Table of Contents
FORM 10-K—ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] | |
For the fiscal year ended DECEMBER 31, 2002
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] | |
For the transition period from to
Commission file number 0-18307
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
| STATE OF WASHINGTON | 91-1423516 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| 101 STEWART STREET, SUITE 700 SEATTLE, WASHINGTON | 98101 | |||
| (Address of principal executive offices) | (Zip Code) | |||
Registrant’s telephone number, including area code: (206) 621-1351
Securities registered pursuant to Section 12(b) of the Act:
| Title of each reviewed class | Name of each exchange on which registered | |
| (NONE) | (NONE) |
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
Indicate by check mark whether registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and has been subject to such filing requirements for the past 90 days.
Yes [X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes [ ] No [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [ X ]
Table of Contents
The aggregate market value of the Limited Partner Units representing limited partner interests was approximately $10,402,415 on as of June 28, 2002, based on the most currently available secondary market trading information, as of that same date.
At December 31, 2002, there were 19,087 Limited Partnership Units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
| (1) | Form S-1 Registration Statement declared effective on March 16, 1989 (No. 33-25892). | ||
| (2) | Form 10-K Annual Reports for fiscal years ended December 31, 1989, December 31, 1990, December 31, 1992 and December 31, 1994, December 31, 1998 and December 31, 2001, respectively. | ||
| (3) | Form 10-Q Quarterly Report for period ended June 30, 1989, March 31, 1995 and June 30, 2002. | ||
| (4) | Form 8-K dated November 11, 1994. | ||
| (5) | Form 8-K dated June 30, 1995. | ||
| (6) | Form 8-K dated January 5, 1996. | ||
| (7) | Form 8-K dated March 11, 2003. |
This filing contains 32 pages. Exhibits Index appears on page 32.
Financial Statements/Schedules Index appears on page 25.
2
Table of Contents
Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Litigation Reform Act of 1995. Statements contained or incorporated by reference in this document that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Reform Act of 1995. Forward-looking statements may be identified by use of forward-looking terminology such as “believe”, “intends”, “may”, “will”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms, variations of those terms or the negative of those terms.
PART I
ITEM 1. BUSINESS
Northland Cable Properties Eight Limited Partnership (the “Partnership”) is a Washington limited partnership consisting of one general partner and approximately 940 limited partners holding 19,087 partnership units as of December 31, 2002. Northland Communications Corporation, a Washington corporation, is the General Partner of the Partnership (referred to herein as “Northland” or the “General Partner”).
Northland was formed in March 1981 and is principally involved in the ownership and management of cable television systems. Northland currently manages the operations and is the general partner for cable television systems owned by two limited partnerships, and is the managing member of Northland Cable Networks, LLC, which also owns and operates cable television systems. Northland is also the parent company of Northland Cable Properties, Inc., which was formed in February 1995 and is principally involved in direct ownership of cable television systems, and is the majority member and manager of Northland Cable Ventures, LLC. Northland is a subsidiary of Northland Telecommunications Corporation (“NTC”). Other subsidiaries, direct and indirect, of NTC include:
NORTHLAND CABLE TELEVISION, INC. — formed in October 1985 and principally involved in the direct ownership of cable television systems. Sole shareholder of Northland Cable News, Inc.
| NORTHLAND CABLE NEWS, INC. — formed in May 1994 and principally involved in the production and development of local news, sports and informational programming for the Partnership and other Northland affiliates. As of January 2001, Northland Cable News, Inc. stopped providing these services to the Partnership. |
NORTHLAND CABLE SERVICES CORPORATION — formed in August 1993 and principally involved in the development and production of computer software used in billing and financial record keeping for Northland-affiliated cable systems. Also provides technical support associated with the build out and upgrade of Northland affiliated cable systems. Sole shareholder of Cable Ad-Concepts, Inc.
| CABLE AD-CONCEPTS, INC. — formed in November 1993 and principally involved in the sale, development and production of video commercial advertisements that are cablecast on Northland-affiliated cable systems. |
NORTHLAND MEDIA, INC. — formed in April 1995 as a holding company. Sole shareholder of the following two entities:
| STATESBORO MEDIA, INC. — formed in April 1995 and principally involved in operating an AM radio station serving the community of Statesboro, Georgia and surrounding areas. | |||
| CORSICANA MEDIA, INC. — purchased in September 1998 and principally involved in operating an AM radio station serving the community of Corsicana, Texas and surrounding areas. |
The Partnership was formed on September 21, 1988 and began operations in 1989. The Partnership serves the communities and surrounding areas of La Conner, Washington, Aliceville, Alabama and Swainsboro, Georgia (the “Systems”). As of December 31, 2002, the total number of basic subscribers served by the Systems was 9,921, and the Partnership’s penetration rate (basic subscribers as a percentage of homes passed) was approximately 66%. The Partnership’s properties are located in rural areas, which, to some extent, do not offer consistently acceptable off-air network signals. Management believes that this factor, combined with the existence of fewer entertainment alternatives than in large markets contributes to a larger proportion of the population subscribing to cable television (higher penetration).
3
Table of Contents
The Partnership has 17 non-exclusive franchises to operate the Systems. These franchises, which will expire at various dates through the year 2019 with one franchise extending to 2044, have been granted by local and county authorities in the areas in which the Systems operate. Annual franchise fees are paid to the granting authorities. These fees vary between 2% and 5% and are generally based on the respective gross revenues of the Systems in a particular community. The franchises may be terminated for failure to comply with their respective conditions.
The following is a description of the areas served by the Systems as of December 31, 2002. The system serving the area of La Conner, WA was sold to an unaffiliated third party on March 11, 2003.
LaConner, WA: The LaConner system serves communities within three counties in northwestern Washington along Puget Sound. LaConner was predominately a fishing and farming community when founded in the late 1800’s and temporarily became a major trading port. Today, LaConner has become a popular tourist area, with surrounding landscapes of pastoral farms and tulip fields. Its main street, featuring wooden decks and courtyards, runs along the Swinomish slough. The Swinomish Indian Reservation is located on the outskirts of LaConner. Certain information regarding the LaConner, WA System as of December 31, 2002 is as follows:
| Basic Subscribers Expanded Basic Subscribers Premium Subscribers Digital Subscribers Estimated Homes Passed | 1,632 1,012 636 123 2,745 |
Aliceville, AL: The Aliceville system serves the communities in west central Alabama. The communities, located south and west of Tuscaloosa, include Aliceville, Carrollton, Pickensville, Reform, Gordo, Millport, Kennedy, Eutaw and Marion. Certain information regarding the Aliceville, AL system as of December 31, 2002 is as follows:
| Basic Subscribers Premium Subscribers Estimated Homes Passed | 5,387 1,651 8,420 |
Swainsboro, GA: The Swainsboro system serves the incorporated community of Swainsboro and nearby unincorporated areas of Emanuel County, Georgia. Swainsboro is predominantly an agricultural community located in central Georgia, and is the county seat for Emanuel County. Certain information regarding the Swainsboro, GA system as of December 31, 2002 is as follows:
| Basic Subscribers Expanded Basic Subscribers Premium Subscribers Digital Subscribers Estimated Homes Passed | 2,902 1,402 1,908 294 3,900 |
The Partnership had 13 employees as of December 31, 2002. Management of these systems is handled through offices located in the towns of LaConner, Washington, Aliceville, Alabama and Swainsboro, Georgia. Pursuant to the Agreement of Limited Partnership, the Partnership reimburses the General Partner for time spent by the General Partner’s accounting staff on Partnership accounting and bookkeeping matters. (See Item 13 (a) below.)
The Partnership’s cable television business is not considered seasonal. The business of the Partnership is not dependent upon a single customer or a few customers, the loss of any one or more of which would have a material adverse effect on its business. No customer accounts for 10% or more of revenues. No material portion of the Partnership’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental unit, except that franchise agreements may be terminated or modified by the franchising authorities as noted above. During the last year, the Partnership did not engage in any research and development activities.
