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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997 Commission File
No.
33-72468
33-72468-01
THE HELICON GROUP, L.P.
(Exact name of registrant as specified in its charter)
Delaware 4841 22-3248703
(State or other jurisdiction (Primary Standard (I. R. S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)
HELICON CAPITAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 4841 22-3248702
(State or other jurisdiction (Primary Standard (I. R. S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
(201) 568-7720
(Address, including Zip Code and telephone number,
including area code, of registrants' principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 Regulation S-K is not contained herein, and will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the Registrants: Not applicable.
The number of shares outstanding of the common stock of Helicon Capital
Corp., as of March 31, 1998:100
DOCUMENTS INCORPORATED BY REFERENCE:
Registration Statement No. 33-72468 on Form S-4 effective, February 3, 1994
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<PAGE>
TABLE OF CONTENTS
FORM 10-K
PART I PAGE
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ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 15
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 16
ITEM 6. SELECTED FINANCIAL DATA 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 22
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 22
ITEM 11. EXECUTIVE COMPENSATION 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 28
SIGNATURES 33
<PAGE>
PART I
ITEM 1. BUSINESS
General
The Helicon Group, L.P. ("THGLP" or the "Company") was organized as a
limited partnership on August 10, 1993 under the laws of the state of Delaware
to consolidate the ownership interests of Helicon Group, Ltd. ("Helicon"),
Terrebonne Cablevision, L.P., Roxboro Cablevision Associates, L.P. and Vermont
Cablevision Associates, L.P. (collectively, the "Predecessor Companies") in
connection with a roll-up plan completed on November 3, 1993 (the "roll-up"). As
a result of the roll-up, the Company acquired substantially all of the operating
assets and agreements of all the cable television systems which were previously
owned by the Predecessor Companies. The stockholders and the partners of the
Predecessor Companies became limited partners of the Company. The Company
operates under the name "Helicon Cable Communications". The general partner of
the Company is Baum Investments, Inc., a Delaware corporation, which is 100%
owned by Mr. Baum. On April 8, 1996, the Company became 99% owned by Helicon
Partners I, L.P. (HPI) and 1% owned by the Baum Investments, Inc., the general
partner, (See "Certain Relationships and Related Transactions" section). The
Company is managed by Helicon Corp., an affiliated management company.
Helicon Capital Corp., a Delaware corporation and a wholly-owned subsidiary
of the Company, was formed solely to be an co-issuer along with the Company of
$115,000,000 aggregate principal amount of 11% Senior Secured Notes (the "Senior
Secured Notes"). Helicon Capital Corp. had nominal assets as of December 31,
1996 and 1997 and had no operations from the date of incorporation to December
31, 1997.
Helicon Telephone Co., a Delaware corporation, is a wholly owned subsidiary
and Helicon Telephone Pennsylvania, LLC, a Pennsylvania limited liability
company, is a 99% owned subsidiary of the Company. Such subsidiaries, along with
certain other 99% owned limited liability companies which have not yet commenced
operations, were formed for the purpose of providing local exchange, intrastate
and interstate telecommunications services. As of December 31, 1997, Helicon
Telephone Co. , Helicon Telephone Pennsylvania, LLC, and the other 99% owned
limited liability companies had nominal assets and had no operations from the
dates of incorporation to December 31, 1997. On December 16, 1996, Helicon
Telephone Company, LLC filed an application with the Pennsylvania Public Utility
Commission for certification as a competitive local exchange carrier in the
service territory of Bentleyville Telephone Company. As of December 31, 1997,
this application was still pending.
Page 1 of 33
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The Company operates cable television systems located in Pennsylvania, West
Virginia, North Carolina, Louisiana, Vermont and New Hampshire (the "Systems").
At December 31, 1997, the Company's cable television systems passed
approximately 136,243 homes with 98,231 subscribers (customers). The Company has
typically established itself in a state through a large acquisition and has
added to the initially acquired system through acquisitions of nearby systems
and line extensions. In addition to acquisitions of systems in the ordinary
course of its business, the Company acquired large groups of subscribers in 1989
in Terrebonne and LaFourche, Louisiana, in 1992 in Barre and St. Johnsbury,
Vermont and Haverhill, New Hampshire and in 1997 in Watauga County, Blowing
Rock, Beech Mountain and the Town of Boone, North Carolina.
Helicon Corp. is responsible for the day-to-day management of the Systems
pursuant to an existing management agreement. Helicon Corp. is owned and
controlled by Mr. Theodore Baum. Management fees relating to the Systems are
payable monthly in an amount equal to five percent (5%) of gross revenues from
the operation of the Systems subject to certain limitations.
A cable television system receives television, radio and data signals at
the system's "headend" site by means of over-the-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 originate its own television programming and
other information services for distribution through the system. 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 Company's Systems offer customers various levels of cable services
consisting of broadcast television signals of local network affiliates,
independent and educational television stations, a limited number of television
signals from so-called "super stations," numerous satellite-delivered,
non-broadcast channels, programming originated locally by the respective cable
television system and informational displays featuring news, weather, stock
market and financial reports and public service announcements. For an extra
monthly charge, the Systems also offer "premium" television services to their
customers. For an additional event charge, the Systems offer pay-per-view
services consisting of recently released movies and special events including
boxing and wrestling matches, other sporting events and concerts.
A customer generally pays an initial installation charge and fixed monthly
fees for basic, premium and new product tier ("NPT") television services and for
other services (such as the rental of converters or other equipment). Such
monthly service fees constitute the primary source of revenues for the Systems.
The Systems currently offer customers various levels of cable television
services consisting of a combination of broadcast television signals and
satellite television signals.
Page 2 of 33
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The service options offered by the Company vary from System to System,
depending upon a System's channel capacity and viewer interests. Rates for
services also vary from market to market and according to the type of services
selected. Since September 1, 1993, when the Federal Communications Commission
(the "FCC") rate regulation commenced, each of the Systems, except the Vermont
System, has offered customers both broadcast services and satellite ("cable
programming") services as its basic package, and super-stations and other
satellite services on a new programming service tier basis, as well as several
premium services. The Vermont System offers both a broadcast basic, an expanded
level of basic with only satellite services, an NPT tier package, as well as
several premium services. Each channel within an NPT package is also available
on an individual a la carte basis.
For an extra monthly charge, the Systems offer "premium" television
services to their customers. These services (such as HBO(R), Cinemax(R),
Showtime(R), The Movie Channel(R), The Disney Channel(R) and regional sports
networks) are satellite-delivered channels that consist principally of feature
films, live sporting events, concerts and other special entertainment features,
usually presented without commercial interruption. Approximately eighty-eight
percent of the subscribers are offered pay-per-view ("PPV") which allow them to
purchase current release movies (after theatrical distribution) and other top,
live sporting events (primarily boxing and wrestling matches) and concerts. The
Systems receive additional fees from customers for such PPV programming, and
from the sale of available advertising spots on advertiser-supported satellite
channels. The Systems also offer home shopping services to their customers, and
the Systems share in the revenues from sales of products in the Systems' service
areas.
In recent years, the Company has begun to install converters in the Systems
that can be "addressed" by sending coded signals from the headend over the cable
network. Addressable converters enable the system operator automatically to
change the customer's level of service without visiting the customer's home.
Addressable converters improve system programming flexibility, enable the
operator to simplify its billing procedures, allow customers the option of
changing their levels of service on short notice and enable customers to select
and order pay-per-view programming events using the converter's on-line
capability.
In 1996, the Company began to purchase advanced analog addressable
converters manufactured by General Instrument ("CFT-2200's") for its
Pennsylvania system. In 1997, the Company began offering the interactive
StarSight navigational program guide, which enables customers to make on-screen
selections of any programs available, in its Pennsylvania and North Carolina
systems.
In March 1996, the Company began providing dial tone Internet Service to
customers in its Pennsylvania system. On April 1, 1997, the Company transferred
the net assets of the telephone dial-up internet access provider business to
HPI.
On April 8, 1996, the Company acquired a 1% equity interest in HPI
Acquisition Co., LLC, a newly formed affiliated entity organized for the purpose
of acquiring and operating cable systems.
Page 3 of 33
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On August 1996, the Company entered into a contract with a national paging
company and began offering paging service in its Louisiana cable systems. In
1997, the Company offered paging service in its Pennsylvania and Vermont cable
systems. The Company is planning to offer paging service to some of its other
cable systems in 1998.
In January 1997, the Company began offering private data network systems
and cable modems to customers and is planning to offer these services to all of
its cable systems in 1998.
Programming
The United States Congress has enacted the Cable Television Consumer
Protection and Competition Act of 1992 ("the 1992 Cable Act") under which cable
television operators are required to obtain retransmission consent from
commercial broadcast stations, except for established superstations and
noncommercial educational stations ("exempt stations"), in return for the right
to continue to carry their television signals. Alternatively, a local commercial
broadcaster can demand carriage under the 1992 Cable Act's "must-carry"
provisions, although in such event the cable television operator cannot seek
compensation from the local broadcaster for such carriage. Historically, the
Company has not paid fees for retransmission of local broadcast signals other
than mandatory copyright fees. The Company obtained retransmission consents for
the signals of all the commercial broadcast stations which it carries (and which
are not "exempt stations" or stations which invoke must carry provisions) on
terms which will not have a material adverse effect on the Company. Under the
1992 Cable Act, stations must elect "must carry" or retransmission consent every
three years. The next election is in the fall of 1999. The Company does not
anticipate any material changes from the current signal carriage structure.
Helicon Corp., a management company managing the Company's Systems, has
various contracts to obtain basic, satellite and premium programming for the
Systems from program suppliers with compensation being 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 to Helicon Corp. Helicon Corp.'s programming
contracts are generally for fixed periods of time ranging from three to ten
years and are subject to negotiated renewal. Helicon Corp. currently supplies
the programming it receives to THGLP pursuant to a Programming Supply Agreement
with THGLP dated November 3, 1993. THGLP pays to Helicon Corp. only the costs
incurred by Helicon Corp. under the respective programming agreements. No
assurances can be given that Helicon Corp.'s programming costs will not increase
substantially in the near future, or that other materially adverse terms will
not be added to Helicon Corp.'s programming contracts. Management believes,
however, that Helicon Corp.'s relations with its programming suppliers generally
are good.
Cable programming costs are expected to continue to increase due to the
additional programming provided to basic customers, increased costs to produce
or purchase cable programming, inflationary increases, regulation and other
factors. Increases in the cost of premium programming services have been offset
in part by additional volume discounts as a result of increases in the number of
customers of the systems managed by Helicon Corp. In 1995, 1996 and 1997,
programming costs as a percentage of revenues were 19.2%, 19.3% and 20.9%
respectively. The 1992 Cable Act permits full recovery of regulated basic and
cable programming tier program cost increases under its rate "price cap"
regulations.
Page 4 of 33
<PAGE>
Cooperative. The Company became a member of the National Cable Television
Cooperative ("NCTC") in 1986. Through the NCTC's 8.5 million subscriber
membership purchasing power, the Company has been able to obtain additional
favorable programming discounts. This has enabled the Company to reduce many of
its programming expenses to levels similar to some of the major cable television
multi-system operators. NCTC has announced that it will attempt to acquire bulk
rate pricing for its members for purchases of digital converters. If NCTC is
successful, the cost of digital converters to the Company will decrease.
Franchises
Cable television systems generally operate under non-exclusive franchises
granted by local governmental authorities. These franchises typically contain
many conditions, such as time limitations on commencement and completion of
construction; conditions of service, including number of channels types of
programming and the provision of free service to schools and certain other
public institutions; and the maintenance of insurance and indemnity bonds and
non-compliance penalties, forfeiture and termination clauses and other material
provisions. Certain provisions of local franchises are subject to Federal
regulation under both the 1984 Cable Act, which created national standards and
guidelines for the regulation of cable television systems, and the 1992 Cable
Act.
The 1984 Cable Act provides, among other things, for an orderly franchise
renewal process in which renewal of franchise licenses issued by governmental
authorities will not be unreasonably withheld or, if renewal is withheld and the
franchise authority chooses to acquire the system, such franchise authority must
pay the operator either (i) the "fair market value" (without value assigned to
the franchise) for the system covered by such franchise if the franchise did not
exist before the October 1984 effective date of the 1984 Cable Act, or if the
franchise was pre-existing but the franchise agreement did not provide for a
buyout, or (ii) in the case of pre-existing franchises with buyout provisions,
the price set forth in such franchise agreements. In addition, the 1984 Cable
Act establishes 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", below. The Company believes that it has good relationships with its
franchising communities. To date, the Company has never had a franchise revoked
for any of the Systems, and no request of the Company for franchise renewals or
extensions has been denied, although such renewed or extended franchises have
frequently resulted in franchise modifications on terms satisfactory to the
Company.
The 1984 Cable Act also established buyout rates for franchises which
post-date the existence of the 1984 Cable Act or pre-date the 1984 Cable Act but
the franchise agreement does not contain buyout provisions; in the event the
franchise is terminated "for cause" and the franchise authority desires to
acquire the system, the franchise authority must pay the operator an "equitable"
price. If the franchise pre-dates the 1984 Cable Act and the franchise agreement
does provide for a buyout in the event of termination, the terms of the
franchise agreement govern. To date, none of the Company's franchises have been
terminated. See "Legislation and Regulation", below.
