6
<PAGE> 170
NOTES TO THE PRO FORMA UNAUDITED CONSOLIDATED COMBINED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
basis in assets not acquired or liabilities not assumed are eliminated including
prepaids and other assets, accounts payable and other current liabilities, due
to affiliates and shareholders' equity.
NCTV PRO FORMA FOOTNOTES
The Company has allocated the purchase price of the Acquisition Systems as
follows:
<TABLE>
<CAPTION>
ESTIMATED
AIKEN GREENWOOD USEFUL LIFE
----------- ----------- --------------
<S> <C> <C> <C>
Land and Buildings............................. $ 30,000 $ 4,213,200 20 years
Distribution plant............................. 6,618,985 11,408,090 10 years
Other equipment................................ 235,000 285,000 5 - 10 years
Total Property and Equipment......... 6,883,985 11,906,290
---------- ----------
Subscriber Lists............................... 636,160 775,120 5 years
Franchise agreements........................... 22,139,987 27,633,458 10 years
---------- ----------
Total Intangible Assets.............. 22,776,147 28,408,578
Total Assets......................... $29,660,132 $40,314,868
========== ==========
</TABLE>
P-7
<PAGE> 171
NOTES TO THE PRO FORMA UNAUDITED CONSOLIDATED COMBINED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(i) Service revenues, operating and general and administrative expenses
reflect historical results for the period January 1, 1996 to October 11, 1996,
the date on which the Company consummated the Moses Lake Acquisition.
Depreciation and amortization expense reflects the recording of expense for the
period January 1, 1996 to October 11, 1996, based upon the allocation of
purchase price to various categories of property and equipment using methods and
terms consistent with those utilized by the Company. The adjustments are as
follows:
<TABLE>
<CAPTION>
HISTORICAL RESTATED
---------- --------
<S> <C> <C>
Depreciation expense............................ $240 $ 454
Amortization expense............................ 683 1,729
---- ------
$923 $2,183
==== ======
</TABLE>
Interest expense represents the elimination of historical interest expense
in the amount of $867 and the recording of $1,502 of interest expense for the
period January 1, 1996 to October 11, 1996 on acquisition borrowings of $21,995
under the Company's revolving credit and term loan facility. Management fees are
recorded at 5.0% of revenues based on the Company's Management Agreement.
(j) To eliminate historical management fees of $835 for the Acquisition
Systems and record management fees based on the Company's Management Agreement
of 5.0% of revenues.
(k) To eliminate the Acquisition Systems' historical depreciation expense
and record depreciation expense for 1996 based upon the allocation of purchase
price to various categories of property and equipment using methods and terms
consistent with those utilized by the Company. Depreciation expense, on a
pro-forma basis, related to the Acquisition Systems is less than historical
depreciation recorded by the Acquisition Systems. The Company utilizes the
straight-line depreciation method while the Acquisition Systems have
historically utilized accelerated methods. In addition, useful lines used for
depreciation purposes by the Company exceed those historically used by the
Acquisition Systems. These two factors combine to lower depreciation expense
despite the step-up in asset values as a result of the Acquisition. Adjustments
for each of the Acquisition Systems are as follows:
<TABLE>
<CAPTION>
ELIMINATE RECORD
--------- ------
<S> <C> <C>
Aiken II Cable Systems.......................... $ 2,937 $1,200
Greenwood Cable System.......................... 701 706
------- ------
$ 3,638 $1,906
======= ======
</TABLE>
(l) To eliminate the Acquisition Systems' historical amortization expense
and record amortization expense for 1996 based upon the allocation of purchase
price to various categories of intangible assets using methods and terms
consistent with those utilized by the Company. Amortization expense, on a
pro-forma basis, increased over historical amounts as a result of the Company's
recording additional intangible assets associated with the purchase of the
Acquisition Systems. Adjustments for each of the Acquisition Systems are as
follows:
<TABLE>
<CAPTION>
ELIMINATE RECORD
--------- ------
<S> <C> <C>
Aiken II Cable Systems.......................... $ 799 $2,918
Greenwood Cable System.......................... 2,758 2,342
------- ------
$ 3,557 $5,260
======= ======
</TABLE>
P-8
<PAGE> 172
NOTES TO THE PRO FORMA UNAUDITED CONSOLIDATED COMBINED
FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(m) To eliminate historical interest expense of the Company of $9,765 and
to record estimated interest expense of $11,924 for 1996, including amortization
of debt issuance costs and loan fees based upon the Offering and amounts
outstanding under the Senior Credit Facility totaling $9,565 determined as
follows:
<TABLE>
<S> <C>
Indebtedness at January 1, 1996........................ $ 82,570
Borrowings in connection with the Moses Lake
Acquisition.......................................... 21,995
Repayment from net proceeds of the Notes............... (96,550)
Amounts borrowed for loan fees and costs on the Senior
Credit Facility...................................... 1,550
--------
$ 9,565
=========
</TABLE>
(n) To record interest on borrowings under the Senior Credit Facility of
$69,285 in connection with the Acquisition.