Partnership revenues are derived primarily from monthly payments received from cable television subscribers. Subscribers are divided into four categories: basic subscribers, expanded basic subscribers, premium subscribers, and digital subscribers. “Basic subscribers” are households that subscribe to the basic level of service, which generally provides access to the three major television networks (ABC, NBC and CBS), a few independent local stations, PBS (the Public Broadcasting System) and certain satellite
4
Table of Contents
programming services, such as ESPN, CNN or The Discovery Channel. “Expanded basic subscribers” are households that subscribe to an additional level of certain satellite programming services, the content of which varies from system to system. “Premium subscribers” are households that subscribe to one or more “pay channels” in addition to the basic service. These pay channels include such services as “Showtime”, “Home Box Office”, “Cinemax”, “Disney” or “The Movie Channel”. “Digital subscribers” are those who subscribe to digitally delivered video and audio services where offered.
COMPETITION
Cable television systems currently experience competition from several sources, including broadcast television, cable overbuilds, direct broadcast satellite services, private cable and multichannel multipoint distribution service systems. Cable television systems are also in competition in various degrees with other communications and entertainment media, including motion pictures, home video cassette recorders, Internet data delivery and Internet video delivery. The following provides a summary description of these sources of competition.
Broadcast Television
Cable television systems have traditionally competed with broadcast television, which consists of television signals that the viewer is able to receive directly on his television without charge using an “off-air” antenna. The extent of this competition is dependent in part upon the quality and quantity of signals available by antenna reception as compared to the services provided by the local cable system. Accordingly, cable operators find it less difficult to obtain higher penetration rates in rural areas (where signals available off-air are limited) than in metropolitan areas where numerous, high quality off-air signals are often available without the aid of cable television systems. The recent licensing of digital spectrum by the FCC will provide incumbent broadcast licenses with the ability to deliver high definition television pictures and multiple digital-quality program streams, as well as advanced digital services such as subscription video.
Overbuilds
Cable television franchises are not exclusive, so that more than one cable television system may be built in the same area. This is known as an “overbuild.” Overbuilds have the potential to result in loss of revenues to the operator of the original cable television system. Constructing and developing a cable television system is a capital intensive process, and it is often difficult for a new cable system operator to create a marketing edge over the existing system. Generally, an overbuilder would be required to obtain franchises from the local governmental authorities, although in some instances, the overbuilder could be the local government itself. In any case, an overbuilder would be required to obtain programming contracts from entertainment programmers and, in most cases, would have to build a complete cable system such as headends, trunk lines and drops to individual subscribers homes throughout the franchise areas.
Federal cross-ownership restrictions historically limited entry by local telephone companies into the cable television business. The 1996 Telecom Act eliminated this cross-ownership restriction. See “Regulation and Legislation” below. It is therefore possible for companies with considerable resources to overbuild existing cable operators and enter the business. Several telephone companies have begun seeking cable television franchises from local governmental authorities and constructing cable television systems. The Partnership cannot predict at this time the extent of telephone company competition that will emerge in areas served by the Partnership’s cable television systems. The entry of telephone companies as direct competitors, however, is likely to continue over the next several years and could adversely affect the profitability and market value of the Partnership’s systems. The entry of electric utility companies into the cable television business, as now authorized by the 1996 Telecom Act, could have a similar adverse effect.
Direct Broadcast Satellite Service
High powered direct-to-home satellites have made possible the wide-scale delivery of programming to individuals throughout the United States using small roof-top or wall-mounted antennas. The two leading DBS providers have experienced dramatic growth over the last several years and together now serve over 18 million customers nationwide. Companies offering direct broadcast satellite service use video compression technology to increase channel capacity of their systems to more than 100 channels and to provide packages of movies, satellite networks and other program services which are competitive to those of cable television systems. DBS companies historically faced significant legal and technological impediments to providing popular local broadcast programming to their customers. Recent federal legislation reduced this competitive disadvantage. Nevertheless, technological limitations still affect DBS companies, and it is expected that DBS companies will offer local broadcast programming only in the top 50 to 100 U.S. markets for the foreseeable future. The same legislation reduced the compulsory copyright fees paid by DBS companies and allowed them to
5
Table of Contents
continue offering distant network signals to rural customers. The availability of low or no cost DBS equipment, delivery of local signals in some markets and exclusivity with respect to certain sports programming has increased DBS’s market share over recent years. The impact of DBS services on the Partnership’s market share within its service areas cannot be precisely determined but is estimated to have taken away between 2% and 15% depending upon the specific area.
Private Cable
Additional competition is provided by private cable television systems, known as satellite master antenna television, serving multi-unit dwellings such as condominiums, apartment complexes, and private residential communities. These private cable systems may enter into exclusive agreements with apartment owners and homeowners associations, which may preclude operators of franchised systems from serving residents of these private complexes. Operators of private cable, which do not cross public rights of way, are free from the federal, state and local regulatory requirements imposed on franchised cable television operators.
Mulitchannel Multipoint Distribution Service Systems
Cable television systems also compete with wireless program distribution services such as multichannel, multipoint distribution service systems, commonly called wireless cable, which are licensed to serve specific areas. Multichannel, multipoint distribution service systems use low-power microwave frequencies to transmit television programming over-the-air to paying subscribers. This industry is less capital intensive than the cable television industry, and it is therefore more practical to construct systems using this technology in areas of lower subscriber penetration.
REGULATION AND LEGISLATION
Summary
The following summary addresses the key regulatory developments and legislation affecting the cable television industry. Other existing federal legislation and regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements are currently the subject of a variety of judicial proceedings, legislative hearings and administrative and legislative proposals, which could change, in varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings nor their impact upon the cable television industry or the Partnership can be predicted at this time.
The Partnership expects to adapt its business to adjust to the changes that may be required under any scenario of regulation. At this time, the Partnership cannot assess the effects, if any, that present regulation may have on the Partnership’s operations and potential appreciation of its Systems. There can be no assurance that the final form of regulation will not have a material adverse impact on the Partnership’s operations.
The operation of a cable system is extensively regulated at the federal, local, and, in some instances, state levels. The Cable Communications Policy Act of 1984, the Cable Television Consumer Protection and Competition Act of 1992 (the “1992 Cable Act”), and the 1996 Telecommunications Act (the “1996 Telecom Act”, and, collectively, the “Cable Act”) establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (“FCC”) has principal responsibility for implementing the policies of the Cable Act. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Partnership cannot predict the impact of future developments on the cable television industry. Future regulatory and legislative changes could adversely affect the Partnership’s operations.
Cable Rate Regulation
The 1992 Cable Act imposed an extensive rate regulation regime on the cable television industry, which limited the ability of cable companies to increase subscriber fees. Under that regime, all cable systems were subject to rate regulation, unless they face “effective competition” in their local franchise area. Federal law now defines “effective competition” on a community-specific basis as requiring satisfaction of conditions rarely satisfied in the current marketplace.
Although the FCC established the underlying regulatory scheme, local government units, commonly referred to as local franchising authorities, are primarily responsible for administering the regulation of the lowest level of cable service called the basic service tier. The basic service tier typically contains local broadcast stations and public, educational, and government access channels. Local
6
Table of Contents
franchising authorities also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services. Before a local franchising authority begins basic service rate regulation, it must certify to the FCC that it will follow applicable federal rules. Many local franchising authorities have voluntarily declined to exercise their authority to regulate basic service rates.
As of December 31, 2002, none of the Partnership’s local franchising authorities were certified to regulate basic tier rates. The 1992 Cable Act permits communities to certify and regulate rates at any time, so that it is possible that additional localities served by the systems may choose to certify and regulate rates in the future.
The FCC itself historically administered rate regulation of cable programming service tiers, which represent the expanded level of non-“basic” and non-“premium”, programming services. The 1996 Telecom Act, however, provided special rate relief for small cable operators offering cable programming service tiers. The elimination of cable programming service tier regulation afforded the Partnership substantially greater pricing flexibility.
Under the rate regulations of the FCC, most cable systems were required to reduce their basic service tier and cable programming service tier rates in 1993 and 1994, and have since had their rate increases governed by a complicated price cap scheme that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. The FCC has modified its rate adjustment regulations to allow for annual rate increases and to minimize previous problems associated with regulatory lag. Operators also have the opportunity to bypass this “benchmark” regulatory scheme in favor of traditional “cost-of-service” regulation in cases where the latter methodology appears favorable. Cost of service regulation is a traditional form of rate regulation, under which a utility is allowed to recover its costs of providing the regulated service, plus a reasonable profit.