Page 5 of 33
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As of December 31, 1997, the Systems held 92 franchises. These franchises
generally provide for the payment of fees to the issuing authority. Annual
franchise fees imposed on the Systems range up to 5% of the Subscriber revenues
generated by a System. For the past three years, franchise fee payments made by
THGLP have averaged approximately 1.8% of total gross System revenues. Franchise
fees are passed directly through to the customers on their monthly bills.
General business or utility taxes may also be imposed in various jurisdictions.
The 1984 Cable Act prohibits franchising authorities from imposing franchise
fees in excess of 5% of gross revenues and also permits the cable operator to
seek re-negotiation 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.
The following table groups the Company's Subscribers by year of franchise
expiration, where applicable.
Year of Numb Percentage of Number of
Franchise Expiration Subscribers Subscribers Franchises
- -------------------- ----------- ----------- ----------
1998 897 .9% 1
1999-2003 45,262 46.1% 40
2004-2008 22,686 23.1% 35
2009 and after 3,582 3.6% 5
No expiration 16,847 17.2% 11
No Franchise 3,462 3.5% --
Grandfathered under 1984
Cable Act 5,495 5.6% --
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Total 98,231 100% 92
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The Company operates certain systems which serve multiple communities and,
in some circumstances, portions of such systems serving approximately 203
subscribers, comprising approximately 0.2% of the Company's subscribers, extend
into jurisdictions for which the Company believes no franchise is necessary. In
addition, the Company has been operating in six communities in West Virginia
without any franchise having been formally issued, although the Company has
applied for the grant of such franchises. In view of the length of time that the
Company has been operating in such communities and the small number of
subscribers located therein, the Company believes that there is no significant
risk that it will be unable to continue operating therein without a franchise.
The non-franchised communities serve 4,429 subscribers, in West Virginia and
1,066 subscribers in Pennsylvania, comprising approximately 5.6% of the
subscribers in all of the Systems.
Competition
The Systems compete with other communications and entertainment media,
including conventional over-the-air local broadcast television service. Cable
television systems also are susceptible to competition from other video
programming delivery systems, from other forms of home entertainment such as
video cassette recorders, and, in varying degrees, from sources of entertainment
in the community, including motion picture theaters, live theater and sporting
events. The Telecommunications Act of 1996 has increased the potential for
competition, especially from telephone and electric utilities, significantly.
(See discussion of the 1996 Act below).
Page 6 of 33
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In recent years, the FCC has adopted policies encouraging new technologies
and providing a more favorable operating environment for certain existing
technologies that compete with cable television. Such policies have the
potential to create substantial additional competition to cable. These
technologies include, among others, DBS services whereby signals are transmitted
by satellite to receiving facilities located on the premises of the DBS
subscribers. Earth stations designed for private home use now enable individual
households to receive much of the satellite-delivered programming services
formerly available only to cable television subscribers. Although DBS does not
provide subscribers with local broadcast stations, recently some DBS providers
have announced their intention to do so, subject to favorable action by Congress
and/or the U.S. Copyright Office to approve such service. DBS service has been
successfully marketed throughout the country, including areas where the Company
operates Systems. The Company believes, that, compared to DBS operators, the
Company is a lower cost provider of comparable programming to customers. It is,
however, anticipated that DBS operators will, in the future, package programming
on a more desirable basis for customers and/or lower the high costs associated
with DBS when compared to the cost of obtaining cable television service. The
Company expects increasing competition from DBS providers.
Cable television systems also may compete with wireless program
distribution services which generally utilize low power microwave frequencies to
transmit television programming over-the-air to subscribers ("MMDS"). The
ability of MMDS to compete with cable television systems has been limited in the
past by the limited amount of frequency capacity. Under amended FCC regulations,
MMDS systems compete more effectively with cable television systems by using
additional frequencies. The Company currently competes with Wireless One, an
MMDS operator in its Terrebonne Parish, Louisiana System.
Additional competition exists from private cable television systems serving
condominiums, apartment complexes and other private residential developments.
The operators of these private systems known as Master Antenna Television
("MATV") and Satellite Master Antenna Television ("SMATV"), often enter into
exclusive agreements with apartment building owners or homeowners associations
that preclude operators of franchised cable television systems from serving
residents of such private complexes. Moreover, a private cable television system
normally is free of the regulatory burdens imposed on franchised cable
television systems. The Company currently does not compete with SMATV and MATV
systems in its areas and only serves an insignificant number of customers in
apartment complexes.
Since the Systems operate under non-exclusive franchises, other operators
(including municipal franchising authorities themselves as well as, telephone
and electric utilities) may obtain permission to build cable television systems
in areas in which the Systems presently operate. To date, there is competition
from such operators in less than 0.5% of the existing mileage in the Company's
franchise areas. In the Fall of 1996, Bentleyville Telephone Company ("BTC"),
which operates local telephone service in the Borough of Bentleyville,
Pennsylvania, began to build a cable system in the Borough of Bentleyville where
the Company provides services to approximately 862 customers and in February
1997, BTC began offering a
Page 7 of 33
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42 channel basic cable service in competition with the company's 62 channel
basic cable service. The Company has been able to effectively compete with BTC.
The Company also anticipates that, over time, it will become subject to
increasing competition from other telephone companies. This may have a material,
but as yet undeterminate, impact on the Company's operations.
The Telecommunications Act of 1996, Public Law 104-104, enacted on February
8, 1996, ("1996 Act") instituted sweeping changes in the telecommunications
industries. The 1996 Act allows telephone companies, including the regional bell
operating companies and others, to compete in their local telephone service
areas with cable operators by repealing the telephone company cable television
cross-ownership ban, thereby allowing direct ownership of franchised cable
systems. Cable systems could be placed at a competitive disadvantage if the
delivery of video program services by local telephone companies becomes
widespread because cable systems are required to obtain local franchises to
provide cable service and must comply with a variety of obligations under such
franchises. Issues of cross-subsidization by local telephone companies pose
strategic disadvantages for cable operators to compete with local telephone
companies providing video services. Additionally, the 1992 Cable Act insures
that telephone company providers of video services will have the opportunity to
acquire and offer to subscribers all significant cable programming services.
The 1996 Act amends the Public Utilities Holding Company Act and permits
electric utilities to provide telecommunication services (including cable
television), provided they do so through separate subsidiaries. It is expected
that many large utility companies, which have already installed fiber backbone
for signaling and metering purposes, will now become significant competitors to
cable television.
The 1996 Act also substantially eliminates the barriers to competitors,
including cable operators, entering into the business of local telephone
exchange service and other telecommunications services traditionally provided by
the local exchange carrier. It declares that no state or local laws or
regulations may prohibit or have the effect of prohibiting the ability of any
entity to provide any interstate or intrastate telecommunications service.
Nevertheless, many states and local authorities have continued to erect barriers
to cable operators desiring to provide telecommunications services.
On December 16, 1996, Helicon Telephone Pennsylvania, LLC filed an
application with the Pennsylvania Public Utility Commission for certification as
a competitive local exchange carrier in the service territory of Bentleyville
Telephone Company. At December 31, 1997 this application was still pending.
Advances in communications technology and changes in the marketplace are
constantly occurring. Therefore, it is not possible to predict the extent to
which the Company will be adversely affected by competition or the effect which
ongoing future developments might have on the Systems or on the cable television
industry generally.
Page 8 of 33
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Employees
At December 31, 1997, the Company had 180 full-time employees. The Company
considers its relations with its employees to be good. In the Company's
Pennsylvania System, 40 employees (18 technical and 22 clerical) are represented
by two unions and are covered by collective bargaining agreements. The
collective bargaining agreement covering technical employees was recently
reviewed and will expire on December 31, 1999 and the collective bargaining
agreement covering clerical employees is scheduled to expire on December 31,
1998. No other employees of the Company are represented by unions.
Legislation and Regulation
The cable television industry is subject to extensive governmental
regulation at the Federal, state and local level. In addition, various
legislative and regulatory proposals, such as tax reform proposals and proposals
to revise the Copyright Act of 1976, may materially affect the cable television
industry. The following is a summary of Federal laws and regulations that
currently materially affect the growth and operation of the cable television
industry, and a summary of certain state and local regulations.
This section does not purport to be a summary of all present and proposed
Federal, state and local regulations and legislation relating to the cable
television industry. Other existing Federal regulations, copyright licensing,
and, in many jurisdictions, state and local franchise and regulatory
requirements, currently are the subject of a variety of judicial proceedings,
legislative hearings, and administrative and legislative proposals which could
change, in varying degrees, the manner in which cable television systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable industry or the Company can be predicted at this time.
1984 Cable Act
Congress enacted the 1984 Cable Act to create uniform national standards
and guidelines for the regulation of cable television systems. Among other
things, the 1984 Cable Act affirmed the right of franchising authorities (state
or local, depending on the practice in individual states) to award one or more
franchises within their jurisdictions. It also prohibited post-1984 Cable Act
cable television systems from operating without a franchise in such
jurisdiction. In connection with new franchises, the 1984 Cable Act provides
that in granting or renewing franchises, franchising authorities may establish
requirements for cable-related facilities and equipment, but may not specify
requirements for video programming or information services other than in broad
categories.
The 1984 Cable Act preempted local control over rates for premium channels
and optional program tiers, as well as deregulating rates for basic cable
services in areas where the cable operator was subject to "effective
competition" to be defined by the FCC. The FCC's original definition of
"effective competition", the presence of at least three off-air broadcast
signals in the cable community, effectively de-regulated rates for most cable
systems following the 1984 Cable Act. This scheme was altered significantly by
the 1992 Cable Act, discussed below.
Page 9 of 33
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Although franchising authorities may impose franchise fees under the 1984
Cable Act, such payments cannot exceed 5% of a cable television system's annual
gross revenues. In those communities in which franchise fees are required, the
Company currently pays franchise fees ranging from flat annual fees equal to
less than 1% of gross revenues to fees of 5% of gross revenues. Franchising
authorities are also empowered to require cable operators to provide
cable-related facilities, equipment and, in the case of pre-1984 Cable Act
franchises, services to the public and to enforce compliance with such franchise
requirements and voluntary commitments. When changed circumstances render such
compliance commercially impracticable, however, the 1984 Cable Act provides for
franchising authorities to renegotiate franchise requirements and, under certain
circumstances, permits the cable operator to make changes in programming without
local approval.
The 1984 Cable Act established renewal procedures designed to protect
incumbent franchisees against arbitrary denials of renewal. This statute
requires that franchising authorities consider a franchisee's past performance
and renewal proposal on their own merits in light of community needs and without
comparison to competing applicants. Nevertheless, renewal is not assured, as the
franchisees must meet certain statutory standards. Moreover, even if a franchise
is renewed, a franchising authority may impose new and more onerous requirements
such as upgrading of facilities and equipment, although the municipality must
take into account the costs of meeting such requirements. Also, the franchising
authority may require higher franchise fees, up to the 5% of annual gross
revenues limit established by the 1984 Cable Act, as a condition of renewal.
The 1984 Cable Act permits local franchising authorities to require cable
television operators to set aside certain channels for public, educational, and
governmental access programming. The 1984 Cable Act further requires cable
television systems with 36 or more channels to designate a portion of their
channel capacity for commercial leased access by third parties. Although there
has been limited activity in this area nationally, it is possible that such
leased access will result in competition to services offered over the cable
television system, particularly since the 1992 Cable Act, discussed below,
empowers the FCC to set the rates and conditions for such leased access channels
and the FCC has adopted rates and other rules designed to increase use of leased
channels by third party programmers.
1992 Federal Cable Legislation
Congress enacted the 1992 Cable Act in order to effect significant change
in the regulatory framework under which cable television systems operate. After
implementation of the 1984 Cable Act, rates for cable television service were
unregulated for substantially all of the Systems. One of the purposes of the
1992 Cable Act was to re-impose rate regulations for most cable systems.
Page 10 of 33
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Rate Regulation
The 1992 Cable Act requires each cable television system to establish a
basic service tier consisting, at a minimum, of all local broadcast signals and
all non-satellite delivered distant broadcast signals which the system wishes to
carry and all public, educational and governmental access programming. Nearly
all cable systems became subject to local rate regulation of basic service.
Franchising authorities were empowered to apply FCC regulations to ensure that
basic rates were reasonable and that rates for equipment, including
installation, converters, and additional outlets, were based on actual cost. In
addition, the 1992 Cable Act provided for regulation by the FCC of the rates for
cable programming service ("CPS") tiers, defined as tiers of service other than
the basic service tier. Under this regulatory scheme, many cable systems were
required to reduce rates and to limit future rate increases for basic service
and equipment, and for other tiers of service. Services offered on a per-channel
or per-program basis are not subject to rate regulation by either municipalities
or the FCC.
In June 1995, the FCC instituted rules granting significant regulatory
relief to "small cable companies" and "small systems", those serving 15,000 or
fewer subscribers owned by companies of 400,000 or fewer subscribers. Such
systems are allowed to use a simplified rate formula which presumes rates up to
$1.24 per channel are reasonable. "Small system" status transfers if the system
is subsequently sold to a large company. Moreover, under the 1996 Act, as
discussed below, the Company qualifies for small cable system status and is
effectively deregulated.
