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.
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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.
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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.
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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.
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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.
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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% -- ------ ----- ------ Total 98,231 100% 92 ====== ===== ======
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).
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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
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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.
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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.
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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.
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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.
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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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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.
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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.
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
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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 $19,947,430.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to ordinary and routine litigation proceedings that are incidental to the Company's business. Management believes that the outcome of all pending legal proceedings will not, in the aggregate, have a material adverse effect on the financial condition of the Company.
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ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information called for by this Item is not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information called for by this Item is not applicable.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The financial data set forth below has been derived from the Financial Statements of the Company. The data below ($ 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.
(a) 1993 net loss includes an extraordinary item-loss on extinguishment of debt of $3.7 million.
ITEM 7.
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.
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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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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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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
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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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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.
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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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report on Page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
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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.
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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.
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.
- ---------- 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.
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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.
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.
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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.
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ITEM 13.
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.
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 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
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
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
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
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
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
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
Consolidated Balance Sheets as of December 31, 1996 and 1997
Consolidated Statements of Operations for each of the three years ended December 31, 1997
Consolidated Statements of Changes in Partners' Deficit for each of the three-years ended December 31, 1997
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1997
Notes to Consolidated Financial Statements
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.
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
THE HELICON GROUP, L.P. AND WHOLLY OWNED INCORPORATED ENTITIES Consolidated Balance Sheets December 31, 1996 and 1997
See accompanying notes to consolidated financial statements.
THE HELICON GROUP, L.P. AND WHOLLY OWNED INCORPORATED ENTITIES Consolidated Statements of Operations Years Ended December 31, 1995, 1996 and 1997
See accompanying notes to consolidated financial statements.
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
See accompanying notes to consolidated financial statements.
THE HELICON GROUP, L.P. AND WHOLLY OWNED INCORPORATED ENTITIES Consolidated Statements of Cash Flows Years Ended December 31, 1995, 1996 and 1997
See accompanying notes to consolidated financial statements.
F - 6
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.
(Continued)
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.
(Continued)
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.
(Continued)
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 ============ ============
(Continued)
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:
5. Intangible Assets and Deferred Costs
Intangible assets and deferred costs are summarized as follows at December 31:
(Continued)
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.
(Continued)
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%.
(Continued)
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.
(Continued)
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,
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 ========== ==========
(Continued)
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.
(Continued)
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.