In a particular effort to ease the regulatory burden on small cable systems, the FCC created special rate rules applicable for systems with fewer than 15,000 subscribers owned by an operator with fewer than 400,000 subscribers. The special rate rules allow for a simplified cost-of-service showing. All of the Partnership’s systems are eligible for these simplified cost-of-service rules, and have calculated rates generally in accordance with those rules.
Under the FCC’s rate rules, premium cable services offered on a per-channel or per-program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. However, federal law requires that the basic service tier be offered to all cable subscribers and limits the ability of operators to require purchase of any cable programming service tier if a customer seeks to purchase premium services offered on a per-channel or per-program basis, subject to a technology exception which sunsets in 2002. The 1996 Telecom Act also relaxes existing “uniform rate” requirements by specifying that uniform rate requirements do not apply where the operator faces “effective competition,” and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing still may be made to the FCC.
Regulation by the FCC of cable programming service tier rates for all systems, regardless of size, sunset pursuant to the 1996 Telecom Act on March 31, 1999. Certain legislators, however, have called for new rate regulations. Should this occur, all rate deregulation, including that applicable to small operators like the Partnership, could be jeopardized.
Cable Entry Into Telecommunications
The 1996 Telecom Act creates a more favorable environment for the Partnership to provide telecommunications services beyond traditional video delivery. It provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. A cable operator is authorized under the 1996 Telecom Act to provide telecommunications services without obtaining a separate local franchise. States are authorized, however, to impose “competitively neutral” requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of-way and may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service.
The favorable pole attachment rates afforded cable operators under federal law can be gradually increased by utility companies owning the poles, beginning in 2001, if the operator provides telecommunications service, as well as cable service, over its plant. The FCC recently clarified that a cable operator’s favorable pole rates are not endangered by the provision of Internet services, but the U.S. Court of Appeals for the 11th Circuit recently ruled in Gulf Power Co. v. FCC, 208F.3d 1263 (11th Cir. 2000) (“Gulf Power”) that the FCC has no authority to regulate pole rents for cable systems providing Internet services (because, the court ruled, Internet services are not telecommunications services or cable services). The court subsequently stayed the issuance of the mandate in Gulf Power pending
7
Table of Contents
the filing of and final action on a petition for write of certiorari seeking review of the Gulf Power decision in the U.S. Supreme Court. The stay allows for the orderly review of the decision in the U.S. Supreme Court. In the interim, the FCC may continue to process pending pole attachment complaints under its existing rules and procedures. If the 11th Circuit decision goes into effect, it could significantly increase pole attachment rates and adversely impact cable operators.
Cable entry into telecommunications will be affected by the regulatory landscape now being fashioned by the FCC and state regulators. One critical component of the 1996 Telecom Act to facilitate the entry of new telecommunications providers (including cable operators) is the interconnection obligation imposed on all telecommunications carriers. The Supreme Court effectively upheld most of the FCC interconnection regulations, but recently the 8th Circuit Court of Appeals vacated other portions of the FCC’s rules on slightly different grounds. More recently, the 9th Circuit Court of Appeals ruled in the FCC’s favor on these same rules, creating a split in authority that may be resolved by the Supreme Court. Although these regulations should enable new telecommunications entrants to reach viable interconnection agreements with incumbent carriers, many issues, including which specific network elements the FCC can mandate that incumbent carriers make available to competitors, remain unresolved.
Similarly, if another FCC decision requiring that incumbent telephone companies permit co-location of competitors’ equipment on terms more favorable to competitors is sustained on administrative and judicial appeal, this decision, too, would make it easier for new entrants, including the Partnership, to provide telecommunications service.
Internet Service
There is at present no significant federal regulation of cable system delivery of Internet services. Furthermore, the FCC recently issued several reports finding no immediate need to impose this type of regulation. However, this situation may change as cable systems expand their broadband delivery of Internet services. In particular, proposals have been advanced at the federal level that would require cable operators to provide access to unaffiliated Internet-service providers and online service providers. In one instance, the Federal Trade Commission is considering whether and to what extent to impose, as a condition of Time Warner’s merger with America Online, certain “open access” requirements on Time Warner’s cable systems, thereby allowing unaffiliated Internet-service providers access to Time Warner’s broadband distribution infrastructure.
Some local franchising authorities unsuccessfully tried to impose mandatory Internet access or “open access” requirements as part of cable franchise renewals or transfers. In AT&T Corp v. City of Portland, No. 99-35609 (9th Cir., June 22, 2000), the federal Court of Appeals for the Ninth Circuit overturned a federal district court in Portland, Oregon’s ruling that local franchising authorities have the lawful authority to impose these type of conditions. The lower court had ruled that the City of Portland had inherent authority to require, as a condition of the City’s consent to the transfer of TCI’s cable franchise to AT&T, that AT&T provide “open access” to the “cable modem platform” of the Excite@Home Internet service. On appeal, the Court of Appeals rejected the City’s attempt to impose “open access” conditions on AT&T delivery of Internet service over the cable system because that service, according to the Court, is not a cable service, but a “telecommunications service.” The potential regulatory state and federal implications of this rationale are unclear, given the various regulatory requirements for the provision of telecommunications services. There have been at least two additional court rulings that have rejected local imposition of “open access” conditions on cable-provided Internet access, but those ruling have employed very different legal reasoning. A federal court in Virginia found that Internet service was a cable service, but as such was exempt from local “open access” regulation. Another federal court in Florida even more recently ruled that “open access” could not be imposed on local operators because doing so would violate the First Amendment. Other local authorities have imposed or may impose mandatory Internet access requirements on cable operators. These developments could, if they become widespread, burden the capacity of cable systems and complicate any plans the Partnership may have to develop for providing Internet service.
Telephone Entry Into Cable Television
The 1996 Telecom Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable cross-ownership ban. Local exchange carriers, including the regional telephone companies, can now compete with cable operators both inside and outside their telephone service areas with certain regulatory safeguards. Because of their resources, local exchange carriers could be formidable competitors to traditional cable operators. Various local exchange carriers currently are providing video programming services within their telephone service areas through a variety of distribution methods, including both the deployment of broadband wire facilities and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers providing video programming should be regulated as a traditional cable operator, subject to local franchising and federal regulatory requirements, unless the local exchange carrier elects to deploy its plant as
8
Table of Contents
an open video system. To qualify for favorable open video system status, the competitor must reserve two-thirds of the system’s activated channels for unaffiliated entities. The Fifth Circuit Court of Appeals reversed certain of the FCC’s open video system rules, including its preemption of local franchising. The FCC recently revised its OVS rules to eliminate this general preemption, thereby leaving franchising discretion to local and state authorities. It is unclear what effect this ruling will have on the entities pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their offerings across traditional service boundaries, the general prohibition remains on local exchange carrier buyouts of co-located cable systems. Cable operator buyouts of co-located local exchange carrier systems, and joint ventures between cable operators and local exchange carriers in the same market also are prohibited. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition, including a carefully circumscribed “rural exemption.” The 1996 Telecom Act also provides the FCC with the limited authority to grant waivers of the buyout prohibition.
Electric Utility Entry Into Telecommunications/Cable Television
The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, including cable television, notwithstanding the Public Utility Holding Company Act. Electric utilities must establish separate subsidiaries, known as “exempt telecommunications companies” and must apply to the FCC for operating authority. Like telephone companies, electric utilities have substantial resources at their disposal, and could be formidable competitors to traditional cable systems. Several of these utilities have been granted broad authority by the FCC to engage in activities, which could include the provision of video programming.
Additional Ownership Restrictions
The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable cross-ownership, including broadcast network/cable restrictions, but leaves in place existing FCC regulations prohibiting local cross-ownership between co-located television stations and cable systems. The 1996 Cable Act leaves in place existing restrictions on cable cross-ownership with satellite master antenna television and multichannel multipoint distribution service facilities, but lifts those restrictions where the cable operator is subject to effective competition. FCC regulations permit cable operators to own and operate satellite master antenna television systems within their franchise area, provided that their operation is consistent with local cable franchise requirements.