Under the 1992 Cable Act, cable television systems may not require
subscribers to purchase any service tier other than the basic tier as a
condition of access to video programming offered on a per-channel or per-program
basis. Cable television operators who do not already have the necessary
equipment in place to comply with this requirement must implement the technology
to facilitate this access by the year 2002. Currently, only the North Carolina
System does not have such technology in place.
Carriage of Television Broadcast Signals.
Commercial television broadcast stations which are "local" to a cable
system, i.e., the system is located in the station's Area of Dominant Influence,
must elect every three years whether to require the cable system to carry the
station, subject to certain exceptions, or whether the cable system must
negotiate and compensate the broadcaster for "retransmission consent" to carry
the station. Local noncommercial television stations also are given similar
mandatory carriage rights, but are not given the option to negotiate
retransmission consent for the carriage of their signals.
Other Requirements
In addition, the 1992 Cable Act (i) requires cable television programmers
under certain circumstances to offer their programming to present and future
competitors of cable television such as MMDS, SMATV and DBS operators at not
unreasonably discriminatory prices, (ii) directs the FCC to set standards for
limiting the number of channels that a cable television system operator could
program with programming services controlled by such operator and prohibits new
exclusive contracts with program suppliers without FCC approval, (iii) bars
municipalities from unreasonably refusing to grant additional competitive
franchises, (iv) regulates the ownership by cable television operators of other
media such as MMDS and SMATV.
Page 11 of 33
<PAGE>
The FCC has imposed new regulations under the 1992 Cable Act in the areas
of customer service, technical standards, compatibility with other consumer
electronic equipment such as "cable ready" television sets and video cassette
recorders, equal employment opportunity, subscriber privacy, rates for leased
access channels, obscenity and indecency, and disposition of a customer's home
wiring. In October 1997 the FCC revised its rules to permit, under certain
circumstances, competitive SMATV and MMDS services to take over the cable
operator's wiring inside the common areas of a multiple dwelling unit. In
addition, further rule changes, which are intended to further increase
competition to cable systems serving multiple dwelling units, are under
consideration by the FCC.
The Telecommunications Act of 1996.
The Telecommunications Act of 1996, Public Law 104-104, ("1996 Act") was
enacted on February 8, 1996. This new law significantly alters federal, state
and local regulation of telecommunications providers and services, including the
cable television industry and the Company. The following is a summary of the key
provisions of the 1996 Act which could materially affect the cable television
industry and the Company.
Competition to Cable Television
The 1996 Act instituted sweeping changes in the telecommunications
industries and has significantly increased the potential for competition to
cable television, especially from telephone and electric utilities.
(See discussion under the previous topic "Competition)
Cable Rate Regulation. Under the 1996 Act, the Company qualifies for small
cable system status and is effectively deregulated. Immediate CPS tier rate
regulation relief is afforded to "small cable operators", those with fewer than
approximately 600,000 subscribers and less than $250 million gross annual
revenues and with less than 50,000 subscribers in the rate regulated franchise
area. The 1996 Act eliminates as of March 31, 1999, all rate regulation of any
upper cable program service "CPS" tier service, although certain members of
Congress and FCC officials have called for postponement of this regulatory
sunset and have also urged more rigorous rate regulation generally. The 1996 Act
does not disturb existing or pending CPS tier rate settlements, nor does it
eliminate regulation of rates for Basic Service Tiers (except that cable systems
which had, as of December 31, 1994, only one tier of service are fully
deregulated).
Cable Uniform Rate Requirements. The 1996 Act amends the requirement that
cable rates be uniform throughout a franchise area to exempt situations where
the cable operator faces "effective competition," and by permitting bulk
discounts to multiple dwelling units. The FCC retains jurisdiction to
investigate complaints of "predatory pricing".
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<PAGE>
Cable Equipment Compatibility, Scrambling Requirements. The 1996 Act
directs an FCC equipment compatibility rulemaking looking toward (1) some form
of common design among televisions, VCRs, and cable systems, (2) open
competition for all converter features unrelated to security descrambling, and
(3) minimal impact on unrelated telephone and computer features. The FCC is
directed to adopt regulations which assure the competitive availability of
converters ("navigation devices") from vendors other than cable operators. Any
FCC rules in this area cannot impinge upon signal security concerns or theft of
service protections for cable operators.
Ownership Restrictions and Market Entry. The 1996 Act allows telephone
companies to compete directly with cable operators by repealing the historic
telephone company/cable cross-ownership ban. This allows Local Exchange Carriers
("LEC") including the Regional Bell Operating Companies, to compete with cable
operators both inside and outside their telephone service areas. Because of
their resources, LECs could be formidable competitors to traditional cable
operators, and certain LECs have begun offering cable service.
The 1996 Act also provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utility Holding Company Act of 1935, as
amended. Because of their resources, utilities could be formidable competitors
to traditional cable systems. (See discussion under "Competition.")
The 1996 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
television stations and cable systems. The 1996 Act also eliminates the three
year holding period previously required under a statutory provision regarding
"anti-trafficking." The present federal regulatory scheme leaves in place
existing restrictions on cable cross-ownership with SMATV and MMDS facilities,
but lifts those restrictions where the cable operator is subject to effective
competition. However, the FCC has adopted regulations which permit cable
operators to own and operate SMATV systems within their franchise area, provided
that such operation is consistent with local cable franchise requirements.
Pole Attachments The FCC currently regulates the rates and conditions
imposed by most public utilities for use of their poles, unless, under the
Federal Pole Attachment Act, state public service commissions are able to
demonstrate that they regulate the cable television pole attachment rates (as is
true in certain states in which the Company does business). In the absence of
state regulation, the FCC administers pole attachment rates though the use of a
formula which it has devised.
The 1996 Act introduces several changes to the regulation of cable pole
attachments that could affect the Company. Pursuant to that law, the FCC
recently established a new formula for poles used by cable operators which
eventually will result in higher pole rental rates. This new FCC formula does
not apply in states which certify they regulate pole rents.
Page 13 of 33
<PAGE>
Copyright
Cable television systems are subject to Federal copyright licensing,
covering carriage of television broadcast signals. In exchange for contributing
a percentage of their revenues to a Federal copyright royalty pool, cable
television operators obtain a compulsory license to retransmit copyrighted
materials from broadcast signals. Existing Copyright Office regulations require
that compulsory copyright payments be calculated on the basis of revenue derived
from any service tier containing broadcast retransmissions. Although the FCC has
no formal jurisdiction over this area, it has recommended to Congress that the
compulsory copyright scheme be eliminated. The U.S. Copyright Office has
similarly recommended such a repeal. Without the compulsory license, cable
television operators would need to negotiate rights from the copyright owners
for each program carried on each broadcast station in the channel lineup. Such
negotiated agreements could increase the cost to cable television operators of
carrying broadcast signals. Thus, given the uncertain but possible adoption of
this type of copyright legislation, the nature or amount of the Company's future
payments for broadcast signal carriage cannot be predicted at this time.
State and Local Regulations
Cable television systems are generally operated pursuant to franchises,
permits or licenses, issued by a municipality or other local and/or state
government entity. Franchises are usually issued for fixed terms and must
periodically be renewed. Most of the franchises for the Systems were granted on
a nonexclusive basis. The 1992 Cable Act prohibits local authorities from
granting exclusive franchises or unreasonably refusing to award competing
franchises. Each franchise agreement generally contains provisions governing
subscriber charges for basic cable television services, fees to be paid to the
franchising authority, length of the franchise term, renewal and sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public streets and number of
types of cable television services provided. Though the 1984 Cable Act provides
for certain procedural protections, there can be no assurance that renewals will
be granted or that renewals will be made on similar terms and conditions. See
"1984 Cable Act".
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. States where the Company operates Systems,
including Vermont and West Virginia, have enacted legislation with respect to
the regulation of cable television systems.
ITEM 2. PROPERTIES
The Company's principal physical asset consist of cable television systems,
including signal-receiving, encoding and decoding electronics, headends,
distribution systems, and subscriber house drop equipment for each of its cable
television systems. The signal receiving apparatus typically includes a tower,
antenna, 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, are
located near the receiving devices. The Company's distribution systems consist
of coaxial and fiber optic cables and related electronic equipment. Subscriber
equipment consists of taps, house drops and
Page 14 of 33
<PAGE>
converters. The Company owns its distribution system, various office and studio
fixtures, test equipment and service vehicles. The physical components of the
Systems require maintenance and periodic upgrading to keep pace with
technological advances. The Company considers all of its properties to be in
excellent condition.
The Company's cables generally are attached to utility poles under pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in underground ducts or trenches. The FCC regulates
most pole attachment rates under the Federal Pole Attachment Act. The physical
components of the Systems require maintenance and periodic upgrading to keep
pace with technological advances.
The Company owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices.
The Company believes that its properties, both owned and leased, are in good
condition and in areas suitable and adequate for the Company's business
operations. Management believes that the Company's franchises and licenses in
each of the Township of North Union, Pennsylvania; the City of Uniontown,
Pennsylvania; Terrebonne Parish, Louisiana; the communities in Vermont and
Watauga County and the Town of Boone, North Carolina ( taken as a whole) are
material to the results of operations of the Company. Additionally, the headend
sites used by the Systems in such locations are material to the Company
regardless of whether such headend sites are owned or leased; and the Company's
private pole agreements in such locations are material to the Company.
Substantially all of the assets of the Company, including the Systems, are
subject to liens of the Company's lenders.
See "Management -- Certain Relationships and Related Transactions" for a
description of office space leased from an affiliated entity.
The Pennsylvania System serves Uniontown, Shippenville, Mariana and other
contiguous areas of western Pennsylvania. The West Virginia System serves
subscribers throughout western West Virginia and communities surrounding
Charleston, West Virginia. On January 31, 1997, the Company acquired subscribers
in the West Virginia counties of Wirt and Wood, for a purchase price of
$1,053,457. The Vermont/New Hampshire System serves Barre, St. Johnsbury and the
Upper Valley areas of eastern Vermont and Piermont, New Hampshire. In 1994, the
Company was awarded the East Mountpelier franchise in Vermont which is
contiguous to Barre. On January 31, 1995, the Company acquired subscribers in
Bradford, Chelsea, and South Royalton, Vermont which are contiguous to Barre and
Upper Valley, Vermont, for a purchase price of $350,000. The Company applied to
the Vermont Public Service Bureau and has obtained a franchise for the Town of
Tunbridge which is contiguous to South Royalton and Chelsea. The Louisiana
System serves Terrebonne, Lafourche and St. Mary's Parish (Amelia) Louisiana.
The North Carolina System serves the City of Roxboro, Person County and the
eastern part of Caswell County in northeastern North Carolina. On June 26, 1997,
the Company acquired subscribers in the North Carolina communities of Watauga
County, Blowing Rock, Beech Mountain and the Town of Boone, for a purchase price
of $19,947,430.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to ordinary and routine litigation proceedings that
are incidental to the Company's business. Management believes that the outcome
of all pending legal proceedings will not, in the aggregate, have a material
adverse effect on the financial condition of the Company.
Page 15 of 33
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by this Item is not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information called for by this Item is not applicable.
ITEM 6. SELECTED FINANCIAL DATA
The financial data set forth below has been derived from the Financial
Statements of the Company. The data below ($ in 000's) should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this report.
<TABLE>
<CAPTION>
1993(a) 1994 1995 1996 1997
------- ------- ------- ------- -------
Income Statement Data: ($ in 000's)
<S> <C> <C> <C> <C> <C>
Revenues $29,448 $31,664 $35,225 $38,060 $42,946
Depreciation and amortization 10,314 9,453 9,561 10,127 11,204
Operating income (loss) (1,381) 5,828 7,580 8,144 9,041
Interest expense 9,498 12,477 12,992 13,497 14,520
Net loss (18,361) (7,343) (5,196) (5,142) (5,357)
<CAPTION>
Balance Sheet Data: ($ in 000's)
=========================================================
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total assets $69,942 $63,207 $60,938 $58,146 $72,607
Total debt 117,170 119,104 122,675 124,382 143,341
Shareholders' and partners' deficit (54,915) (62,258) (67,453) (72,596) (77,953)
</TABLE>
(a) 1993 net loss includes an extraordinary item-loss on extinguishment of debt
of $3.7 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company incurred a net loss for the fiscal years ended December 31,
1995, 1996 and 1997, respectively. The principal items contributing to the
Company's net losses are the high level of expenses relating to depreciation,
amortization and interest. These expenses are the result of capital expenditures
related to continued expansion and rebuilding of the Systems, the Company's
acquisitions and its financing activities. The Company believes that recurring
net losses are common for cable television companies and expects that such net
losses will continue. The Company believes that working capital generated from
the issuance of the Senior Secured Notes and cash flow generated from operations
will be sufficient to meet its operating needs and future commitments. See
"Liquidity and Capital Resources" below.
Page 16 of 33
<PAGE>
Results of Operations
Twelve Months Ended December 31, 1997 Compared to Twelve Months Ended
December, 1996.
