UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the quarterly period ended March 31, 2003 | ||
| or | ||
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the transition period from to |
Commission file number 333-43157
NORTHLAND CABLE TELEVISION, INC.
| STATE OF WASHINGTON (State or other jurisdiction of incorporation) |
91-1311836 (I.R.S. Employer Identification No.) |
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
| STATE OF WASHINGTON (State or other jurisdiction of incorporation) |
91-1638891 (I.R.S. Employer Identification No.) |
|
| 101 STEWART STREET, SUITE 700 SEATTLE, WASHINGTON |
98101 | |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (206) 621-1351
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
Yes o No x
This filing contains 17 pages. Exhibits index appears on page 14.
PART 1 — FINANCIAL INFORMATION
ITEM 1. Financial Statements
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS — (UNAUDITED)
| March 31, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
ASSETS |
|||||||||||
Current Assets: |
|||||||||||
Cash and cash equivalents |
$ | 5,646,898 | $ | 1,538,002 | |||||||
Due from Parent and affiliates |
1,045,845 | 796,464 | |||||||||
System
sale receivable
|
4,083,000 | — | |||||||||
Accounts receivable |
1,681,010 | 2,047,900 | |||||||||
Prepaid expenses |
498,075 | 392,271 | |||||||||
Total current assets |
12,954,828 | 4,774,637 | |||||||||
Investment in Cable Television Properties: |
|||||||||||
Property and equipment, net of accumulated
depreciation of $54,413,063 and $52,255,286,
respectively |
43,066,553 | 44,152,208 | |||||||||
Franchise agreements, net of accumulated amortization
of $38,923,291 |
39,487,137 | 39,487,137 | |||||||||
Goodwill, net of accumulated amortization
of $2,407,104 |
3,937,329 | 3,937,329 | |||||||||
Total investment in cable television properties |
86,491,019 | 87,576,674 | |||||||||
Loan fees, net of accumulated amortization of $2,195,910
and $2,650,564, respectively |
2,022,676 | 3,188,581 | |||||||||
Other intangible assets, net of accumulated
amortization of $3,158,865 and $3,140,381, respectively |
118,124 | 136,608 | |||||||||
Assets from discontinued operations |
— | 25,504,853 | |||||||||
Total assets |
$ | 101,586,647 | $ | 121,181,353 | |||||||
LIABILITIES
AND SHAREHOLDER’S DEFICIT |
|||||||||||
Current
Liabilities: |
|||||||||||
Accounts payable |
$ | 79,787 | $ | 528,645 | |||||||
Accrued expenses |
7,716,930 | 4,705,722 | |||||||||
Converter deposits |
116,610 | 116,027 | |||||||||
Subscriber prepayments |
1,402,105 | 1,629,235 | |||||||||
Due to affiliates |
217,611 | 228,220 | |||||||||
Current portion of notes payable |
3,062,500 | 2,775,920 | |||||||||
Income
tax payable |
500,000 | — | |||||||||
Interest rate swap agreements |
— | 120,377 | |||||||||
Liabilities from discontinued operations |
— | 1,443,610 | |||||||||
Total current liabilities |
13,095,543 | 11,547,756 | |||||||||
Notes payable, net of current portion |
113,164,034 | 165,255,262 | |||||||||
Deferred tax liabilities
|
81,422 | — | |||||||||
Total liabilities |
126,340,999 | 176,803,018 | |||||||||
Shareholder’s Deficit: |
|||||||||||
Common stock (par value $1.00 per share, authorized
50,000 shares; 10,000 shares issued and outstanding)
and additional paid-in capital |
12,359,377 | 12,359,377 | |||||||||
Accumulated deficit |
(37,113,729 | ) | (67,981,042 | ) | |||||||
Total shareholder’s deficit |
(24,754,352 | ) | (55,621,665 | ) | |||||||
Total liabilities and shareholder’s deficit |
$ | 101,586,647 | $ | 121,181,353 | |||||||
The accompanying notes are an integral part of these consolidated balance sheets.