Must Carry/Retransmission Consent
The 1992 Cable Act contains broadcast signal carriage requirements. Broadcast signal carriage is the transmission of broadcast television signals over a cable system to cable customers. These requirements, among other things, allow local commercial television broadcast stations to elect once every three years between a “must carry” status or a “retransmission consent” status. Less popular stations typically elect must carry, which is the broadcast signal carriage requirement that allows local commercial television broadcast stations to require a cable system to carry the station. Must carry requests can dilute the appeal of a cable system’s programming offerings because a cable system with limited channel capacity may be required to forego carriage of popular channels in favor of less popular broadcast stations electing must carry. More popular stations, such as those affiliated with a national network, typically elect retransmission consent, which is the broadcast signal carriage rule that allows local commercial television broadcast stations to negotiate terms (such as mandating carriage of an affiliated cable network) for granting permission to the cable operator to carry the stations. Retransmission consent demands may require substantial payments or other concessions.
The Partnership has been able to reach agreements with all of the broadcasters who elected retransmission consent. To date, compliance with the “retransmission consent” and “must carry” provisions of the 1992 Cable Act has not had a material effect on the Partnership, although these provisions may affect the operations of the Partnership in the future, depending on factors as market conditions, the introduction of digital broadcasts, channel capacity and similar matters when these arrangements are negotiated or renegotiated.
The burden associated with must carry may increase substantially if broadcasters proceed with planned conversion to digital transmission and the FCC determines that cable systems must carry all analog and digital broadcasts in their entirety. This burden would reduce capacity available for more popular video programming and new Internet and telecommunication offerings. The broadcast industry continues to press the FCC on the issue of digital must carry. A rulemaking regarding must carry obligations during the transition from analog to digital broadcasting remains pending at the FCC. It remains unclear when a final decision will be released.
9
Table of Contents
Access Channels
Local franchising authorities can include franchise provisions requiring cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires cable systems to designate a portion of their channel capacity, up to 15% in some cases, for commercial leased access by unaffiliated third parties. The FCC has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for commercial leased access use. In the Partnership’s experience to date, requests for commercial leased access carriages have been relatively limited.
Access to Programming
To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes video programmers affiliated with cable companies from favoring their cable operators over new competitors and requires these programmers to sell their programming to other multichannel video distributors. This provision limits the ability of vertically integrated cable programmers to offer exclusive programming arrangements to cable companies. There also has been interest expressed in further restricting the marketing practices of cable programmers, including subjecting programmers who are not affiliated with cable operators or programmers who deliver their service by terrestrial means (rather than by satellite) to the program access requirements. These changes should not have a dramatic impact on the Partnership, but would limit potential competitive advantages the Partnership enjoys.
Inside Wiring; Subscriber Access
In an order issued in 1997, the FCC established rules that require an incumbent cable operator upon expiration of a multiple dwelling unit service contract to sell, abandon, or remove “home run” wiring that was installed by the cable operator in a multiple dwelling unit building. These inside wiring rules are expected to assist building owners in their attempts to replace existing cable operators with new programming providers who are willing to pay the building owner a higher fee, where this fee is permissible. The FCC has also proposed abrogating all exclusive multiple dwelling unit service agreements held by incumbent operators.
With limited exceptions, existing FCC regulations prohibit any state or local law or regulations, or private covenant, private contract, lease provision, homeowners’ association rule or similar restriction, impairing the installation, maintenance or use of certain video reception antennas on property within the exclusive control of a tenant or property owner.
Other Regulations of the Federal Communications Commission
In addition to the FCC regulations noted above, there are other FCC regulations covering such areas as:
| • | equal employment opportunity, | ||
| • | subscriber privacy, | ||
| • | programming practices, including, among other things, |
• syndicated program exclusivity
• network program nonduplication,
• local sports blackouts,
• indecent programming,
• lottery programming,
• political programming,
10
Table of Contents
• sponsorship identification,
• children’s programming advertisements, and
• closed captioning,
| • | registration of cable systems and facilities licensing, | ||
| • | maintenance of various records and public inspection files, | ||
| • | aeronautical frequency usage, | ||
| • | lockbox availability, | ||
| • | antenna structure notification, | ||
| • | tower marking and lighting, | ||
| • | consumer protection and customer service standards, | ||
| • | technical standards, | ||
| • | consumer electronics equipment compatibility, and | ||
| • | emergency alert systems. |
The FCC recently ruled that cable customers must be allowed to purchase cable converters from third parties and established a multi-year phase-in during which security functions, which would remain in the operator’s exclusive control, would be unbundled from basic converter functions, which could then be satisfied by third party vendors.
The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations.
Copyright
Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenues to a federal copyright royalty pool, cable operators can obtain blanket permission to retransmit copyrighted material included in broadcast signals. Effective July 1, 2000, the federal Copyright Office increased the cable compulsory license rates used to calculate cable systems’ copyright payments under the cable compulsory license. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative review and could adversely affect the Partnership’s ability to obtain desired broadcast programming. The outcome of this legislative activity cannot be predicted. Copyright clearances for nonbroadcast programming services are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising that use music controlled by the two principal major music performing rights organizations, the American Society of Composers, Authors and Publishers (ASCAP) and BroadcastMusic, Inc. (BMI). The cable industry has had a long series of negotiations and adjudications with both organizations. A prior voluntarily negotiated settlement with BMI has now expired, and is subject to further proceedings. The governing rate court recently set retroactive and prospective cable industry rates for ASCAP music based on the previously negotiated BMI rate. Although the Partnership cannot predict the ultimate outcome of these industry proceedings or the amount of any license fees that they may be required to pay for past and future use of association-controlled music, the Partnership does not currently believe these license fees will be significant to their business and operations.
11
Table of Contents
State and Local Franchise Regulation
Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity in order to cross public rights-of-way. Federal law now prohibits local franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises.
Cable franchises generally are granted for fixed terms and in many cases include monetary penalties for non-compliance and may be terminable if the franchisee fails to comply with material provisions. The specific terms and conditions of franchises vary materially between jurisdictions. Each franchise generally contains provisions governing cable operations, service rates, franchising fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states subject cable systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although local franchising authorities have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, local franchising authorities cannot insist on franchise fees exceeding 5% of the system’s gross cable-related revenues, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming.
Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the local franchising authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and service or increased franchise fees as a condition of renewal. Similarly, if a local franchising authority’s consent is required for the purchase or sale of a cable system or franchise, the local franchising authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. The Cable Act requires franchising authorities to act on any franchise transfer request within 120 days after receipt by the franchising authority of all information required by FCC regulations. Approval is deemed to be granted if the franchising authority fails to act within such 120-day period. Historically, most of the Partnership’s franchises have been renewed and transfer consents granted.
Under the 1996 Telecom Act, local franchising authorities are prohibited from limiting, restricting, or conditioning the provision of competitive telecommunications services except for certain “competitively neutral” requirements necessary to manage public rights of way. In addition, local franchising authorities may not require the Partnership to provide any telecommunications service or facilities, other than institutional networks under certain circumstances, as a condition of an initial cable franchise grant, franchise renewal, or franchise transfer. The 1996 Telecom Act also provides that franchising fees are limited to an operator’s cable-related revenues and do not apply to revenues that the Partnership derives from providing new telecommunications services.
ITEM 2. PROPERTIES
The Partnership’s cable television systems are located in and around LaConner, Washington, Aliceville, Alabama and Swainsboro, Georgia. The principal physical properties of the Systems consist of system components (including antennas, coaxial cable, electronic amplification and distribution equipment), motor vehicles, miscellaneous hardware, spare parts and real property, including office buildings and headend sites and buildings. The Partnership’s cable plant passed approximately 15,065 homes as of December 31, 2002. Management believes that the Partnership’s plant passes all areas which are currently economically feasible to service. Future line extensions depend upon the density of homes in the area as well as available capital resources for the construction of new plant. (See Part II. Item 7. Liquidity and Capital Resources.)