Revenues. Revenues increased $4,885,993 or 12.8% to $42,945,730.
Approximately 45% of the increase in revenues was attributed to the June 26,
1997 acquisition of a cable television system in North Carolina. The balance of
the increase was primarily due to higher basic service and new program service
rates and strong growth in advertising revenue. Excluding the effects of the
North Carolina acquisition, the average monthly cable revenue per basic
subscriber increased from $36.07 in 1996 to $38.72 in 1997. The $2.65 increase
reflected primarily i) an increase of $1.59 in basic revenues; ii) an increase
of $.58 due to the new program services; iii) an increase of $0.37 in
advertising revenue; iv) a increase of $.10 in premium subscription revenue; and
v) an increase of $.01 in other services.
Operating, Marketing, General and Administrative Expenses. Operating,
marketing, general and administrative expenses increased $2,620,146 or 14.9% to
$20,160,815. Approximately 45% of the increase in expenses was attributed to the
North Carolina cable television system acquisition and approximately 25%
reflected additional expenses for new and expanded programming services. The
balance of the increase in expenses was consistent with the growth in revenues,
coupled with general cost increases. As a percentage of revenues, operating,
marketing, general and administrative expenses increased from 46.1% in 1996 to
46.9% in 1997.
Depreciation and Amortization. Depreciation and amortization expenses
increased $1,076,763 or 10.6% to $11,203,963, primarily as a result of $627,492
higher depreciation charges relating to the North Carolina acquisition and
ongoing capital expenditures in the other cable systems; and, $449,271 higher
amortization expense largely attributed to the North Carolina acquisition.
Management Fee Charged by Affiliate. Management fee expenses increased
$244,299 or 12.8% to $2,147,286 consistent with the increase in revenues.
Corporate and other expenses. Corporate and other expenses increased
$47,215 or 13.7% to $392,512.
Operating Income. Operating income for the twelve months ended December 31,
1997 increased $897,570 or 11.0% to $9,041,154 from the $8,143,584 operating
income in the comparable 1996 period. The improvement in operating results was
due to increased profits on higher revenues.
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<PAGE>
Interest Expense. Interest expense increased $1,023,115 or 7.6% to
$14,519,725. Approximately 93% of the increase in interest expense is associated
with the debt for the North Carolina acquisition. The balance of the increase
was primarily due to higher cash interest expense on the Senior Secured Notes,
which after November 1, 1996, pay interest at the rate of 11% per annum, offset
in part by the absence of non-cash interest expense attributed to the original
issue discount on the Senior Secured Notes which became fully amortized on
November 1, 1996 offset in part by lower interest expense on the 1994 Credit
Facility which was repaid on June 26, 1997.
Interest Income. Interest income decreased $88,962 or 42.3% to $121,582
primarily due to lower average cash balances.
Twelve Months Ended December 31, 1996 Compared to Twelve Months Ended
December 31, 1995.
Revenues. Revenues increased $2,835,017 or 8.0% to $38,059,737. The
increase in revenues was primarily attributed to increase in basic service
rates, internal subscriber growth, new program service revenues, non-cable
internet service revenues (acquired March 22, 1996) and strong growth in
advertising revenue. The average monthly cable revenue per basic subscriber
increased from $33.89 in 1995 to $36.07 in 1996. The $2.18 increase reflected
primarily i) an increase of $1.81 in basic cable revenues; ii) an increase of
$.06 due to the new program services; iii) an increase of $.36 in advertising
revenue; iv) a decrease of $.09 in premium subscription revenue; and v) an
increase of $.04 in other services.
Operating, Marketing, General and Administrative Expenses. Operating,
marketing, general and administrative expenses increased $1,579,233 or 9.9% to
$17,540,669. Approximately half of this increase reflected additional expenses
for new and expanded programming services including costs related to the
non-cable internet service. The balance of the increase in expenses was
consistent with the growth in revenues and subscribers, coupled with general
cost increases. As a percentage of revenues, operating, marketing, general and
administrative expenses increased from 45.3% in 1995 to 46.1% in 1996. This
increase was attributed to the introduction of the non-cable internet service
whose costs outpaced its revenues.
Depreciation and Amortization. Depreciation and amortization expenses
increased $566,242 or 5.9% to $10,127,200, primarily as a result of $490,640
higher depreciation charges relating to capital expenditures made in 1995 and
1996, and $75,602 higher amortization expenses reflecting the full year effect
of amortizing certain intangible costs which were incurred in 1995.
Management Fee Charged by Affiliate. Management fee expenses increased
$141,751 or 8.0% to $1,902,987, consistent with the increase in revenues.
Corporate and Other Expenses. Corporate and other expenses decreased
$16,036 or 4.4% to $345,297 primarily due to higher gains from asset sales.
Operating Income. Operating income for the twelve months ended December 31,
1996 increased $563,827 or 7.4% to $8,143,584 from the $7,579,757 operating
income in the comparable 1995 period. The improvement in operating results was
due to increased profits on higher revenues.
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<PAGE>
Interest Expense. Interest expense increased $504,656 or 3.9% to
$13,496,610 primarily as a result of monthly interest payments on the note due
to the Principal Owner which resumed in November 1995, as per the terms of the
Senior Secured Notes, higher cash interest expense on the Senior Secured Notes,
which after November 1, 1996 pay interest at the rate of 11% per annum, offset
in part by lower non-cash interest expense attributed to the original issue
discount on the Senior Secured Notes which became fully amortized on November 1,
1996.
Interest Income. Interest income decreased $5,991 or 2.8% to $210,544.
Liquidity and Capital Resources
The cable television business requires substantial financing for
construction, expansion and maintenance of the cable plant as well as for
acquisitions. The Company has historically financed its capital needs and
acquisitions through long-term debt and, to a lesser extent, through cash
provided from operating activities. The general availability of bank financing
has been variable over recent years. In 1993, the Company refinanced its 1992
Credit Facility by issuing $115,000,000 aggregate principal amounts 11% Senior
Secured Notes due 2003. In 1994, the Company utilized its available cash and
also entered into a credit facility with another bank consisting of $2,500,000
three year term loan facility, under which none was outstanding at December 31,
1997 and a $2,500,000 one-year line of credit facility with a bank bearing
interest at Prime Plus 1.5%, none of which was outstanding at December 31, 1997,
secured by all the assets of the Company (the "1994 Credit Facility"). On
February 23, 1996, the 1994 Credit Facility was amended to include an additional
loan facility of $318,000 and extended to May 31, 1996. On June 28, 1996, the
term loan of the 1994 Credit Facility was extended to May 31, 1997. On June 23,
1997, all balances outstanding under the 1994 Credit Facility were repaid in
full and the 1994 Credit Facility was terminated. On June 26, 1997, the Company
entered into a new credit facility (the 1997 Credit Facility) with a new bank
consisting of $20,000,000 senior secured term loan facility due November 1,
2000, bearing interest at LIBOR plus 2.75%, under which $20,000,000 was
outstanding at December 31, 1997, secured by all the assets of the Company. The
proceeds of the 1997 Credit Facility was used to acquire certain cable
television assets in North Carolina. On February 24, 1997, the Company entered
into a $285,000 loan agreement with a new bank, under which $276,641 was
outstanding at December 31, 1997. The proceeds of this new loan were used to
construct the Company's new office building in Vermont which secures the loan.
(See Credit Agreements of the Company, below).
The Company operates at low and sometimes negative working capital levels.
This is primarily due to account payable balances, which often include
significant amount of capital expenditures. Such payables are paid when due from
available cash balances, including cash generated from operations up to the date
of payment.
Cash flows provided by operating activities amounted to $6,066,378,
$7,375,875 and $5,808,469 for the years ended December 31, 1995, 1996 and 1997,
respectively. In 1996, cash generated from operations increased from 1995
primarily due to increased profits on higher revenues, higher accounts payable
balances, higher accrued interest and lower
Page 19 of 33
<PAGE>
receivables from subscribers. In 1997, cash generated from operations decreased
from 1996 primarily due to the absence of the amortization of debt discount
offset in part by financing costs incurred on the 1997 Credit Facility.
Net cash used in investing activities amounted to $7,483,249, $4,799,240
and $25,323,444 for the years ended December 31, 1995, 1996 and 1997,
respectively and included the following:
o In 1995, the Company incurred $6,561,044 in capital expenditures related to
the expansion and rebuilding of the systems, paid $350,000 in connection
with the acquisition of the property, plant and equipment and intangibles
of adjacent cable television systems and incurred $578,655 in other
deferred costs.
o In 1996, the Company incurred $4,771,631 in capital expenditures related to
the expansion and rebuilding of the systems, paid $40,000 in connection
with the acquisition of equipment and intangibles of a telephone dial-up
internet access provider and incurred $9,556 in other deferred costs.
o In 1997, the Company incurred $4,246,007 in capital expenditures related to
the expansion and rebuilding of the systems, paid $21,000,887 in connection
with the acquisition of property, plant and equipment and intangibles of a
cable television system and incurred $99,820 in other deferred costs.
Net cash provided by financing activities amounted to $996,290 and
$18,457,411 for the years ended December 31, 1995 and 1997, respectively, while
net cash used in financing activities amount to $810,262 for the year ended
December 31, 1996, which included the following:
o In 1995, the Company had $2,850,000 in borrowings and $1,100,000 in
principal repayments under the 1994 Credit Facility with Fleet Bank, made
$402,729 in principal repayments under the Company's equipment credit
facilities (See Credit Agreements of the Company, below).
o In 1996, the Company had $400,000 in borrowings and $952,777 in principal
repayments under the 1994 Credit Facility with Fleet Bank, made $446,808 in
principal repayments under the Company's equipment credit facilities (see
Credit Agreements of the Company, below).
o In 1997, the Company redeemed $1,000,000 of certificates of deposits, had
$20,285,000 in borrowings, made $1,505,581 in principal re-payments and
$768,526 in other principal repayments under the Company's equipment credit
facilities. (see Credit Agreements of the Company, below)
o Advances to other affiliates and repayments of such advances result from
management fees and other reimbursable expenses.
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<PAGE>
Credit Agreements of the Company. On December 31, 1997, the Company had
cash and cash equivalents of $3,693,625 and the following credit arrangements:
(i) $115,000,000 aggregate principal amount of 11% Senior Secured Notes due
2003; (ii) the new 1997 Credit Facility with a bank which consisted of a
$20,000,000 senior secured term loan facility due November 1, 2000 all of which
was outstanding, bearing interest at LIBOR plus 2.75% secured by all the assets
of the Company (iii) the 10% Note due August 20, 2000 to Simmons Communications
Company, L.P. in the amount of $2,036,765 (the original principal amount plus
accrued interest thereon through September 30, 1997); (iv) $5,000,000 principal
amount in favor of Mr. Baum pursuant to a Prime Plus 2% Subordinated Note which
has no due date and may only be repaid, subject to the passage of certain
limiting tests prior to repayment of the Notes; (v) $1,028,089 of certain other
equipment credit facilities with various due dates not exceeding five years. The
principal cash payments required under the Company's outstanding indebtedness
for the fiscal years ended December 31, 1998, 1999, 2000 and 2001 are estimated
to aggregate $388,321, $318,133, $20,233,957, $27,124,042, respectively. The
Company intends to use available cash and cash generated from operating
activities to make such debt service payments. The principal cash payments
required under the Company's outstanding indebtedness for the fiscal year ended
December 31, 2002 are estimated to aggregate $25,000,400. The Company intends to
use available cash and cash generated from operating activities to make such
debt service payments or refinance its indebtedness to satisfy such obligations.
In the past, the Company has committed substantial capital resources for
(i) construction and expansion of existing Systems, (ii) routine replacement of
cable television plant, (iii) increase in the channel capacity of certain of its
Systems, (iv) acquisition of certain Systems, and (v) increase in the percentage
of its Systems which are equipped with addressable technology. In 1995, 1996 and
1997 capital expenditures, excluding acquisitions, totaled $6,561,044,
$4,771,631 and $4,246,007, respectively.
The Company has budgeted approximately $6,200,000 for capital expenditures
for the Systems during 1998, which includes $1,200,000 for rebuilding portions
of the Pennsylvania, North Carolina, Louisiana and Vermont Systems, $700,000 for
extensions on the Systems, $500,000 for Private Networks and $3,800,000 for
converters, customer installation material, and other capital expenditures. The
Company believes it will have sufficient cash to fund all such capital
expenditures.
The Company believes that available working capital and cash flows
generated from operations will be sufficient to allow it to meet its planned
capital expenditures, meet its debt obligations and cover its other short and
long term liquidity needs. Also, while the Company presently sees no reason to
do so, it could adjust scheduled capital expenditures if the Company's liquidity
position so warrants.
Inflation
Certain of the Company's expenses, such as those for wages and benefits,
for equipment repair and replacement, and for billing and marketing, increase
with general inflation. However, the Company does not believe that its financial
results have been, or will be, adversely affected by inflation, provided that it
is able to increase its service rates periodically.
Page 21 of 33
<PAGE>
Year 2000 Compliance
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
Management has initiated a partnership-wide program to prepare the computer
systems and applications for the year 2000. The Company continues to evaluate
appropriate courses of corrective action, including replacement of certain
systems whose associated costs would be recorded as assets and amortized.