P-9
<PAGE> 173
PROSPECTUS
------------------------
$100,000,000
LOGO NORTHLAND CABLE TELEVISION, INC.
OFFER TO EXCHANGE $1,000 IN PRINCIPAL AMOUNT OF ITS
10 1/4% SENIOR SUBORDINATED NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR
EACH $1,000 IN PRINCIPAL AMOUNT OF ITS OUTSTANDING
10 1/4% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
HARRIS TRUST AND SAVINGS BANK
<TABLE>
<S> <C>
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT COURIER OR HAND:
HARRIS TRUST AND SAVINGS BANK HARRIS TRUST AND SAVINGS BANK
C/O HARRIS TRUST COMPANY OF NEW YORK C/O HARRIS TRUST COMPANY OF NEW YORK
P.O. BOX 1010 88 PINE STREET
WALL STREET STATION 19TH FLOOR
NEW YORK, NY 10268-1010 NEW YORK, NY 10005
BY FACSIMILE:
(212) 701-7336
CONFIRM BY TELEPHONE:
(212) 701-7624
</TABLE>
<PAGE> 174
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms used but not defined in Part II have the meanings
ascribed to them in the Prospectus contained in this Registration Statement.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 23B.08.510 of the Revised Code of Washington authorizes Washington
corporations to indemnify their officers and directors under certain
circumstances against expenses and liabilities incurred in legal proceedings
involving such persons because of their being or having been an officer or
director. Each of the Company's and NCN's Articles of Incorporation and Bylaws
require indemnification of the Company's and NCN's respective officers and
directors to the fullest extent permitted by Washington law. The Company also
maintains directors' and officers' liability insurance.
Each of the Company's and NCN's By-laws and Articles of Incorporation
provide that the Company and NCN, respectively, shall, to the full extent
permitted by the Washington Business Corporation Act (the "Washington Business
Act") of the State of Washington, as amended from time to time, indemnify all
directors and officers of the Company. In addition, each of the Company's and
NCN's articles of Incorporation contains a provision eliminating the personal
liability of directors to the Company or NCN or either of their respective
shareholders or its shareholders for monetary damages arising out of a breach of
fiduciary duty. Under Washington law, this provision eliminates the liability of
a director for breach of fiduciary duty but does not eliminate the personal
liability of any director for (i) acts or omissions of a director that involve
intentional misconduct or a knowing violation of law, (ii) conduct in violation
of Section 23B.08.310 of the Revised Code of Washington (which section relates
to unlawful distributions) or (iii) any transaction from which a director
personally received a benefit in money, property or services to which the
director was not legally entitled.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
or NCN pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended (the "Securities Act") and is, therefore, unenforceable.
Reference is made to the Purchase Agreement, a copy of which is filed as
Exhibit 10.4 hereto, which provides for indemnification of the directors and
officers of the Company and NCN against certain liabilities, including those
arising under the Securities Act, the Securities Exchange Act of 1934, as
amended or otherwise in certain circumstances.
II-1
<PAGE> 175
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS:
The following exhibits are filed pursuant to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------
<C> <S>
3.1* Articles of Incorporation of Northland Cable Television, Inc., as
Amended
3.2* Articles of Incorporation of Northland Cable News, Inc.
3.3* Bylaws of Northland Cable Television, Inc.
3.4* Bylaws of Northland Cable News, Inc.
4.1* Indenture among Northland Cable Television, Inc., Northland Cable News,
Inc. and Harris Trust Company of California dated as of November 12,
1997.
5.1 Opinion of Haythe & Curley
10.1* Amended and Restated Credit Agreement between Northland Cable
Television, Inc. and the First National Bank of Chicago as agent dated
as of November 12, 1997.
10.2* Management Agreement dated August 23, 1994 between Northland Cable
Television, Inc. and Northland Telecommunication Corporation.
10.3* Asset Purchase and Sale Agreement dated as of August 17, 1997 between
InterMedia Partners of Carolina, L.P. and Robin Cable Systems, L.P. as
Sellers and Northland Cable Television, Inc.