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
12
Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
| (a) | There is no established public trading market for the Partnership’s units of limited partnership interest. | ||
| (b) | The approximate number of equity holders as of December 31, 2002, is as follows: |
| Limited Partners: General Partners: | 940 1 |
| (c) | During 2002, 2001, 2000, 1999 and 1998, the Partnership made no cash distributions. |
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements included in Item 8. “Financial Statements and Supplementary Data.”
| Years ended December 31, | ||||||||||||||||||||||||
| 2002 (1) | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||||||
| SUMMARY OF OPERATIONS: | ||||||||||||||||||||||||
| Revenue | $ | 5,112,896 | $ | 5,132,726 | $ | 5,148,191 | $ | 4,974,846 | $ | 4,876,464 | ||||||||||||||
| Operating income | 616,553 | 498,757 | 528,626 | 466,394 | 310,189 | |||||||||||||||||||
| Net income (loss) | 182,102 | (319,969 | ) | (160,886 | ) | (403,306 | ) | (634,150 | ) | |||||||||||||||
| Net income (loss) per limited partner unit | 10 | (17 | ) | (8 | ) | (21 | ) | (33 | ) | |||||||||||||||
| Cumulative tax losses per limited partner unit | (520 | ) | (520 | ) | (520 | ) | (520 | ) | (520 | ) | ||||||||||||||
(1) As of December 31, 2001, the Partnership discontinued amortization of its franchise agreements and goodwill in accordance with SFAS No. 142. Amortization of these items was $387,648 for both years ended December 31, 2001 and 2000.
| December 31, | ||||||||||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||||||
| BALANCE SHEET DATA: | ||||||||||||||||||||||||
| Total assets | $ | 9,641,472 | $ | 10,226,110 | $ | 11,239,622 | $ | 12,044,826 | $ | 13,197,193 | ||||||||||||||
| Term loan | 8,213,663 | 8,828,957 | 9,693,028 | 10,272,182 | 10,625,000 | |||||||||||||||||||
| Total liabilities | 8,905,709 | 9,672,449 | 10,365,992 | 11,010,310 | 11,759,371 | |||||||||||||||||||
| General partner’s deficit | (72,861 | ) | (74,682 | ) | (71,482 | ) | (69,873 | ) | (65,840 | ) | ||||||||||||||
| Limited partners’ capital | 808,624 | 628,343 | 945,112 | 1,104,389 | 1,503,662 | |||||||||||||||||||
| Distribution per limited partner unit | — | — | — | — | — | |||||||||||||||||||
| Cumulative distributions per limited partner unit | — | — | — | — | — | |||||||||||||||||||
13
Table of Contents
| Quarters Ended | |||||||||||||||||||||||||||||||||
| December 31, | September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||||||||||||
| 2002 | 2002 | 2002 | 2002 | 2001 | 2001 | 2001 | 2001 | ||||||||||||||||||||||||||
| Revenue | $ | 1,260,050 | $ | 1,274,280 | $ | 1,295,717 | $ | 1,282,849 | $ | 1,263,281 | $ | 1,286,340 | $ | 1,298,734 | $ | 1,284,371 | |||||||||||||||||
| Operating income | 140,117 | 141,330 | 171,187 | 163,919 | 104,025 | 139,682 | 142,955 | 112,095 | |||||||||||||||||||||||||
| Net income (loss) | 8,419 | 30,643 | 81,002 | 62,038 | (64,161 | ) | (77,227 | ) | (75,737 | ) | (102,844 | ) | |||||||||||||||||||||
| Net income (loss) | |||||||||||||||||||||||||||||||||
| per limited | |||||||||||||||||||||||||||||||||
| partner unit | 1 | 2 | 4 | 3 | (3 | ) | (4 | ) | (4 | ) | (5 | ) | |||||||||||||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
2002 and 2001
Total revenue reached $5,112,896 for the year ended December 31, 2002, decreasing slightly from $5,132,726 for the year ended December 31, 2001. Rate increases implemented during 2002 were offset by a decrease in subscribers. Of the 2002 revenue, $3,861,514 (76%) is derived from subscriptions to basic services, $374,384 (7%) from subscriptions to premium services, $226,236 (4%) from subscriptions to expanded basic services, $230,430 (5%) from advertising services, and $420,332 (8%) from other sources.
The following table displays historical average rate information for various services offered by the Partnership’s systems (amounts per subscriber per month):
| 2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||
| Basic Rate | $ | 30.75 | $ | 28.50 | $ | 27.35 | $ | 25.95 | $ | 24.65 | ||||||||||
| Expanded Basic Rate | 8.50 | 8.75 | 8.25 | 7.95 | 7.40 | |||||||||||||||
| HBO Rate | 10.00 | 10.00 | 10.70 | 10.50 | 10.50 | |||||||||||||||
| Cinemax Rate | 8.50 | 8.00 | 7.30 | 7.50 | 8.00 | |||||||||||||||
| Showtime Rate | 8.75 | 8.75 | 8.75 | 8.25 | 7.00 | |||||||||||||||
| Disney Rate | — | — | — | 8.60 | 8.60 | |||||||||||||||
| Encore Rate | 2.00 | 1.75 | 1.50 | 1.50 | 1.50 | |||||||||||||||
| Starz | 3.50 | 5.50 | 6.25 | 6.70 | 7.00 | |||||||||||||||
| Service Contract Rate | 1.25 | 2.00 | 2.00 | 2.05 | 2.10 | |||||||||||||||
Operating expenses totaled $474,132 for the year ended December 31, 2002, representing an increase of approximately 4% from $457,087 for the year ended December 31,2001. The increase is attributable to higher operating salaries and pole rental expenses, offset by a decrease in regional management expenses. Salary and benefit costs are the major component of operating expenses. Employee wages are reviewed annually and, in most cases, increased based on cost of living adjustments and other factors. Therefore, management expects operating expenses to increase in the future.
General and administrative expenses totaled $1,317,136 for the year ended December 31, 2002, representing an increase of approximately 4% from $1,265,497 for the year ended December 31, 2001. This increase is due to increased salaries and benefits, property taxes, system utility expenses and administrative overhead.
Programming expenses totaled $1,485,525 for the year ended December 31, 2002, representing an increase of approximately 8% from $1,371,517 for the year ended December 31, 2001. This increase is due to increased costs charged by various program suppliers as well as new digital service launches offset by a decrease in the number of subscribers served. Rate increases from program suppliers, as well as new fees due to the launch of additional channels, will contribute to the trend of increased programming costs in the future.
14
Table of Contents
Depreciation and amortization expense decreased approximately 21%, from $1,539,868 in 2001 to $1,219,550 in 2002. The decrease is primarily attributable to the Partnership’s implementation of Statement of Financial Accounting Standards (“SFAS”) No. 142 “ Goodwill and Other Intangible Assets.” As of December 31, 2001, the Partnership discontinued amortizing its franchise agreements and goodwill resulting in a decrease of approximately $390,000 in amortization expense for the year ended December 31, 2002. This is offset by depreciation and amortization of plant, equipment and other intangible assets acquired during 2002.
Interest expense decreased approximately 35% from $688,204 in 2001 to $446,052 in 2002. The Partnership’s average bank debt balance decreased from approximately $9,326,423 in 2001 to $8,576,751 in 2002, due to principal payments made in 2002. In addition, the Partnership’s effective interest rate decreased from 7.38% in 2001 to 5.20% in 2002.
In 2002, the Partnership generated net income of $182,102. The Partnership has historically incurred net operating losses prior to 2002 as a result of significant non-cash charges to income for depreciation and amortization. However, the Partnership’s implementation of SFAS No. 142 “Goodwill and Other Intangible Assets,” discontinued the amortization of its franchise agreements and goodwill resulting in a decrease of approximately $390,000 in amortization expense for the year ended December 31, 2002. The Partnership has generated positive operating income in each of the three years ended December 31, 2002, and Management anticipates that this trend will continue.
2001 and 2000
Total revenue reached $5,132,726 for the year ended December 31, 2001, compared to $5,148,191 for the year ended December 31, 2001. Rate increases implemented during 2001 were offset by a decrease in subscribers. Of the 2001 revenue, $3,939,909 (77%) is derived from subscriptions to basic services, $385,676 (8%) from subscriptions to premium services, $208,993 (4%) from subscriptions to expanded basic services, $186,144 (3%) from advertising services and $412,004 (8%) from other sources, including late fee revenue.