Accordingly, the Company does not expect the amounts required to be expensed
over the next three years to have a material effect on its financial position or
result of operations. The amount expensed in 1997 was immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report
on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors, executive and key officers of Helicon Corp. and Baum
Investments, Inc., the general partner of the Company, are set forth below.
Name Age Position with Baum Investments and Helicon Corp.
- ---- --- ------------------------------------------------
Theodore B. Baum 63 Chairman of the Board of Directors; Chief Executive
Officer; and President
Gregory A. Kriser 47 Chief Operating Officer; Executive Vice President
Herbert J. Roberts 43 Chief Financial Officer; Treasurer; Senior
Vice President
David M. Baum 36 Senior Vice President of Operations
Thomas Gimbel 55 Senior Vice President of Engineering
Ruth Baum 59 Vice President; Director
George S. Psyllos 43 Vice President and Corporate Controller
Richard Hainbach 45 Secretary
Mr. Baum has been Chief Executive Officer and President of Helicon Corp.
since 1974. Mr. Baum is a 33-year veteran of the cable television industry. He
is a former owner and Chief Operating Officer of Cable Information Systems, a
company engaged in the ownership and operation of cable television systems. In
June 1977, Mr. Baum founded the Company under the name Fayette Cablevision
Company.
Page 22 of 33
<PAGE>
Mr. Kriser has been Executive Vice President and Chief Operating Officer of
Helicon Corp. since 1985. Mr. Kriser currently is a director of the Cable
Telecommunications Association and Cable in the Classroom and a member of the
National Academy of Cable Programming. Prior to joining Helicon Corp. in January
1985, Mr. Kriser had nine years management experience in the cable industry,
including positions with UA Columbia Cablevision (1976-1977), Teleprompter
Corporation (1977), Showtime Entertainment, Inc. (1977-1979), Satellite Vision
Systems Partners (1983-1984) and United Satellite Communications, Inc. (1984).
In addition, Mr. Kriser founded his own firm, GK Communications Corporation, a
consulting firm to cable firms requiring financial, marketing, franchising and
operations planning in major markets, which he served as President from
1979-1983.
Mr. Roberts joined Helicon Corp. as Senior Vice President, Chief Financial
Officer and Treasurer in January 1990. Previously he was Vice President of
Prudential-Bache Capital Funding. Prior to joining Prudential-Bache in early
1988, he worked for the CBS Television Network where he had overall
responsibility for the financial management of CBS's efforts in New Ventures
such as CBS/Blackhawk Cable Systems, SportsChannel/American Movie
Classics/Bravo, CBS CableConnects and CBS Broadcast International. Before
joining CBS in 1981, he spent five years in public accounting with Touche Ross
and Arthur Young.
Mr. David Baum became Senior Vice President of Operations in January 1996.
Previously, Mr. Baum was the Vice President of Marketing/Programming at Helicon
Corp. since October 1989 when he rejoined the Company. In 1988, Mr. Baum was
self employed as a real estate developer. Mr. Baum assisted in the construction
of THGLP's cable television system in southwestern Pennsylvania between 1978 and
1981. In 1981 and 1982, he managed his own cable television marketing company.
Mr. David Baum is the son of Mr. and Mrs. Baum.
Mr. Gimbel became the Senior Vice President of Engineering of Helicon Corp.
as of January 1, 1998. Mr. Gimbel formerly was Chief Operating Officer of
Fidelity Systems, Inc., a cable and telephone construction company. His prior
affiliations also include Vice President of Engineering at Cablevision
Industries, Inc. and Vice President, Systems Manager of Comcast Cablevision of
Philadelphia. He has been active in the Society of Cable Television Engineers
and the National Cable Television Association engineering committee. Mr. Gimbel
is a licensed professional quality engineer.
Mrs. Ruth Baum became a director and a Vice President of Helicon Corp. in
July 1991. For more than two years prior thereto, Mrs. Baum was a passive
investor in various cable television properties. She has acted as an advisor to
Mr. Baum in connection with his varied cable interests. Mrs. Baum is the wife of
Mr. Baum and the mother of David Baum.
Mr. George Psyllos is the Vice President and Corporate Controller of
Helicon Corp. Mr. Psyllos joined Helicon Corp. in December 1990. Prior to
joining Helicon Corp., Mr. Psyllos held various financial management positions
in Sea-Land Service Inc. (1988-1990), Purolator Courier Corp. (1980-1988), and
Price Waterhouse & Co., LLC (1977-1980). Mr. Psyllos has been a Certified Public
Account (CPA) since 1980 and is a member of the American Institute of CPA's and
the New Jersey Society of CPA's.
Page 23 of 33
<PAGE>
Mr. Richard Hainbach became the Secretary and General Counsel of Helicon
Corp. in January 1996. Previously he was Vice President and General Counsel of
Multi-Vision Cable TV Corp. Mr. Hainbach has more than nine years of legal
experience in the cable industry. Prior to that, he was in private legal
practice in New York City.
ITEM 11. EXECUTIVE COMPENSATION
Compensation to the principal executive officers is paid by Helicon Corp.
from management fees paid to Helicon Corp., pursuant to the management agreement
between the Company and Helicon Corp. The executive officers of Helicon Corp.
are also executive officers of Baum Investments, Inc.
Summary Compensation Table
The following table summarizes the compensation paid during 1995, 1996 and
1997 estimated to the five highest paid executive officers of Helicon Corp.
<TABLE>
<CAPTION>
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
- --------------------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Theodore B. Baum 1997 65,400 (1 $250,000 $1,053,405 (2 $15,480 (5
Chief Executive Officer; 1996 62,700 (1 -0- 994,770 (2 $15,555 (5
President 1995 61,200 (1 -0- 962,250 (2 -0-
(1 (2
Gregory A. Kriser 1997 226,000 -0- 87,750 (3 -0-
Executive Vice President 1996 202,539 $50,000 87,750 (3 -0-
1995 178,000 -0- 87,720 (3 -0-
(3
Herbert J. Roberts 1997 220,500 $50,000 40,785 (3 -0-
Senior Vice President; Chief 1996 198,211 $50,000 40,785 (3 -0-
Financial Officer; Treasurer 1995 174,000 -0- 40,770 (3 -0-
(3
David M. Baum 1997 240,000 $50,000 (4 2,720 -0-
Vice President 1996 204,464 150,000 (4 1,300 -0-
1995 175,000 -0- 1,180 -0-
Thomas Gimbel 1997 150,000 -0- (3 24,825 (3 -0-
Vice President 1996 131,557 $30,000 (3 24,825 (3 -0-
1995 114,000 -0- (3 24,755 (3 -0-
(3 (3
</TABLE>
- ----------
1) Includes payments made by Helicon Corp. pursuant to a current employment
agreement with Mr. Baum. The employment agreement provides for annual
compensation of $65,400 with certain escalation provisions therein. Under
his employment agreement, Mr. Baum is engaged as the Chief Executive
Officer of Helicon Corp. and its affiliates. Helicon Corp. also has a
consulting arrangement with Elizabeth Baum, the daughter of Mr. and Mrs.
Baum, pursuant to which Ms. Baum was paid $75,000 for her legal services as
Assistant Secretary of Helicon Corp. Ruth Baum, Mr. Baum's wife, is
employed by Helicon Corp. as its Vice President at an annual salary of
$65,400.
2) Includes $955,000, $987,500 and $1,045,000 of consulting fees paid in 1995,
1996 and 1997 respectively, to TR Cable Consultants, a company owned by
Theodore and Ruth Baum.
3) Includes consulting fees which have historically been paid by the Company,
pursuant to consulting agreements between the Company and the individual
consultants. Such consulting services have principally taken the form of
strategic oversight and business planning.
4) Payment of the bonus was to Cable Marketing Group, a company owned by David
M. Baum and his wife, Sande Baum.
5) Represents the premium paid by Helicon Corp. pursuant to Mr. Baum's
employment agreement which requires Helicon Corp. to provide $3.0 million
of life insurance on Mr. Baum with the beneficiary of the policy to be
designated by Mr. Baum.
Page 24 of 33
<PAGE>
Compensation of Directors
No Director of Baum Investments, Inc., (the general partner of the Company) or
Helicon Corp. is presently compensated for any services provided as a director.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
Each of Messrs. Kriser, Roberts and Gimbel have a consulting agreement with
the Company which is disclosed in the footnotes to the summary compensation
table. Additionally, in the event of a voluntary retirement or withdrawal of a
limited partner of Helicon Partners I, L.P. which is controlled by a member of
the management of the Company other than Theodore Baum or his immediate family,
the Company has the right, and in the event of an involuntary retirement, the
obligation, to purchase the partnership interests controlled by such member of
management. The purchase price for such interests is the fair market value or
the amount, if any, owed by such partners or their controlling shareholders to
Theodore Baum under certain promissory notes. The purchase price is payable by
delivery of the Company's subordinated note and, under certain circumstances,
also partly in cash; all as more fully set forth in the Company's Agreement of
Limited Partnership.
Board Compensation Committee Report on Executive Compensation
For the 1995, 1996 and 1997 fiscal years, the Company had no compensation
committee. The Company is controlled by Mr. Theodore Baum, the Chairman of the
Board of Directors, Chief Executive Officer and President of Helicon Corp. and
Baum Investments; and the compensation of the Company's executive officers is
determined by Mr. Baum subject to the approval of the boards of directors of
Helicon Corp. and Baum Investments.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table set forth the number and percentage of interests in the
Company owned by the Company's management and certain beneficial owners. HPI
owns 99% of the interest in the Company. With the exception of Baum Investments,
Inc. which has both a direct and indirect ownership interests in the Company,
all beneficial ownership interests in the Company are owned indirectly through
HPI. Other than as set forth below, no person or entity beneficially owns more
than 5.0% of the limited partnership interests in the Company.
Page 25 of 33
<PAGE>
Name and Address of Beneficial Owner Type of Interest Ownership
------------------------------------ ---------------- ---------
Baum Investments, Inc. (1) General Partner 1.990%
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
Helicon Corp. (1) Limited Partner .594%
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
Helicon Group Ltd. (1) Limited Partner 61.320%
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
TREDD Investors (1) Limited Partner 15.583%
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
TREDD TWO (1) Limited Partner 16.721%
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
Theodore B. Baum (2) Limited Partner 95.208%
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
Gregory A. Kriser (3) (6) Limited Partner 2.307%
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
Herbert J. Roberts(4) (6) Limited Partner .990%
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
Thomas Gimbel(5) (6) Limited Partner .495%
630 Palisade Avenue
Englewood Cliffs, New Jersey 07632
Sandler Capital Management (7) Warrant Holder 8.368%
767 Fifth Avenue
New York, New York 10153
SunAmerica Investments, Inc. (7) Warrant Holder 13.947%
1 SunAmerica Center
Los Angeles, California 90067
All Directors and Officers as a Group (6 persons) 100.00%
- ----------
(1) Mr. Baum, Chief Executive Officer and President of the Company, owns all of
the outstanding stock of Baum Investments, Inc., the sole general partner
of the Company, and together with Ruth Baum, beneficially owns all of the
stock of Helicon Group Ltd. and the trust interests in TREDD Investors and
TREDD TWO. Baum Investments, Inc. also owns a 1.0% general partnership
interest in HPI, and thus owns an additional indirect .99% limited
partnership interest in the Company.
(2) Includes 1.00% general partnership interest held by Baum Investments, Inc.,
61.320% limited partnership interest held by Helicon Group Ltd., 15.583%
limited partnership interest held by TREDD Investors, 16.721% limited
partnership interests held by TREDD Two, a .594% limited partnership
interest held by Helicon Corp. and an .99% limited indirect partnership
interest held by Baum Investments, Inc.
(3) Represents the 2.307% limited partnership interest held by GAK Cable, Inc.
All of the outstanding shares of GAK Cable Inc., are owned by Gregory A.
Kriser.
(4) Represents the .990% limited partnership interest held by Roberts Cable
Corp. All of the outstanding shares of Roberts Cable Corp. are beneficially
owned by Herbert J. Roberts.
(5) Represents the .495% limited partnership interest held by Gimbel Cable
Corp. All of the outstanding shares of Gimbel Cable Corp. are owned by
Thomas Gimbel.
(6) Disclaims beneficial ownership.
(7) Indirect limited partnership ownership through warrants to acquire
interests in HPI. Disclaims beneficial ownership.
Page 26 of 33
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 8, 1996, the existing limited partners of The Helicon Group, L.P.
("THGLP") exchanged (the "Exchange") their limited partnership interests in
THGLP for all Class A Common Limited Partnership Interests and Preferred
Partnership Interests in Helicon Partners I, L.P. ("HPI"). As a result of this
Exchange, THGLP became 99% owned by HPI (HPI now owns all of the limited
partnership interests in THGLP and Baum Investments, Inc. continues to be the
general partner of THGLP and to own a 1.00% general partnership interest in
THGLP). The previous limited partners of the THGLP presently own 100% of the
limited partnership interests of HPI, subject to dilution upon exercise of the
warrants issued in connection with the Exchange, see Footnote 14 "Other Events".