10.4* Purchase Agreement between Northland Cable Television, Inc., Northland
Cable News, Inc., BancAmerica Robertson Stephens and First Chicago
Capital Markets, Inc., dated November 6, 1997.
10.5* Registration Rights Agreement among Northland Cable Television, Inc.,
Northland Cable News, Inc., BancAmerica Robertson Stephens and First
Chicago Capital Markets, Inc. dated as of November 12, 1997.
10.6* First Amendment to Asset Purchase and Sale Agreement dated as of June 2,
1997 between Intermedia Partners of Carolina, L.P. and Robin Cable
Systems, L.P. as sellers and Northland Cable Television, Inc.
12.1* Computation of Deficiency of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Haythe & Curley (See Exhibit 5.1)
23.3 Consent of Price Waterhouse LLP.
24.1* Power of Attorney (See II-4 and II-5)
25.1* Statement of Eligibility of Trustee.
99.1* Form or Letter of Transmittal to Exchange 10 1/4% Senior Subordinated
Notes due 2007.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to Securities Dealers, Commercial Banks, Trust Companies
and Other Nominees.
99.4* Form of Letter to Clients.
</TABLE>
- ---------------
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES:
None.
II-2
<PAGE> 176
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the
adjudication of such issue.
With respect to the Securities registered on this form pursuant to Rule
415, the undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 177
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, as of February 12, 1998.
NORTHLAND CABLE TELEVISION, INC.
By: /s/ JOHN S. WHETZELL
-----------------------------------
Its: Chairman of the Board and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- ------------------
<C> <S> <C>
/s/ JOHN S. WHETZELL Chairman of the Board, February 12, 1998
- ----------------------------------------------- President and Director
John S. Whetzell (Principal Executive
Officer)
* Vice President (Principal February 12, 1998
- ----------------------------------------------- Financial and Accounting
Gary S. Jones Officer)
* Director February 12, 1998
- -----------------------------------------------
Richard I. Clark
Director
- -----------------------------------------------
John E. Iverson
*By: /s/ JOHN S. WHETZELL
- -----------------------------------------------
Attorney-in-fact
</TABLE>
II-4
<PAGE> 178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Seattle, State of Washington, as of February 12, 1998.
NORTHLAND CABLE NEWS, INC.
By: /s/ JOHN S. WHETZELL
------------------------------------
Its: Chairman of the Board and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- ------------------
<C> <S> <C>
/s/ JOHN S. WHETZELL Chairman of the Board, February 12, 1998
- ----------------------------------------------- President and Director
John S. Whetzell (Principal Executive
Officer)
* Vice President (Principal February 12, 1998
- ----------------------------------------------- Financial and Accounting
Gary S. Jones Officer)
* Director February 12, 1998
- -----------------------------------------------
Richard I. Clark
Director
- -----------------------------------------------
John E. Iverson
*By: /s/ JOHN S. WHETZELL
- -----------------------------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE> 179
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------------
<C> <S>
3.1* Articles of Incorporation of Northland Cable Television, Inc., as
Amended
3.2* Articles of Incorporation of Northland Cable News, Inc.
3.3* Bylaws of Northland Cable Television, Inc.
3.4* Bylaws of Northland Cable News, Inc.
4.1* Indenture among Northland Cable Television, Inc., Northland Cable News,
Inc. and Harris Trust Company of California dated as of November 12,
1997.
5.1 Opinion of Haythe & Curley
10.1* Amended and Restated Credit Agreement between Northland Cable
Television, Inc. and the First National Bank of Chicago as agent dated
as of November 12, 1997.
10.2* Management Agreement dated August 23, 1994 between Northland Cable
Television, Inc. and Northland Telecommunication Corporation.
10.3* Asset Purchase and Sale Agreement dated as of August 17, 1997 between
InterMedia Partners of Carolina, L.P. and Robin Cable Systems, L.P. as
Sellers and Northland Cable Television, Inc.
10.4* Purchase Agreement between Northland Cable Television, Inc., Northland
Cable News, Inc., BancAmerica Robertson Stephens and First Chicago
Capital Markets, Inc., dated November 6, 1997.
10.5* Registration Rights Agreement among Northland Cable Television, Inc.,
Northland Cable News, Inc., BancAmerica Robertson Stephens and First
Chicago Capital Markets, Inc. dated as of November 12, 1997.
10.6* First Amendment to Asset Purchase and Sale Agreement dated as of June 2,
1997 between Intermedia Partners of Carolina, L.P. and Robin Cable
Systems, L.P. as sellers and Northland Cable Television, Inc.
12.1* Computation of Deficiency of Ratio of Earnings to Fixed Charges.