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME — (UNAUDITED)
| For the three months ended March 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
Service revenues |
$ | 12,405,755 | $ | 12,133,311 | ||||||||
Expenses: |
||||||||||||
Cable system operations (including
$69,995 and $57,343, net paid to affiliates
in 2003 and 2002, respectively), exclusive of
depreciation and amortization shown below |
4,822,356 | 4,604,446 | ||||||||||
General and administrative (including
$600,056, net paid to affiliates in 2003,
and $36,547, net received from affiliates 2002) |
2,157,102 | 1,671,177 | ||||||||||
Management fees paid to Parent |
620,288 | 606,596 | ||||||||||
Depreciation and amortization |
2,177,256 | 2,169,393 | ||||||||||
Total operating expenses |
9,777,002 | 9,051,612 | ||||||||||
Income from operations |
2,628,753 | 3,081,699 | ||||||||||
Other income (expense): |
||||||||||||
Interest expense |
(2,423,987 | ) | (3,132,960 | ) | ||||||||
Interest income and other, net |
(131 | ) | 4,825 | |||||||||
Unrealized gain on interest rate swap agreements |
120,377 | 968,175 | ||||||||||
Gain (loss) on disposal of assets |
174 | (5,824 | ) | |||||||||
| (2,303,567 | ) | (2,165,784 | ) | |||||||||
Income from continuing operations before income
tax expense |
325,186 | 915,915 | ||||||||||
Income tax expense |
(81,422 | ) | — | |||||||||
Income from continuing operations |
243,764 | 915,915 | ||||||||||
Discontinued operations (note 4) |
||||||||||||
Income (loss) from operations of Aiken and Port
Angeles Systems, net of tax (including gain on
sales of systems of $31,525,585 in 2003) |
30,623,549 | (426,627 | ) | |||||||||
Net income |
30,867,313 | 489,288 | ||||||||||
Other comprehensive loss: |
||||||||||||
Reclassification of accumulated other comprehensive
income to unrealized gain on interest rate swaps |
— | (104,000 | ) | |||||||||
Other comprehensive loss |
— | (104,000 | ) | |||||||||
Total comprehensive income |
$ | 30,867,313 | $ | 385,288 | ||||||||
The accompanying notes are an integral part of these consolidated balance sheets.
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED)
| For the three months ended March 31, | ||||||||||
| 2003 | 2002 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||
Net income |
$ | 30,867,313 | $ | 489,288 | ||||||
Adjustments to reconcile net income to
cash provided by operating activities: |
||||||||||
Depreciation and amortization |
2,595,054 | 2,636,755 | ||||||||
Unrealized gain on interest rate swap agreements |
(120,377 | ) | (968,175 | ) | ||||||
Amortization of loan costs |
170,140 | 167,996 | ||||||||
(Gain) loss on disposal of assets |
(31,525,759 | ) | 5,824 | |||||||
Deferred income taxes |
81,422 | |||||||||
(Increase) decrease in operating assets: |
||||||||||
Accounts receivable |
366,890 | (53,796 | ) | |||||||
Prepaid expenses |
(105,805 | ) | (24,545 | ) | ||||||
Due from Parent and affiliates |
(249,381 | ) | (617,294 | ) | ||||||
Increase (decrease) in operating liabilities |
||||||||||
Accounts payable and accrued expenses |
1,570,943 | 1,239,295 | ||||||||
Due to affiliates |
(10,609 | ) | 552,923 | |||||||
Converter deposits |
581 | (209 | ) | |||||||
Subscriber prepayments |
(227,130 | ) | 379,372 | |||||||
Net cash provided by operating activities |
3,413,282 | 3,807,434 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||
Investment in cable television properties |
(1,073,540 | ) | (1,594,614 | ) | ||||||
Proceeds from sale of cable system |
53,445,107 | 226,088 | ||||||||
Proceeds from disposal of assets |
600 | 5,550 | ||||||||
Net cash provided by (used in) investing activities |
52,372,167 | (1,362,976 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||
Proceeds from notes payable |
— | — | ||||||||
Principal payments on borrowings |
(51,804,648 | ) | — | |||||||
Loan fees and other costs incurred |
— | (6,426 | ) | |||||||
Net cash used in financing activities |
(51,804,648 | ) | (6,426 | ) | ||||||
INCREASE IN CASH |
3,980,801 | 2,438,032 | ||||||||
CASH, beginning of period |
1,666,097 | 2,724,099 | ||||||||
CASH, end of period |
$ | 5,646,898 | $ | 5,162,131 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||||
Cash paid during the period for interest |
$ | 982,009 | $ | 1,727,177 | ||||||
Cash paid during the period for state income taxes |
$ | 7,410 | $ | 4,881 | ||||||
The accompanying notes are an integral part of these consolidated statements.