Helicon Corp. is responsible for the day-to-day management of the Systems
pursuant to the existing management agreement with the Company , and in such
capacity has executive decision making authority, subject to the control of Baum
Investments. Helicon Corp. is owned and controlled by Mr. Baum, the owner of
Baum Investments which is the general partner of the Company . The initial term
of the existing management agreement between the Company and Helicon Corp.
expires in November 2003 with the provision for automatic renewal in consecutive
ten-year periods unless otherwise terminated. Management fees relating to the
Systems are payable monthly in an amount equal to 5% of revenues from the
operation of the Systems subject to certain limitations.
The office building in Pennsylvania is leased by the Company from a Company
owned by Mr. and Mrs. Baum. This lease covers approximately 10,000 square feet
of space and continues through May 2005 at a triple net rent of approximately
$5,200 per month plus certain adjustments. The Company believes that the terms
of the lease are at least as favorable as could be obtained from third parties.
Mr. Baum has contributed, directly or indirectly, unsecured, non-interest
bearing personal promissory notes (the "Baum Notes") in the aggregate principal
amount of $30.5 million to the capital of the Company. Although the Baum Notes
are unconditional, they do not become payable except (i) in amounts starting at
$19.5 million through December 15, 1994 and increasing thereafter in
installments to a maximum of $30.5 million on December 16, 1996 and (ii) at such
time after such dates as the Company's creditors shall have exhausted all claims
against the Company's assets. Mr. Baum contributed the Baum Notes in order to
enhance the overall creditworthiness of the Company. Mr. Baum is the beneficial
owner of 96.17% of the equity interests of the Company, the enhancement of the
Company's creditworthiness confers a benefit on him.
Pursuant to the management agreement (see Item 14.3 "Exhibits") between
Helicon Corp. and the Company, during 1995, 1996 and 1997 the Company was
charged management fees of $1.8 million, $1.9 million, and $2.1 million,
respectively. Management fees are calculated based on the gross revenues of the
Systems. Additionally, during 1995, 1996 and 1997, the Partnership was also
charged $639,477, $980,000, $713,906, respectively, for certain costs incurred
by this related party on their behalf.
Page 27 of 33
<PAGE>
TR Cable Consultants, a company owned by Theodore and Ruth Baum, received
aggregate consulting fees of $955,000, $987,500 and $1,045,000 from Helicon
Corp. in respect of consulting services provided by TR Cable Consultants to
Helicon Corp. for the year ended December 31, 1995, 1996 and 1997, respectively.
As executive officers of Helicon Corp., Theodore and Ruth Baum were paid
salaries by Helicon Corp. with respect to their executive officer and
administrative functions. Their compensation for non-executive officer and
administrative functions, such as services performed with respect to the
investigation of potential acquisitions and expansion of existing Systems by the
Company and the development of marketing and financing strategies, was paid in
the form of a consulting fee to TR Cable Consultants.
On November 3, 1993, the Company implemented a roll-up plan to consolidate
the ownership of the Systems previously held by the Predecessor Companies, to
simplify the capital structure of such Predecessor Companies and increase the
operating financial flexibility of the Systems. The roll-up plan was achieved by
the transfer to the Company of substantially all the assets of such Predecessor
Companies in exchange for equity interests in the Company in connection with
which the Company assumed substantially all the obligations of such Predecessor
Companies.
Certain members of the Company's management borrowed funds from Mr. Baum in
connection with their indirect purchase of limited partnership interests in
Helicon Partners I, L.P. See Item 11 "Executive Compensation -- Employment
Contracts, Termination of Employment and Change-in-Control Arrangements" for
disclosure regarding such arrangements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Form 10-K
1. Financial Statements
The following information is contained in the Financial section of this
Annual Report for the fiscal year ended December 31, 1997 (see Page F-1 of
this Report).
o Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1997
o Consolidated Statements of Operations for each of the three years ended
December 31, 1997
o Consolidated Statements of Changes in Partners' Deficit for each of the
three years ended December 31, 1997.
o Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997.
o Notes to the Consolidated Financial Statements
Page 28 of 33
<PAGE>
2. Financial Statement Schedules
The information called for by this item is either not applicable or
included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Certificate of Limited Partnership of the Company filed August
10, 1993 (filed as Exhibit 3.1 to Registration Statement No.
33-72468 on Form S-4 effective February 3, 1994 and incorporated
herein by reference).
3.2 Agreement of Limited Partnership of the Company dated as of
November 3, 1993 (filed as Exhibit 3.2 to Registration Statement
No. 33-72468 on Form S-4 effective February 3, 1994 and
incorporated herein by reference).
3.3 Articles of Incorporation of HCC filed August 11, 1993 (filed as
Exhibits 3.3 to Registration Statement No. 33-72468-01 on Form
S-4 effective February 3, 1994 and incorporated herein by
reference).
3.4 Bylaws of HCC (filed as Exhibit 3.4 to Registration Statement No.
33-72468-01 on Form S-4 effective February 3, 1994 and
incorporated herein by reference).
4.1 Indenture dated as of October 15, 1993 between the Company, HCC
and Shawmut Bank Connecticut, National Association as Trustee,
relating to the 11% Series A Senior Secured Notes due 2003 and
the 11% Series B Senior Secured Notes due 2003 of the Company and
HCC (containing, as exhibits, specimens of the Series A Notes and
the Series B Notes)(filed as Exhibit 4.1 to Registration
Statement No. 33-72468 on Form S-4 effective February 3, 1994 and
incorporated herein by reference).
4.2 Placement Agreement dated as of October 21, 1993 relating to the
11% Series A Senior Secured Notes due 2003 of the Company and HCC
(filed as Exhibit 4.2 to Registration Statement No. 33-72468 on
Form S-4 effective February 3, 1994 and incorporated herein by
reference).
4.3 Registration Rights Agreement dated as of November 3, 1993
relating to the 11% Series A Senior Secured Notes due 2003 of the
Company and HCC (filed as Exhibit 4.3 to Registration Statement
No. 33-72468 on form S-4 effective February 3, 1994 and
incorporated herein by reference).
Page 29 of 33
<PAGE>
4.4 Form of Letter of Transmittal (field as Exhibit 4.4 to
Registration Statement No. 33-72468 on Form S-4 effective
February 3, 1994 and incorporated herein by reference).
4.5 Security Agreement dated as of November 3, 1993 relating to the
security interest granted in the Collateral (filed as Exhibit 4.5
to Registration Statement No. 33-72468 on Form S-4 effective
February 3, 1994 and incorporated herein by reference).
4.6 Cash Collateral Account, Security Pledge and Assignment Agreement
dated as of November 3, 1993 relating to the deposit of certain
proceeds of collateral into the Account (filed as Exhibit 4.6 to
Registration Statement No. 33-72468 on Form S-4 effective
February 3, 1994 and incorporated herein by reference).
10.1 Limited Recourse Promissory Note in the principal amount of
$24,000,000 granted by Theodore B. Baum in favor of the Company
(filed as Exhibit 10.1 to Registration Statement No. 33-72468 on
Form S-4 effective February 3, 1994 and incorporated herein by
reference).
10.2 Limited Recourse Promissory Note in the principal amount of
$6,500,000 granted by Theodore B. Baum in favor of Baum
Investments, Inc. and assigned to the Company (filed as Exhibit
10.2 to Registration Statement No. 33-72468 on Form S-4 effective
February 3, 1994 and Incorporated herein by reference).
10.3 Amended and Restated Note in the principal amount of
$1,390,791.52 granted by the Company in favor of Simmons
Communications Company, L.P. (filed as Exhibit 10.3 to
Registration Statement No. 33-72468 on Form S-4 effective
February 3, 1994 and incorporated herein by reference).
10.4 10% Subordinated Note dated August 20, 1992 in the principal
amount of $1,250,000 granted by Vermont Cablevision Associates,
L.P. in favor of Simmons Communications Company, L.P. marked
"Amended, Restated & Replaced 11/3/93" (filed as Exhibit 10.4 to
Registration Statement No. 33-72468 on Form S-4 effective
February 3, 1994 and incorporated herein by reference).
10.5 13% Subordinated Note dated August 20, 1992 in the principal
amount of $2,250,000 granted by Vermont Cablevision Associates,
L.P. in favor of Simmons Communications Company, L.P. marked
"Paid 11/3/93" (filed as Exhibit 10.5 to Registration Statement
No. 33-72468 on Form S-4 effective February 3, 1994 and
incorporated herein by reference).
10.6 Assumption and Guarantee of Non-Negotiable Subordinated Note in
the Original Principal Amount of $500,000 payable to Swapan K.
Bose (filed as Exhibit 10.5 to Registration Statement No.
33-72468 on Form S-4 effective February 3, 1994 and incorporated
herein by reference).
Page 30 of 33
<PAGE>
10.7 Amended and Restated Promissory Note in the principal amount of
$5,000,000 granted by the Company in favor of Theodore B. Baum
(filed as Exhibit 10.7 to Registration Statement No. 33-72468 on
Form S-4 effective February 3, 1994 and incorporated herein by
reference).
10.8. Management Agreement dated November 2, 1993 between the Company
and Helicon Corp. (filed as Exhibit 10.8 to Registration
Statement No. 33-72468 on Form S-4 effective February 3, 1994 and
incorporated herein by reference).
10.9 Programming Supply Agreement dated November 3, 1993 between the
Company and Helicon Corp. (filed as Exhibit 10.9 to Registration
Statement No. 33-72468 on Form S-4 effective February 3, 1994 and
incorporated herein by reference).
10.10 Amended and Restated Consulting Agreement dated October 1, 1993
among Helicon Corp., HGL, the Company and Thomas Gimbel (filed as
Exhibit 10.10 to Registration Statement No. 33-72468 on Form S-4
effective February 3, 1994 and incorporated herein by reference).
10.11 Amended and Restated Consulting Agreement dated October 1, 1993
among Helicon Corp., HGL, the Company and Gregory A. Kriser
(filed as Exhibit 10.11 to Registration Statement No. 33-72468 on
Form S-4 effective February 3, 1994 and incorporated herein by
reference).
10.12 Amended and Restated Consulting Agreement dated October 1, 1993
among Helicon Corp., HGL, the Company and Herbert Roberts (filed
as Exhibit 10.12 to Registration Statement No. 33-72468 on Form
S-4 effective February 3, 1994 and incorporated herein by
reference).
10.13 Letter Agreement dated October 21, 1993 between the Company and
the Bank of New York (filed as Exhibit 10.13 to Registration
Statement No. 33-72468 on Form S-4 effective February 3, 1994 and
incorporated herein by reference).
10.14 Loan Agreement dated as of December 19, 1994 by and among the
Company, HCC and Fleet Bank (filed as Exhibit 10.14 to Form 10-K
filed on April 12, 1995 and incorporated herein by reference).
10.15 Security Agreement dated as of December 19, 1994 by and among the
Company, HCC and Fleet Bank (filed as Exhibit 10.15 to Form 10-K
filed on April 12, 1995 and incorporated herein by reference).
10.16 Affiliate Subordination Agreement dated as of December 19, 1994
by and among HCC, the Company, Helicon Corp., Baum Investments,
Inc., Theodore B. Baum and Fleet Bank (filed as Exhibit 10.16 to
Form 10-K filed on April 12, 1995 and incorporated herein by
reference).
Page 31 of 33
<PAGE>
10.17. Intercreditor Agreement dated as of December 19, 1994 by and
among the Company, HCC, Fleet Bank and Shawmut Bank Connecticut,
National Association (filed as Exhibit 10.17 to Form 10-K filed
on April 12, 1995 and incorporated herein by reference).
10.18 Letter Agreement dated as of December 19, 1994 between the
Company and Fleet Bank (filed as Exhibit 10.18 to Form 10-K filed
on April 12, 1995 and incorporated herein by reference).
10.19 First Amendment to Loan Agreement dated as of February 23, 1996
by and among the Company, HCC and Fleet Bank.
10.20 Second Amendment to Loan Agreement dated as of June 28, 1996 by
and among the Company, HCC and Fleet Bank.
10.21 Loan Agreement dated as of June 26, 1997 by and among the Company
and Banque Paribas, and The Lenders Party Thereto. (Filed as an
exhibit to the Company's quarterly report on Form 10-Q for the
period ended September 30, 1997).
10.22 Subsidiary Guaranty Security Agreement dated as of June 26, 1997
by and among the Company, HCC and Banque Paribas.(Filed as an
exhibit to the Company's quarterly report on Form 10-Q for the
period ended September 30, 1997).
10.23 Intercreditor Agreement dated as of June 26,1997 among Banque
Paribas as agent under the credit agreement, Fleet National Bank,
HCC and the Company. (Filed as an exhibit to the Company's
quarterly report on Form 10-Q for the period ended September 30,
1997).
12. Statement regarding computation of earnings to fixed charges
ratio.
21. List of Subsidiaries of Registrants (filed as Exhibit 21 to
Registration Statement No. 33-72468 on Form S-4 effective
February 3, 1994 and incorporated herein by reference).
27. Financial Data Schedule.
b) Current Reports on Form 8-K
A report on Form 8-KA was filed on September 10, 1997 reporting an
event under Item 2 on Form 8-K.
c) Exhibits (See Item 14(a)3 above)
d) Financial Statements
Not applicable.