Operating expenses totaled $457,087 for the year ended December 31, 2001, representing a decrease of approximately 7% from $493,975 for the year ended December 31, 2000. The decrease is attributable to a reduction of operating salaries, regional management expenses and pole rental expenses.
General and administrative expenses totaled $1,265,497 for the year ended December 31, 2001, representing an increase of approximately 1% from $1,248,737 for the year ended December 31, 2000. This increase is due to increased salaries and benefits, system utility expenses and administrative overhead.
Programming expenses totaled $1,371,517 for the year ended December 31, 2001, representing an increase of approximately 1% from $1,353,409 for the year ended December 31, 2000. This increase is due to increased costs charged by various program suppliers as well as new digital service launches offset by a decrease in the number of subscribers served.
Depreciation and amortization expense increased from $1,523,444 in 2000 to $1,539,868 in 2001 (approximately 1%). This is primarily due to depreciation and amortization on plant, equipment and intangible assets acquired during 2001, offset by assets becoming fully depreciated.
Interest expense decreased from $828,204 in 2000 to $688,204 in 2001 (approximately 17%). The Partnership’s average bank debt balance decreased from approximately $10,068,030 in 2000 to $9,326,423 in 2001, due to principal payments made in 2001. In addition, the Partnership’s effective interest rate decreased from 8.23% in 2000 to 7.38% in 2001.
LIQUIDITY AND CAPITAL RESOURCES
During 2002, the Partnership’s primary source of liquidity was cash flow from operations. The Partnership generates cash through the monthly billing of subscribers for cable services. Losses from uncollectible accounts have not been material. During 2002, cash generated from monthly billings was sufficient to meet the Partnership’s needs for working capital, capital expenditures and debt service, and management expects the cash generated from these monthly billings will be sufficient to meet the Partnership’s 2003 obligations.
15
Table of Contents
2002
Net cash provided by operating activities totaled $1,313,445 for the year ended December 31, 2002. Adjustments to the $182,102 net income for the period to reconcile to net cash provided by operating activities consisted primarily of $1,232,523 of depreciation and amortization, offset by $49,964 relating to unrealized gains on interest rate swap agreements and changes in other operating assets and liabilities of $62,658.
Net cash used in investing activities consisted of $591,228 in capital expenditures for the year ended December 31, 2002.
Net cash used in financing activities consisted of $615,294 in principal payments on long-term debt and payment of additional loan fees of $5,687 for the year ended December 31, 2002.
Term Loan
In June 2002, the Partnership amended its term loan agreement to extend the maturity date to December 31, 2003 and revise the amount of quarterly principal payments to $200,000 per quarter commencing September 30, 2002. The amendment also adjusted the margin over LIBOR paid to the lender and revised certain financial covenants. In February 2003, the Partnership further amended the agreement such that all amounts outstanding under the term loan become due and payable on June 30, 2004. The Partnership intends to pursue a complete or partial asset sale during the remaining term of the amended credit agreement, but no assurances can be given that such a transaction will occur. It is management’s opinion that the Partnership could renegotiate the terms of the credit agreement prior to its maturity if asset sales sufficient to repay the outstanding bank debt are not completed by June 30, 2004.
As of December 31, 2002, the Partnership’s term loan balance was $7,970,139. As of December 31, 2002, the interest rate on the credit facility was 4.4375% expiring on January 31, 2003. The above rates include a margin paid to the lender based on overall leverage and may increase or decrease as the Partnership’s overall leverage fluctuates.
The Partnership also has a term loan in the amount of $243,524, which bears interest at a fixed rate of 8.25%. Fixed payments of principal and interest are due monthly until maturity on December 31, 2004.
Under the terms of the loan agreement, the Partnership has agreed to restrictive covenants, which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of 4.75 to 1, a Cash Flow Coverage Ratio of 1.00 to 1, and a limitation on the maximum amount of annual capital expenditures of $1,200,000. The General Partner submits quarterly debt compliance reports to the Partnership’s creditor under this agreement. As of December 31, 2002, the Partnership was in compliance with the terms of the loan agreement.
Obligations and Commitments
In addition to working capital needs for ongoing operations, the Partnership has capital requirements for (i) annual maturities and interest payments related to the term loan and (ii) required minimum operating lease payments. The following table summarizes the contractual obligations as of December 31, 2002 and the anticipated effect of these obligations on the Partnership’s liquidity in future years:
| 2003 | 2004 | 2005 | 2006 | 2007 | Total | |||||||||||||||||||
| Term loan | $ | 816,624 | $ | 7,397,039 | — | — | — | $ | 8,213,663 | |||||||||||||||
| Interest payments (current weighted average interest rate of 4.86%) | 397,702 | 182,065 | — | — | — | 579,767 | ||||||||||||||||||
| Minimum operating lease payments | 15,400 | 10,725 | 3,300 | 3,300 | 3,300 | 36,025 | ||||||||||||||||||
| Total contractual cash obligations (a) | $ | 1,229,726 | $ | 7,589,829 | $ | 3,300 | $ | 3,300 | $ | 3,300 | $ | 8,829,455 | ||||||||||||
| (a) | These contractual obligations do not include accounts payable and accrued liabilities, which are expected to be paid in 2003. |
16
Table of Contents
Capital Expenditures
During 2002, the Partnership incurred approximately $590,000 in capital expenditures. These expenditures included the continued system upgrade to 450 MHz in the LaConner, WA system, the continuation of digital service deployment in the Swainsboro, GA system and the ongoing system upgrade to 450MHz in the Aliceville, Alabama system. All capital expenditures for 2002 were financed through cash provided by operations.
Management has budgeted that the Partnership will spend approximately $600,000 on capital expenditures in 2003. These expenditures include the continuation of a system upgrade to 450 MHz in the Aliceville, AL system and the continuation of digital deployment in the Swainsboro, GA system.
SYSTEM SALE
On March 11, 2003, the Partnership sold the operating assets and franchise rights of its cable system serving the community of La Conner, Washington, which served approximately 1,600 basic subscribers, to Wave Division Networks, LLC. The system was sold at a purchase price of approximately $3,200,000. Net proceeds from the transaction were used to repay amounts outstanding under the term loan agreement, and effectively reduce the required principal payments due in 2004.
As of December 31, 2002, the transaction was subject to certain closing conditions, including the buyer obtaining and providing evidence of financing sufficient to complete the transaction. As the sale of the assets was not probable, the assets associated with the transaction were considered to be held for use, as defined in SFAS No. 144, at December 31, 2002.
CRITICAL ACCOUNTING POLICIES
This discussion and analysis of our financial condition and results of operations is based on the Partnership’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting policies, which have been chosen among alternatives, require a more significant amount of management judgment than other accounting policies the Partnership employs.
Revenue Recognition
Cable television service revenue, including service and maintenance, is recognized in the month service is provided to customers. Advance payments on cable services to be rendered are recorded as subscriber prepayments. Revenues resulting from the sale of local spot advertising are recognized when the related advertisements or commercials appear before the public.
Property and Equipment
Property and equipment are recorded at cost. Costs of additions and substantial improvements, which include materials, labor, and other indirect costs associated with the construction of cable transmission and distribution facilities, are capitalized. Indirect costs include employee salaries and benefits, travel and other costs. These costs are estimated based on historical information and analysis. The Partnership periodically performs evaluations of these estimates as warranted by events or changes in circumstances.
In accordance with SFAS No. 51, “Financial Reporting by Cable Television Companies,” the Partnership also capitalizes costs associated with initial customer installations. The costs of disconnecting service or reconnecting service to previously installed locations is expensed in the period incurred. Costs for repairs and maintenance are also charged to operating expense, while equipment replacements, including the replacement of drops, are capitalized.
17
Table of Contents
Intangible Assets
Effective January 1, 2002, the Partnership adopted SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 required that the Partnership cease amortization of goodwill and any other intangible assets determined to have indefinite lives, and established a new method of testing these assets for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value or if the fair value of intangible assets with indefinite lives falls below their carrying value on an annual basis. The amortization of existing goodwill ceased on December 31, 2001. The Partnership determined that its franchise agreements met the definition of indefinite lived assets due to the history of obtaining franchise renewals, among other considerations discussed below. Accordingly, amortization of these assets also ceased on December 31, 2001. The Partnership tested these intangibles for impairment at January 1, 2002 and again during the fourth quarter of 2002 and determined that the fair value of the assets exceeded their carrying value. The Partnership will continue to test these assets for impairment annually, or more frequently as warranted by events or changes in circumstances.