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
| (1) | Basis of Presentation |
Interim Financial Reporting
These unaudited condensed consolidated financial statements are being filed in conformity with Rule 10-01 of Regulation S-X regarding interim financial statement disclosures and do not contain all of the necessary footnote disclosures required for a fair presentation of the consolidated balance sheets, statements of operations and comprehensive income and statements of cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, this data includes all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s consolidated financial position at March 31, 2003, its consolidated statements of operations and comprehensive income for the three months ended March 31, 2003 and 2002 and its consolidated statements of cash flows for the three months ended March 31, 2003 and 2002. Results of operations for these periods are not necessarily indicative of results to be expected for the full year. These financial statements and notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
On March 11, 2003 and March 31, 2003, the Company sold the operating assets and franchise rights of its cable systems in and around Port Angeles, Washington and Aiken, South Carolina, respectively. The accompanying financial statements have been restated to report the discontinued operations of the Company, effected for this sale.
Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” (“SFAS No. 143”) which addresses financial accounting and reporting for obligations associated with the reporting of obligations associated with the retirement of tangible long-lived assets and associated asset retirement obligations (“ARO”). Under the scope of this pronouncement, the Company has ARO associated with removal of equipment from poles and headend sites that are leased from third parties. Based on management’s analyses, the Company has concluded that for the reasons mentioned below, it is not able to reasonably estimate the fair values of the ARO. First, to operate the cable television network, the Company will always need to have equipment deployed at these poles and headend sites. Additionally, the Company has not historically incurred any ARO and, given the length of time in the future when any potential obligations might exist, management believes that estimating any probability at this time is not practicable. As a result, upon adoption of SFAS No. 143 the Company did not record any ARO associated with the obligation to remove the equipment.
| (2) | Intangible Assets |
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortize goodwill or any other intangible assets determined to have indefinite lives. The Company has determined that its franchises meet the definition of indefinite lived assets. The Company tests these assets for impairment on an annual basis during the fourth quarter, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value or if the fair value of intangible assets with indefinite lives falls below their carrying value on an annual basis. The book value of the Company’s intangible assets, effecting for the sale of the Aiken System and the Port Angeles System described in note 4, is presented in the following table:
| March 31, 2003 | December 31, 2002 | ||||||||||||||||||||||||
| Gross | Accumulated | Net | Gross | Accumulated | Net | ||||||||||||||||||||
| Carrying | Amortization | Carrying | Carrying | Amortization | Carrying | ||||||||||||||||||||
| Amount | Amount | Amount | Amount | ||||||||||||||||||||||
Indefinite-lived
intangible assets: |
|||||||||||||||||||||||||
Franchises |
$ | 78,410,428 | $ | (38,923,291 | ) | $ | 39,487,137 | $ | 78,410,428 | $ | (38,923,291 | ) | $ | 39,487,137 | |||||||||||
Goodwill |
6,344,433 | (2,407,104 | ) | 3,937,329 | 6,344,433 | (2,407,104 | ) | 3,937,329 | |||||||||||||||||
| 84,754,861 | (41,330,395 | ) | 43,424,466 | 84,754,861 | (41,330,395 | ) | 43,424,466 | ||||||||||||||||||
Definite-lived
intangible assets: |
|||||||||||||||||||||||||
Loan fees |
4,218,586 | (2,195,910 | ) | 2,022,676 | 5,839,145 | (2,650,564 | ) | 3,188,581 | |||||||||||||||||
Other intangible assets |
3,276,989 | (3,158,865 | ) | 118,124 | 3,276,989 | (3,140,381 | ) | 136,608 | |||||||||||||||||
| $ | 92,250,436 | $ | (46,685,170 | ) | $ | 45,565,266 | $ | 93,870,995 | $ | (47,121,340 | ) | $ | 46,749,655 | ||||||||||||
Amortization of loan fees and other intangibles for each of the next five years is expected to be approximately as follows:
2003 |
$ | 570,000 | ||||||||||||||||||||||
2004 |
472,000 | |||||||||||||||||||||||
2005 |
472,000 | |||||||||||||||||||||||
2006 |
466,000 | |||||||||||||||||||||||
2007 |
349,000 | |||||||||||||||||||||||
| $ | 2,329,000 | |||||||||||||||||||||||
| (3) | Notes Payable |
In August of 2000, the Company refinanced its existing senior bank indebtedness. The original indebtedness was repaid with borrowings under the Revised Senior Credit Facility. Amounts outstanding under the Revised Senior Credit Facility mature on September 30, 2007. The Revised Senior Credit Facility is collateralized by a first lien position on all present and future assets and stock of the Company. Interest rates vary based on certain financial covenants; currently 3.58%. Graduated principal and interest payments are due quarterly, beginning September 30, 2003, until maturity on September 30, 2007. The estimated fair value of the revolving credit and term loan facility is equal to its carrying value because of its variable interest rate nature.