Page 32 of 33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this Report to be signed
on their behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 1998 THE HELICON GROUP, L.P.
(Registrant)
By: Baum Investments, Inc.,
its general partner
By: /s/Theodore B. Baum
(Theodore B. Baum)
President
By: /s/ Herbert J. Roberts
(Herbert J. Roberts)
Senior Vice President
(Principal Financial and
Accounting Officer)
Dated: March 27, 1998 HELICON CAPITAL CORP.
(Registrant)
By: /s/Theodore B. Baum
(Theodore B. Baum)
President
By: /s/ Herbert J. Roberts
(Herbert J. Roberts)
Senior Vice President
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
BAUM INVESTMENTS, Inc., as general
partner of
THE HELICON GROUP, L.P.
/s/ Theodore B. Baum President (Principal Executive March 27, 1998
(Theodore B. Baum) Officer); Director
/s/ David M. Baum Senior Vice President; March 27, 1998
(David M. Baum) Director
HELICON CAPITAL CORP.
/s/ Theodore B. Baum President (Principal Executive March 27, 1998
(Theodore B. Baum) Officer); Director
/s/ David M. Baum Senior Vice President; March 27, 1998
(David M. Baum) Director
Page 33 of 33
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES COVERED BY INDEPENDENT AUDITORS' REPORT (ITEM 14(A))
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 F-3
Consolidated Statements of Operations for each of the three years
ended December 31, 1997 F-4
Consolidated Statements of Changes in Partners'
Deficit for each of the three-years ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
All other schedules have been omitted because the required information
either is not applicable or is shown in the consolidated financial
statements or notes thereto.
F-1
<PAGE>
Independent Auditor's Report
The Partners
The Helicon Group, L.P.:
We have audited the consolidated financial statements of The Helicon Group, L.P.
and wholly owned incorporated entities as listed in the accompanying index.
These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Helicon Group,
L.P. and wholly owned incorporated entities as of December 31, 1996 and 1997 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
New York, New York
March 20, 1998
F-2
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Consolidated Balance Sheets
December 31, 1996 and 1997
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
------------- -------------
Assets (notes 8 and 9)
<S> <C> <C>
Cash and cash equivalents (note 2) $ 5,751,189 $ 3,693,625
Receivables from subscribers 795,568 997,231
Prepaid expenses and other assets 959,916 1,409,724
Property, plant and equipment, net (notes 3, 4,and 10)
28,887,133 35,080,302
Intangible assets and deferred costs, net (notes 3 and 5)
21,751,852 30,628,407
Due from affiliates (note 6) 131,540 797,590
------------- -------------
Total assets $ 58,277,198 $ 72,606,879
============= =============
Liabilities and Partners' Deficit
Liabilities:
Accounts payable $ 2,907,235 $ 3,159,022
Accrued expenses 518,625 760,609
Subscriptions received in advance 371,464 697,633
Accrued interest 2,155,526 2,173,590
Due to principal owner (note 7) 5,000,000 5,000,000
Senior secured notes (note 8) 115,000,000 115,000,000
Loans payable to banks (note 9) 1,497,223 20,276,641
Other notes payable (note 10) 2,885,044 3,064,854
Due to affiliates, net (note 6) 537,844 427,282
------------- -------------
Total liabilities 130,872,961 150,559,631
------------- -------------
Commitments (notes 8 and 12)
Partners' deficit: (note 11)
Accumulated partners' deficit (72,594,763) (77,951,752)
Less capital contribution receivable (1,000) (1,000)
------------- -------------
Total partners' deficit (72,595,763) (77,952,752)
------------- -------------
Total liabilities and partners' deficit $ 58,277,198 $ 72,606,879
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Consolidated Statements of Operations
Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 35,224,720 $ 38,059,737 $ 42,945,730
------------ ------------ ------------
Operating expenses:
Operating expenses (note 12) 9,403,668 10,213,044 12,166,203
General and administrative expenses (notes 6 and 12) 5,476,416 6,177,970 6,619,137
Marketing expenses 1,081,352 1,149,655 1,375,475
Depreciation and amortization 9,560,958 10,127,200 11,203,963
Management fee charged by affiliate (note 6) 1,761,236 1,902,987 2,147,286
Corporate and other expenses (note 7) 361,333 345,297 392,512
------------ ------------ ------------
Total operating expenses 27,644,963 29,916,153 33,904,576
------------ ------------ ------------
Operating income 7,579,757 8,143,584 9,041,154
------------ ------------ ------------
Interest expense (notes 7 and 10) (12,991,954) (13,496,610) (14,519,725)
Interest income 216,535 210,544 121,582
------------ ------------ ------------
(12,775,419) (13,286,066) (14,398,143)
------------ ------------ ------------
Net loss ($ 5,195,662) ($ 5,142,482) ($ 5,356,989)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Consolidated Statements of Changes in Partners' Deficit
Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Partners' Deficit
------------------------- Capital
General Limited Contribution
Partner Partners Receivable Total
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ($256,037) (62,000,582) (1,000) ($62,257,619)
Net loss ($ 51,957) (5,143,705) -- ($ 5,195,662)
--------- ----------- ------ ------------
Balance at December 31, 1995 ($307,994) (67,144,287) (1,000) ($67,453,281)
Net loss ($ 51,425) (5,091,057) -- ($ 5,142,482)
--------- ----------- ------ ------------
Balance at December 31, 1996 ($359,419) (72,235,344) (1,000) ($72,595,763)
Net Loss ($ 53,570) (5,303,419) -- ($ 5,356,989)
--------- ----------- ------ ------------
Balance at December 31, 1997 ($412,989) (77,538,763) (1,000) ($77,952,752)
========= =========== ====== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($ 5,195,662) ($ 5,142,482) ($ 5,356,989)
------------ ------------ ------------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 9,560,958 10,127,200 11,203,963
Amortization of debt discount and deferred financing costs 1,942,730 1,778,684 60,000
(Gain) loss on sale of equipment (6,450) (20,375) (1,069)
Interest on other notes payable added to principal 153,025 168,328 185,160
Change in operating assets and liabilities:
(Increase) decrease in receivables from subscribers (86,988) 119,995 (201,663)
Increase in prepaid expenses and other assets (8,492) (108,888) (449,808)
Increase in financing costs incurred -- -- (400,000)
(Decrease) increase in accounts payable and accrued expenses (249,726) 90,019 424,641
(Decrease) increase in subscriptions received in advance (46,615) (21,560) 326,170
Increase in accrued interest 3,598 384,954 18,064
------------ ------------ ------------
Total adjustments 11,262,040 12,518,357 11,165,458
------------ ------------ ------------
Net cash provided by operating activities 6,066,378 7,375,875 5,808,469
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (6,561,044) (4,771,631) (4,246,007)
Proceeds from sale of equipment 6,450 21,947 23,270
Cash paid for net assets of cable television systems acquired (350,000) -- (21,000,887)
Cash paid for net assets of internet business acquired -- (40,000) --
Increase in intangible assets and deferred costs (578,655) (9,556) (99,820)
------------ ------------ ------------
Net cash used in investing activities (7,483,249) (4,799,240) (25,323,444)
------------ ------------ ------------
Cash flows from financing activities:
Decrease in restricted cash -- -- 1,000,000
Proceeds from bank loans 2,850,000 400,000 20,285,000
Repayment of bank loans (1,100,000) (952,777) (1,505,581)
Repayment of other notes payable (402,729) (446,808) (768,526)
Advances to affiliates (1,317,392) (2,750,376) (1,829,692)
Repayments of advances to affiliates 966,411 2,939,699 1,276,210
------------ ------------ ------------
Net cash provided by (used in) financing activities 996,290 (810,262) 18,457,411
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (420,581) 1,766,373 (1,057,564)
Cash and cash equivalents at beginning of period 3,405,397 2,984,816 4,751,189
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,984,816 $ 4,751,189 $ 3,693,625
------------ ------------ ------------
Supplemental cash flow information:
Interest paid $ 10,892,601 $ 11,164,645 $ 14,256,501
============ ============ ============
Other non-cash items:
Acquisition of property, plant and equipment through issuance of
other notes payable $ 128,111 $ 759,612 $ 763,175
============ ============ ============
Net assets of internet business transferred to affiliate through
an intercompany loan -- -- $ 223,130
============ ============ ============
Investment in HPI Acquisition Co., LLC through the issuance of a
note payable -- $ 1,000 --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
December 31, 1995, 1996 and 19967
1. Organization and Nature of Business
The Helicon Group, L.P. (the "Partnership" or the "Company") was organized
as a limited partnership on August 10, 1993 under the laws of the state of
Delaware to consolidate the ownership interests of Helicon Group, Ltd.
("Helicon"), Terrebonne Cablevision, L.P., Roxboro Cablevision Associates,
L.P. and Vermont Cablevision Associates, L.P. (collectively, the
"Predecessor Companies") in connection with a roll-up plan completed on
November 3, 1993 (the "roll-up"). As a result of the roll-up, the
Partnership acquired substantially all of the operating assets and
agreements of all the cable television systems which were previously owned
by the Predecessor Companies and the stockholders and the partners of the
Predecessor Companies became limited partners of the Partnership. The
Company operates under the name of "Helicon Cable Communications". The
general partner of the Company is Baum Investments, Inc., a Delaware
Corporation, which is 100% owned by Mr. Theodore B. Baum. On April 8, 1996,
the Company became 99% owned by Helicon Partners I, L.P. (HPI) and 1% owned
by the Baum Investments, Inc., the general partner. The Company is managed
by Helicon Corp., an affiliated management company.
The Partnership operates cable television systems located in Pennsylvania,
West Virginia, North Carolina, Louisiana, Vermont and New Hampshire. The
Company also offers advanced services, such as paging, cable modems and
private data network systems to its customers.
2. Summary of Significant Accounting Policies
a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Partnership and its wholly owned incorporated entity,
Helicon Capital Corp. ("HCC"). HCC had nominal assets as of December
31, 1996 and 1997 and had no operations from the date of incorporation
to December 31, 1997. All intercompany accounts have been eliminated
in consolidation. Certain prior intercompany balances have been
reclassified to conform with the current year presentation.
b) Partnership Profits, Losses and Distributions
Under the terms of the Company's partnership agreement, profits,
losses and distributions of the Partnership will be made to each
partner pro-rata based on their respective partnership interest.
F-7
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
2. (Continued)
c) Revenue Recognition
The Partnership recognizes revenues as cable television services are
provided to subscribers. Subscription revenues billed in advance for
services are deferred and recorded as income in the period in which
services are rendered.
d) Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated
using the straight-line method over the estimated useful lives of the
respective assets.
e) Intangible Assets and Deferred Costs
Intangible assets and deferred costs are carried at cost and are
amortized using the straight-line method over the estimated useful
lives of the respective assets. The Partnership periodically reviews
the amortization periods of their intangible assets and deferred
costs. The Partnership evaluates whether there has been a permanent
impairment in the value of these assets by considering such factors
including projected undiscounted cash flows, current market conditions
and changes in the cable television industry that would impact the
recoverability of such assets, among other things.
f) Income Taxes
No provision for Federal or state income taxes has been made in the
accompanying consolidated financial statements since any liability for
such income taxes is that of the Partnership's partners and not of the
Partnership. Certain assets have a basis for income tax purposes that
differs from the carrying value for financial reporting purposes,
primarily due to differences in depreciation methods. As a result of
these differences, at December 31, 1996 and 1997 the net carrying
value of these assets for financial reporting purposes exceeded the
net basis for income tax purposes by approximately $15,100,000 and
$15,400,000, respectively.
g) Cash and Cash Equivalents
Cash and cash equivalents, consisting of amounts on deposit in money
market accounts, checking accounts and certificates of deposit, were
$5,751,189 and $3,693,625 at December 31, 1996 and 1997, respectively.
For purposes of the statements of cash flow, certificates of deposit
with maturities of over 90 days, included above, amounted to
$1,000,000 at December 31, 1996, and were not considered cash
equivalents.
F-8
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
h) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
i) Disclosure about Fair Value of Financial Instruments
Cash and Cash Equivalents, Receivables, Accounts Payable and Accrued
Expenses.
The carrying amounts reported in the consolidated balance sheets for
cash and cash equivalents, current receivables, notes receivable and
accounts payable approximate fair values. The carrying value of
receivables with maturities greater than one year have been
discounted, and if such receivables were discounted based on current
market rates, the fair value of these receivables would not be
materially different than their carrying values.
Senior Secured Notes and Long-term Debt
For the Senior Secured Notes, fair values are based on quoted market
prices. The fair market value at December 31, 1996 and 1997 was
approximately $117,000,000 and $123,000,000, respectively. For
long-term debt, their values approximate carrying value due to the
short term maturity of the debt and/or fluctuating interest.
3. Acquisitions
On January 31, 1995, the Partnership acquired a cable television system,
serving approximately 1,100 subscribers in the Vermont communities of
Bradford, South Royalton and Chelsea. The aggregate purchase price was
approximately $350,000 and was allocated to the net assets acquired which
included property and equipment and intangible assets.