Management believes the franchises have indefinite lives because the franchises are expected to be used by the Partnership for the foreseeable future and effects of obsolescence, competition and other factors are minimal. In addition, the level of maintenance expenditures required to obtain the future cash flows expected from the franchises are not material in relation to the carrying value of the franchises. While the franchises have defined lives based on the franchising authority, renewals are routinely granted, and management expects them to continue to be granted. This expectation is supported by management’s experience with the Partnership’s franchising authorities and the franchising authorities of the Partnership’s affiliates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 143
In September 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Statement No. 143 will be effective for the Partnership beginning January 1, 2003. The Partnership has not yet estimated the impact of implementation on its financial position or results of operations.
Statement of Financial Accounting Standards No. 145
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting for certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. SFAS No. 145 will be effective beginning January 1, 2003, except for the provisions relating to the amendment of SFAS No. 13, which will be effective for transactions occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a material impact on the Partnership’s financial statements.
Statement of Financial Accounting Standards No. 146
In September 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred and is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of SFAS No. 146 will not have a material impact on the Partnership’s financial statements.
FASB Interpretation No. 45
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The interpretation establishes disclosure requirements for December 31, 2002 financial statements for companies that make certain types of guarantees. Beginning in 2003, the interpretation requires that companies record the fair value of certain types of guarantees as a liability in the financial statements. The Partnership has reviewed the interpretation and has concluded that its 2002 disclosures are adequate and does not expect the interpretation to have a material impact on the Partnership’s financial position or results of operations in 2003.
18
Table of Contents
ECONOMIC CONDITIONS
Historically, the effects of inflation have been considered in determining to what extent rates will be increased for various services provided. It is expected that the future rate of inflation will continue to be a significant variable in determining rates charged for services provided, subject to the provisions of the 1996 Telecom Act. Because of the deregulatory nature of the 1996 Telecom Act, the Partnership does not expect the future rate of inflation to have a material adverse impact on operations.
TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES
Management Fees
The General Partner receives a fee for managing the Partnership equal to 5% of the gross revenues of the Partnership, excluding revenues from the sale of cable television systems or franchises. Management fees charged by the General Partner were $255,645, $256,636 and $257,410 for 2002, 2001 and 2000, respectively, which are included as a component of general and administrative expenses in the accompanying statements of operations.
Reimbursements
The General Partner provides or causes to be provided certain centralized services to the Partnership and other affiliated entities. The General Partner is entitled to reimbursement from the Partnership for various expenses incurred by it or its affiliates on behalf of the Partnership allocable to its management of the Partnership, including travel expenses, pole and site rental, lease payments, legal expenses, billing expenses, insurance, governmental fees and licenses, headquarters’ supplies and expenses, pay television expenses, equipment and vehicle charges, operating salaries and expenses, administrative salaries and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by affiliates in rendering the services. The costs of certain services are charged directly to the Partnership, based upon the personnel time spent by the employees rendering the service. The cost of other services is allocated to the Partnership and affiliates based upon relative size and revenue. Management believes that the methods used to allocate services to the Partnership are reasonable. Amounts charged to the Partnership by the General Partner for these services were $287,458, $253,701 and $222,222 for the years ended December 31, 2002, 2001 and 2000, respectively.
The Partnership has entered into operating management agreements with certain affiliates managed by the General Partner. Under the terms of these agreements, the Partnership or an affiliate serves as the executive managing agent for certain cable television systems and is reimbursed for certain operating and administrative expenses. The Partnership paid $228,962, $233,340 and $243,509, net of payment received, under the terms of these agreements during 2002, 2001 and 2000, respectively.
Northland Cable Service Corporation (NCSC), an affiliate of the General Partner, was formed to provide billing system support to cable systems owned and managed by the General Partner. In addition NCSC provides technical support associated with the build out and upgrade of Northland affiliated cable systems. Cable Ad Concepts, a subsidiary of NCSC, assists in the development of local advertising as well as billing for video commercial advertisements to be cablecast on Northland affiliated cable systems. In 2002, 2001 and 2000 the partnership paid $82,627, $93,110 and $74,958, respectively, for these services. Of the 2002 amount, $24,222 was capitalized related to the build out and upgrade of cable systems.
In 1997, the Partnership began paying monthly program license fees to Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the rights to distribute programming developed and produced by NCN. Total license fees charged by NCN during 2000 were $8,196. As of January 1, 2001, NCN stopped providing these services to the Partnership.
CERTAIN BUSINESS RELATIONSHIPS
John E. Iverson, a Director and Secretary of the General Partner, is a partner of the law firm of Ryan, Swanson & Cleveland, PLLC, which has rendered and is expected to continue to render legal services to the General Partner and the Partnership.
19
Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership is subject to market risks arising from changes in interest rates. The Partnership’s primary interest rate exposure results from changes in LIBOR or the prime rate, which are used to determine the interest rate applicable to the Partnership’s debt facilities. The potential loss over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate of all the Partnership’s variable rate obligations would be approximately $80,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended December 31, 2002, 2001 and 2000 are included as a part of this filing (see Item 15 (a) below).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previous Independent Accountant
The Partnership dismissed Arthur Andersen LLP as its independent auditor on July 10, 2002. The decision to dismiss Arthur Andersen was approved by the Board of Directors of the General Partner.
During the two most recent fiscal years and through July 10, 2002, there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen’s satisfaction, would have caused Arthur Andersen to make reference to the subject matter in connection with its report on the Partnership’s financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. Arthur Andersen’s reports on the financial statements of the Partnership for 2000 and 2001 did not contain any adverse opinions or disclaimers of opinions, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.
The Partnership requested that Arthur Andersen provide a currently dated letter confirming its agreement with the above statements. Arthur Andersen informed the Partnership that, because of Arthur Andersen’s current situation, it is unable to provide such letter.
New Independent Accountant
On July 10, 2002, the Partnership engaged KPMG LLP as the firm of independent auditors to audit the Partnership’s financial statements for the fiscal year ending December 31, 2002. The decision to engage KPMG was approved by the Board of Directors of the General Partner. During the period from January 2000 to April 1, 2002, The Partnership did not consult KPMG regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, that was an important factor the Partnership considered in reaching a decision on an accounting, auditing, or financial reporting issue, or the type of audit opinion that might be rendered on our financial statements, or (ii) any matter that was the subject of either a disagreement or reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The General Partner of the Partnership is Northland Communications Corporation, a Washington corporation.
Certain information regarding the officers and directors of Northland and relating to the Partnership is set forth below.
20
Table of Contents
JOHN S. WHETZELL (AGE 61). Mr. Whetzell is the founder of Northland Communications Corporation, its Chief Executive Officer and has been a Director since March 1982. Mr. Whetzell became Chairman of the Board of Directors in December 1984. He also serves as Chief Executive Officer and Chairman of the Board of Northland Telecommunications Corporation and each of its subsidiaries. He has been involved with the cable television industry for over 28 years. Between March 1979 and February 1982 he was in charge of the Ernst & Whinney national cable television consulting services. Mr. Whetzell first became involved in the cable television industry when he served as the Chief Economist of the Cable Television Bureau of the Federal Communications Commission (FCC) from May 1974 to February 1979. He provided economic studies to support the deregulation of cable television both in federal and state arenas. He participated in the formulation of accounting standards for the industry and assisted the FCC in negotiating and developing the pole attachment rate formula for cable television. His undergraduate degree is in economics from George Washington University, and he has an MBA degree from New York University.
JOHN E. IVERSON (AGE 66). Mr. Iverson is the Secretary of Northland Communications Corporation and has served on the Board of Directors since December 1984. He also is the Secretary and serves on the Board of Directors of Northland Telecommunications Corporation and each of its subsidiaries. He is currently a member in the law firm of Ryan, Swanson & Cleveland, P.L.L.C. He is a member of the Washington State Bar Association and American Bar Association and has been practicing law for more than 40 years. Mr. Iverson is the past President and a Trustee of the Pacific Northwest Ballet Association. Mr. Iverson has a Juris Doctor degree from the University of Washington.