21.1 Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Haythe & Curley (See Exhibit 5.1)
23.3 Consent of Price Waterhouse LLP.
24.1* Power of Attorney (See II-4 and II-5)
25.1* Statement of Eligibility of Trustee.
99.1* Form or Letter of Transmittal to Exchange 10 1/4% Senior Subordinated
Notes due 2007.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to Securities Dealers, Commercial Banks, Trust Companies
and Other Nominees.
99.4* Form of Letter to Clients.
</TABLE>
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* Previously filed.
<PAGE> 1
EXHIBIT 5.1
HAYTHE & CURLEY
237 Park Avenue
New York, NY 10017
February 12 ,1998
Northland Cable Television, Inc.
Northland Cable News, Inc.
1201 Third Avenue, Suite 3600
Seattle, Washington 98101
Re: Northland Cable Television, Inc. and
Northland Cable News, Inc.
Registration Statement on Form S-4
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-4 (the "Registration Statement") of Northland Cable Television, Inc., a
Washington corporation ("NCTV"), and Northland Cable Television, Inc., a
Washington corporation (the "Guarantor" and, together with NCTV, the "Company"),
which the Company has filed with the Securities and Exchange Commission relating
to the offer to exchange up to $100,000,000 principal amount of 10 1/4% Senior
Subordinated Notes due 2007 (the "Exchange Notes") for up to $100,000,000
principal amount of the Company's outstanding 10 1/4% Senior Subordinated Notes
due 2007 that were issued and sold in a transaction exempt from registration
under the Securities Act of 1933, as amended (the "Original Notes" and, together
with the Exchange Notes, the "Notes"). The Original Notes have been, and the
Exchange Notes will be, issued pursuant to an Indenture dated as of November 12,
1997 (the "Indenture") among the Company and Harris Trust Company of California,
as trustee, and the Original Notes are, and the Exchange Notes will be,
guaranteed (the "Subsidiary Guarantees") by the Guarantor.
We have examined such matters of fact and questions of law as we have
considered appropriate for purposes of this opinion. We have examined, among
other things, the terms of the Notes, the Subsidiary Guarantees and the
Indenture. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity to authentic original documents of all documents submitted to us
as copies.
We are opining herein as to the effect on the subject transaction only
of the federal securities laws of the united States and the laws of the State of
New York, and we express no opinion with respect to the applicability thereto,
or the effect thereon, of any other laws.
Based on the foregoing, we are of the opinion that:
(i) The Exchange Notes, when duly executed and authenticated in
accordance with the provisions of the Indenture, will be entitled to the
benefits of the Indenture and will be valid and binding obligations of the
Company, enforceable in accordance with their terms except as (x) the
enforceability thereof may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and (y) rights of acceleration and the
availability of equitable remedies may be limited by equitable principles of
general applicability; and
(ii) The Subsidiary Guarantee is entitled to the benefits of the
Indenture and is the valid and binding obligation of the Guarantor, enforceable
against the Guarantor in accordance with its terms except as
<PAGE> 2
(x) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (y) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
We have not reviewed and do not opine as to (x) local laws, (y) banking
laws, or (z) state securities or Blue Sky laws, rules or regulations.
We undertake no responsibility to advise you of any changes in the law
or the facts after the date hereof that would alter the scope or substance of
the opinion expressed herein.
We consent to being named in the Registration Statement and related
Prospectus as counsel who are passing on the legality of the Exchange Notes and
the Subsidiary Guarantee for the Company and to the reference to our name under
the caption "Legal Matters" in such Prospectus. We further consent to your
filing copies of this opinion as an exhibit to the Registration Statement or any
copies of this opinion as an exhibit to the Registration Statement or any
amendment thereto.
Very truly yours,
/S/ HAYTHE & CURLEY
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) as it relates to Northland Cable
Television, Inc. and subsidiary included in or made a part of this registration
statement.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
February 11, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Northland Cable Television, Inc. of our
reports dated October 10, 1997 relating to the financial statements of Aiken II
Cable Systems, a component of Robin Cable Systems, L.P., and the financial
statements of Greenwood Cable System, a component of InterMedia Partners of
Carolina, L.P., which appear in such Prospectus. We also consent to the
references to us under the heading "Experts," "Summary Historical and Pro Forma
Consolidated Financial Data" and "Selected Historical and proforma Consolidated
Financial Data" in such Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Summary Historical and
Proforma Consolidated Financial Data" or "Selected Historical and Proforma
Consolidated Financial Data."
/s/ PRICE WATERHOUSE LLP
San Francisco, California
February 12, 1998