Under the revolving credit and term loan agreement, the Company has agreed to restrictive covenants which require the maintenance of certain ratios, including a Pro Forma Debt Service ratio of not less than 1.25 to 1.0 and a Leverage Ratio of no greater than 6.00 to 1.0, among other restrictions. The Company submits quarterly debt compliance reports to its creditor under this arrangement. As of March 31, 2003, the Company was in compliance with the terms of the loan agreement.
As of the date of this filing, the balance under the credit facility is $16,226,534, and applicable interest rates are as follows: $15,726,534 at a LIBOR based interest rate of 3.58%, which expires July 22, 2003 and $500,000 at a LIBOR based rate of 3.58%, which expires May 22, 2003. The above rates include a margin paid to the lender based on overall leverage, and may increase or decrease as the Company’s leverage fluctuates.
| (4) | System Sales |
On March 11, 2003, the Company sold the operating assets and franchise rights of its cable system in and around the community of Port Angeles, Washington (the “Port Angeles System”). The Port Angeles System was sold at a price of approximately $11,375,000 of which the Company received approximately $10,800,000 at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $575,000 is being held in escrow and will be released to the Company one year from the closing of the transaction, subject to general representations and warranties. Historically, the Company has entered into similarly structured transactions, and collected the amount held in escrow. Substantially all of the proceeds were used to pay down amounts outstanding under the Company’s Senior Credit Facility.
On March 31, 2003, the Company sold the operating assets and franchise rights of its cable system in and around the community of Aiken, South Carolina (the “Aiken System”). The Aiken System was sold at a price of approximately $46.3 million of which the Company received approximately $42.6 million at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $3.7 million is being held in escrow and will be released to the Company one year from the closing of the transaction, subject to general representations and warranties. Historically, the Company has entered into similarly structured transactions, and collected the amount held in escrow. Substantially all of the proceeds were used to pay down amounts outstanding under the Company’s Senior Credit Facility.
The sales were made pursuant to offers by separate, independent third parties. Based on the offers made, management determined that acceptance of the offers would be in the best economic interest of the Company. The sales were not a result of declining or deteriorating operations nor was it necessary to create liquidity or reduce outstanding debt. It is the opinion of management that the Company could have continued existing operations and met all obligations as they became due.
The assets and liabilities attributable to the Aiken System and the Port Angeles System as of December 31, 2002 have been reported as assets and liabilities from discontinued operations in the accompanying balance sheets, and consist of the following:
| As of | |||||
| December 31, 2002 | |||||
Cash and cash equivalents |
$ | 128,095 | |||
Accounts receivable |
636,648 | ||||
Prepaid expenses |
65,139 | ||||
Property and equipment, net of accumulated
depreciation of $10,905,201 |
10,768,828 | ||||
Franchise agreements (net of accumulated
amortization of $9,356,640) |
13,906,143 | ||||
Total assets |
$ | 25,504,853 | |||
Accounts payable |
122,112 | ||||
Accrued expenses |
820,168 | ||||
Converter deposits |
9,152 | ||||
Subscriber prepayments |
492,178 | ||||
Total liabilities |
$ | 1,443,610 | |||
In addition, the revenue, expenses and other items attributable to the operations of the Aiken System for the three months ended March 31, 2003 (the date of sale of the system) and 2002 and to the operations of the Port Angeles System for the period from January 1, 2003 to March 11, 2003 (the date of sale of the system) and for the three months ended March 31, 2002 have been reported as discontinued operations in the accompanying statements of operations and comprehensive income, and include the following:
| 2003 | 2002 | ||||||||
Service revenues |
$ | 3,079,389 | 3,081,497 | ||||||
Expenses: |
|||||||||
Cable systems operations (including
$6,289 and $20,943, net paid to
affiliates in 2003 and 2002, respectively) |
1,205,573 | 1,140,394 | |||||||
General and administrative (including
$152,093, net paid to affiliates in 2003
and $17,571, net received from affiliates
in 2002) |
573,781 | 458,947 | |||||||
Management fees paid to Parent |
153,637 | 154,075 | |||||||
Depreciation and amortization |
417,798 | 467,362 | |||||||