On March 22, 1996, the Partnership acquired the net assets of a telephone
dial-up internet access provider, serving approximately 350 customers in
and around the area of Uniontown, Pennsylvania. The aggregate purchase
price was approximately $40,000.
On April 8, 1996, the Company acquired a 1% interest in HPI Acquisition
Co., LLC ("HPIAC"), a Delaware limited liability company for $1,000. The
balance of HPIAC is owned by HPI. HPIAC was formed to acquire interests in
cable television systems and related businesses. The Company's 1% interest
in HPIAC's net loss to date is not material.
F-9
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
On January 31, 1997, the Partnership acquired a cable television system,
serving approximately 823 subscribers in the West Virginia counties of Wirt
and Wood. The aggregate purchase price was approximately $1,053,457 and was
allocated to the net assets acquired which included property and equipment
and intangible assets.
On June 26, 1997, the Partnership acquired the net assets of a cable
television system serving approximately 11,000 subscribers in the North
Carolina communities of Watauga County, Blowing Rock, Beech Mountain and
the town of Boone. The aggregate purchase price was $19,947,430 and was
allocated to the net assets acquired using the purchase method of
accounting and included, property, equipment and intangible assets. The
Company utilized its available cash and the proceeds from a new credit
facility it entered into with Banque Paribas consisting of $20,000,000
senior secured term loan facility to complete the acquisition (see Loans
Payable - Banks below).
The aggregate purchase price of the 1997 acquisitions was $21,000,887 and
was allocated to the net assets acquired based on their estimated fair
market value as follows:
Land $29,100
Cable television system 7,768,400
Vehicles 165,000
Computer equipment 240,000
Subscriber lists 12,909,429
Organization and other costs 131,584
Other net operating items (242,626)
---------
Total aggregate purchase price $21,000,887
===========
The following unaudited pro-forma summary presents the Partnership's
results of operations as if the North Carolina acquisition had occurred as
of the beginning of the fiscal 1996, after giving effects to certain
adjustments, including the depreciation and amortization of property, plant
and equipment and intangible assets acquired and interest costs on the debt
incurred to finance this acquisition. This pro-forma information has been
prepared for comparative purposes only and does not purport to be
indicative of what would have occurred had the acquisition been made as of
that date or of the results which might occur in the future. Pro-forma
results for other acquisitions are not included because they do not meet
the significance test.
Year ended December 31
---------------------------------
1996 1997
------------ ------------
Revenues $ 41,735,750 $ 44,854,534
============ ============
Net Loss $ 7,467,320 $ 6,500,913
============ ============
F-10
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
4. Property, Plant and Equipment
Property, plant and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
Estimated useful
1996 1997 life in years
----------- ----------- --------
<S> <C> <C> <C>
Land $96,689 $96,689 --
Cable television system 66,618,787 78,060,495 5 to 20
Office furniture and fixtures 418,047 481,062 5 and 10
Vehicles 2,304,077 2,945,543 3 and 5
Building 272,996 510,854 5 and 10
Building and leasehold
Improvements 341,736 356,964 1 to 5
Computers 1,729,593 1,917,681 5 and 10
----------- -----------
71,781,925 84,369,288
Less accumulated depreciation (42,894,792) (49,288,986)
----------- -----------
$28,887,133 $35,080,302
=========== ===========
</TABLE>
5. Intangible Assets and Deferred Costs
Intangible assets and deferred costs are summarized as follows at
December 31:
<TABLE>
<CAPTION>
Estimated useful
1996 1997 life in years
----------- ----------- --------
<S> <C> <C> <C>
Covenants not-to-compete $13,168,422 $13,158,422 5
Franchise agreements 19,650,889 19,650,889 9 to 17
Goodwill 1,703,760 1,703,760 20 and 40
Subscriber lists 16,541,413 29,525,115 6 to 18
Financing costs 4,455,478 4,855,478 8 to 10
Organization and other costs 1,835,332 1,964,904 5 to 10
----------- -----------
57,355,294 70,858,568
Less accumulated amortization (35,603,442) (40,230,161)
----------- -----------
$21,751,852 $30,628,407
=========== ===========
</TABLE>
F-11
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
6. Transactions with Affiliates
Amounts due from/to affiliates result from management fees, expense
allocations and temporary non-interest bearing loans. The affiliates are
related to the Company common-ownership.
During 1995, 1996 and 1997 the Partnership was charged management fees of
$1,761,236 $1,902,987, $2,147,286 respectively. Management fees are
calculated based on the gross revenues of the systems. Additionally, during
1995, 1996 and 1997, the Partnership was also charged $639,477, $980,000
and $713,906, respectively, for certain costs incurred by this related
party on their behalf.
7. Due to Principal Owner
Mr. Theodore Baum, directly or indirectly, is the principal owner of 96.17%
of the general and limited partnership interests of the Partnership (the
"Principal Owner"). Due to Principal Owner consists of $5,000,000 at
December 31, 1996 and 1997. Beginning on November 3, 1993, interest on the
$5,000,000 due to the Principal Owner did not accrue and in accordance with
the provisions of the Senior Secured Notes was not paid for twenty four
months. Interest resumed on November 3, 1995 (see Note 8). The principal
may only be repaid thereafter subject to the passage of certain limiting
tests under the covenants of the Senior Secured Notes. Prior to the
issuance of the Senior Secured Notes, amounts due to Principal Owner bore
interest at varying rates per annum based on the prime rate and were due on
demand. These amounts due to the Principal Owner are subject and
subordinate to the prior payment of the amounts due to banks under the 1994
credit agreement described in note 9. Interest expense includes $91,076 in
1995, $521,701 in 1996 and $530,082 in 1997, related to this debt.
F-12
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
8. Senior Secured Notes
On November 3, 1993, the Partnership and HCC (the "Issuers"), through a
private placement offering, issued $115,000,000 aggregate principal amount
of 11% Senior Secured Notes due 2003 (the "Senior Secured Notes"), secured
by substantially all the assets of the Company. The Senior Secured Notes
were issued at a substantial discount from their principal amount and
generated net proceeds to the Issuers of approximately $105,699,000.
Interest is payable on a semi-annual basis in arrears on November 1 and May
1, beginning on May 1, 1994. The Senior Secured Notes bore interest at a
rate of 9-1/2% until the Partnership's registration statement to register
the Senior Secured Notes with the Securities and Exchange Commission became
effective on February 3, 1994. After that date and until November 1, 1996
the Senior Secured Notes bear interest at the rate of 9% per annum. After
November 1, 1996, the Senior Secured Notes bear interest at the rate of 11%
per annum. The discount on the Senior Secured Notes has been amortized over
the term of the Senior Secured Notes so as to result in an effective
interest rate of 11% per annum.
The Senior Secured Notes may be redeemed at the option of the Issuers in
whole or in part at any time on or after November 1, 1997 at the redemption
price of 108% reducing ratably to 100% of the principal amount, in each
case together with accrued interest to the redemption date. The Issuers are
required to redeem $25,000,000 principal amount of the Senior Secured Notes
on each of November 1, 2001 and November 1, 2002. The indenture under which
the Senior Secured Notes were issued contains various restrictive
covenants, the more significant of which are, limitations on distributions
to partners, the incurrence or guarantee of indebtedness, the payment of
management fees, other transactions with officers, directors and
affiliates, and the issuance of certain types of equity interests or
distributions relating thereto.
9. Loans Payable - Bank
On June 26, 1997, the Company entered into a $20,000,000 senior secured
credit facility with Banque Paribas (the 1997 Credit Facility). The
facility is non-amortizing and is due November 1, 2000. Borrowings under
the facility financed the acquisition of certain cable television assets in
North Carolina (see acquisition note above). Interest on the $20,000,000
outstanding are payable at specified margins over either LIBOR or the rate
of interest publicly announced in New York City by The Chase Manhattan Bank
from time to time as its prime commercial lending rate. The margins vary
based on the Company's total leverage ratio, as defined, at the time of an
advance. Currently interest is payable at LIBOR plus 2.75%.
F-13
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
The 1997 Credit Facility is secured by a first perfected security interest
in all of the assets of the Company and a pledge of all equity interests of
the Company. The credit agreement contains various restrictive covenants
that include the achievement of certain financial ratios relating to
interest, fixed charges, leverage, limitations on capital expenditures,
incurrence or guarantee of indebtedness, transactions with affiliates,
distributions to members and management fees which accrue at 5% of gross
revenues.
On June 23, 1997, the 1994 Credit Facility was repaid in full and the 1994
Credit Facility was terminated.
F-14
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
10. Other Notes Payable
Other Notes payable consists of the following at December 31:
1996 1997
---- ----
Promissory note in consideration
for acquisition of a cable
television system, accruing
interest at 10% per annum on
principal and accrued interest
which is added to principal on
certain specified dates;
interest becomes payable on
January 1, 1998 and the
principal is payable in full in
August 20, 2000 $1,851,604 $2,036,765
Subordinated promissory note
payable in connection with the
acquisition of a limited
partner's interest in a
Predecessor Company, payable in
20 quarterly installments of
$25,000, plus interest at the
prime lending rate (which was
8.5% and 8.25% at December 31,
1996 and 1997, respectively)
through October 31, 1997
75,000 -0-
Installment note, collateralized
by computer equipment and
payable in 60 monthly
installments of $6,184,
including interest at 8% per
annum, through December 18, 1997
71,131 -0-
Installment note, collateralized
by computer equipment and
payable in 60 monthly
installments of $5,300,
including interest at Prime Plus
1.5% per annum, through February
28, 2001; fully repaid June 23,
1997
265,000 -0-
Installment notes, collateralized
by vehicles and payable in
monthly installments, at
interest rates between 5.5% to
11.25% per annum, through
January, 2002
622,309 1,028,089
---------- ----------
$2,885,044 $3,064,854
========== ==========
F-15
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
10. (Continued)
Principal payments due on the above notes payable are summarized as follows
at December 31, 1997:
Year ending December 31 Amount
----------------------- ------
1998 388,321
1999 318,133
2000 233,957
2001 2,124,042
2002 400
----------
$3,064,853
==========
11. Partners' Deficit
In connection with the roll-up, the Principal Owner contributed a
$6,500,000 unsecured, non-interest bearing personal promissory note due on
demand to the general partner of the Partnership. Additionally, the
Principal Owner contributed to the Partnership an unsecured, non-interest
bearing personal promissory note in the aggregate principal amount of
$24,000,000 (together with the $6,500,000 note, the "Baum Notes"). The Baum
Notes have been issued for the purpose of the Partnership's credit
enhancement. Although the Baum Notes are unconditional, they do not become
payable except (i) in increasing amounts presently up to $19,500,000 and in
installments thereafter to a maximum of $30,500,000 on December 16, 1996
and (ii) at such time after such dates as the Partnership's creditors shall
have exhausted all claims against the Partnership's assets.
F-16
(Continued)
<PAGE>
THE HELICON GROUP, L.P. AND WHOLLY OWNED
INCORPORATED ENTITIES
Notes to Consolidated Financial Statements
12. Commitments
The Partnership leases telephone and utility poles on an annual basis. The
leases are self renewing. Pole rental expense for the years ended December
31, 1995, 1996 and 1997 was $464,875, $508,669 and $543,679, respectively.
In connection with certain lease and franchise agreements, the Partnership,
from time to time, issues security bonds.
The Partnership utilizes certain office space under operating lease
agreements which expire at various dates through May 2005 and contain
renewal options.
At December 31, 1997 the future minimum rental commitments under such
leases were as follows:
Year ending December 31 Amount
----------------------- ------
1998 $117,540
1999 96,540
2000 81,540
2001 81,540
2002 18,000
Thereafter 161,280
--------
$556,440
========
Rent expense was $88,160 in 1995 and $92,512 in 1996 and $118,625 in 1997.
13. Other Events
On April 1, 1997, the Company transferred the net assets of the telephone
dial-up internet access provider business to HPI. The transfer was recorded
at the carrying value of those assets at that date of $223,130 and the
Company made an inter-company loan due on demand to HPI in this amount.
On April 8, 1996, the existing limited partners of the Company exchanged
(the "Exchange") their limited partnership interests in the Company for all
Class A Common Limited Partnership Interests and Preferred Partnership
Interests in Helicon Partners I, L.P. ("HPI"). As a result of this
Exchange, the Company became 99% owned by HPI (HPI now owns all of the
limited partnership interests in the Company) and Baum Investments, Inc.
which continues to be the general partner of the Company and to own a 1.00%
general partnership interest in the Company. The previous limited partners
of the Company presently own 100% of the limited partner interests of HPI,
subject to dilution upon exercise of the warrants of HPI that it issued to
third party investors in connection with the Exchange.
On April 8, 1996, the Company acquired a 1% interest in HPI Acquisition
Co., LLC ("HPIAC"), a Delaware limited liability company for $1,000. The
balance of HPIAC is owned by HPI. HPIAC was formed to acquire interests in
cable television systems and related businesses. The Company's 1% interest
in HPIAC's net loss to date is not material.
F-17
Exhibit 12
STATEMENT REGARDING COMPUTATION OF EARNINGS TO FIXED CHARGES
The Company's earnings were inadequate to cover fixed charges by $5,356,989
for the year ended December 31, 1997
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