RICHARD I. CLARK (AGE 45). Mr. Clark is an original incorporator of Northland Communications Corporation and serves as Executive Vice President, Assistant Secretary and Assistant Treasurer of Northland Communications Corporation. He also serves as Vice President, Assistant Secretary and Treasurer of Northland Telecommunications Corporation. Mr. Clark has served on the Board of Directors of both Northland Communications Corporation and Northland Telecommunications Corporation since July 1985. In addition to his other responsibilities, Mr. Clark is responsible for the administration and investor relations activities of Northland, including financial planning and corporate development. From July 1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the area of providing cable television consultation services and has been involved with the cable television industry for nearly 24 years. He has directed cable television feasibility studies and on-site market surveys. Mr. Clark has assisted in the design and maintenance of financial and budget computer programs, and he has prepared documents for major cable television companies in franchising and budgeting projects through the application of these programs. In 1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a Bachelor of Arts degree in accounting.
GARY S. JONES (AGE 45). Mr. Jones is the President of Northland Telecommunications Corporation and each of its subsidiaries. Mr. Jones joined Northland in March 1986 and had previously served as Vice President and Chief Financial Officer for Northland. Mr. Jones is responsible for cash management, financial reporting and banking relations for Northland and is involved in the acquisition and financing of new cable systems. Prior to joining Northland, Mr. Jones was employed as a Certified Public Accountant with Laventhol & Horwath from 1980 to 1986. Mr. Jones received his Bachelor of Arts degree in Business Administration with a major in accounting from the University of Washington in 1979.
RICHARD J. DYSTE (AGE 57). Mr. Dyste serves as Senior Vice President-Technical Services of Northland Telecommunications Corporation and each of its subsidiaries. He joined Northland in April 1986. Mr. Dyste is responsible for planning and advising all Northland cable systems with regard to technical performance as well as system upgrades and rebuilds. He is a past president of the WH Rainier Chapter and a current member of the Society of Cable Telecommunications Engineers, Inc. Mr. Dyste joined Northland in 1986 as an engineer and served as Operations Consultant to Northland Communications Corporation from August 1986 until April 1987. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is a graduate of Washington Technology Institute.
H. LEE JOHNSON (AGE 59). Mr. Johnson has served as Divisional Vice President for Northland since March 1994. He is responsible for the management of systems serving subscribers in Alabama, Georgia, Mississippi, North Carolina and South Carolina. Prior to his association with Northland he served as Regional Manager for Warner Communications, managing four cable systems in Georgia from 1968 to 1973. Mr. Johnson has also served as President of Sunbelt Finance Corporation and was employed as a System Manager for Statesboro CATV when Northland purchased the system in 1986. Mr. Johnson has been involved in the cable television industry for over 33 years and is a current member of the Society of Cable Television Engineers. He is a graduate of Swainsboro Technical Institute and has attended numerous training seminars, including courses sponsored by Jerrold Electronics, Scientific Atlanta, The Society of Cable Television Engineers and CATA.
R. GREGORY FERRER (AGE 47). Mr. Ferrer joined Northland in March 1984 as Assistant Controller and currently serves as Vice President and Treasurer of Northland Communications Corporation. Mr. Ferrer also serves as Vice President and Assistant Treasurer of Northland Telecommunications Corporation. Mr. Ferrer is responsible for coordinating all of Northland’s property tax filing, insurance requirements and system programming contracts as well as interest rate management and other treasury functions.
21
Table of Contents
Prior to joining Northland, he was a Certified Public Accountant at Benson & McLaughlin, a local public accounting firm, from 1981 to 1984. Mr. Ferrer received his Bachelor of Arts in Business Administration from Washington State University with majors in marketing in 1978 and accounting and finance in 1981.
MATTHEW J. CRYAN (AGE 38). Mr. Cryan is Vice President — Budgets and Planning and has been with Northland since September 1990. Mr. Cryan is responsible for the development of current and long-term operating budgets for all Northland entities. Additional responsibilities include the development of financial models used in support of acquisition financing, analytical support for system and regional managers, financial performance monitoring and reporting and programming analysis and supervision of all billing related matters of Northland. Prior to joining Northland, Mr. Cryan was employed as an analyst with NKV Corp., a securities litigation support firm located in Redmond, Washington. Mr. Cryan graduated from the University of Montana in 1988 with honors and holds a Bachelor of Arts in Business Administration with a major in finance.
RICK J. MCELWEE (AGE 41). Mr. McElwee is Vice President and Controller for Northland. He joined Northland in May 1987 as System Accountant and was promoted to Assistant Controller of Northland Cable Television, Inc. in 1993. Mr. McElwee became Divisional Controller of Northland Telecommunications Corporation in 1997 and in January 2001, he was promoted to Vice President and Controller of Northland Telecommunications Corporation. Mr. McElwee is responsible for managing all facets of the accounting and financial reporting process for Northland. Prior to joining Northland, he was employed as an accountant with Pay n’ Save Stores, Inc., a regional drugstore chain. Mr. McElwee graduated from Central Washington University in 1985 and holds a Bachelor of Science in Business Administration with a major in accounting.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation was paid to the General Partner and affiliates during 2002 as indicated in Note 4 to the Notes to Financial Statements—December 31, 2002 (see Items 15 (a) and 13 (a) below).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
| (a) | CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of management as of December 31, 2002 is as follows: |
| AMOUNT AND | ||||||
| NATURE | ||||||
| NAME AND ADDRESS | OF BENEFICIAL | PERCENT OF | ||||
| TITLE OF CLASS | OF BENEFICIAL OWNER | OWNERSHIP | CLASS | |||
| General Partner’s Interest | Northland Communications Corporation 101 Stewart Street, Suite 700 Seattle, Washington 98101 | (See Note A) | (See Note A) |
Note A: Northland has a 1% interest in the Partnership, which increases to a 20% interest in the Partnership at such time as the limited partners have received 100% of their aggregate cash contributions plus a preferred return. The natural person who exercises voting and/or investment control over these interests is John S. Whetzell.
(b) CHANGES IN CONTROL. Northland has pledged its ownership interest as General Partner of the Partnership to the Partnership’s lender as collateral pursuant to the terms of the revolving credit and term loan agreement between the Partnership and its lender.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The General Partner receives a management fee equal to 5% of the gross revenues of the Partnership, not including revenues from any sale or refinancing of the Partnership’s System. The General Partner also receives reimbursement of normal operating and general and administrative expenses incurred on behalf of the Partnership.
22
Table of Contents
The Partnership has an operating management agreement with Northland Cable Properties Seven Limited Partnership (“NCP-Seven”), an affiliated partnership organized and managed by Northland. Under the terms of this agreement, the partnership serves as the exclusive managing agent for one of NCP-Seven’s cable systems and is reimbursed for certain operating and administrative costs.
NCP-Seven serves as the executive managing agent for one of the Partnership’s cable television systems and is reimbursed for certain operating and administrative expenses.
Northland Cable Services Corporation (“NCSC”), an affiliate of Northland, provides software installation and billing services to the Partnership’s Systems. In addition, NCSC provides technical support associated with the build out and upgrade of Northland affiliated cable systems.
Cable Ad-Concepts, Inc. (“CAC”), an affiliate of Northland, provides the production and development of video commercial advertisements and advertising sales support.
Northland Cable News, Inc.(“NCN”), an affiliate of Northland, provides programming to certain of the Partnership’s systems. As of January 1, 2001, NCN stopped providing these services to the Partnership.
Management Fees
The General Partner receives a fee for managing the Partnership equal to 5% of the gross revenues of the Partnership, excluding revenues from the sale of cable television systems or franchises. Management fees charged by the General Partner were $255,645, $256,636 and $257,410 for 2002, 2001 and 2000, respectively, which are included as a component of general and administrative expenses in the accompanying statements of operations.
Reimbursements
The General Partner provides or causes to be provided certain centralized services to the Partnership and other affiliated entities. The General Partner is entitled to reimbursement from the Partnership for various expenses incurred by it or its affiliates on behalf of the Partnership allocable to its management of the Partnership, including travel expenses, pole and site rental, lease payments, legal expenses, billing expenses, insurance, governmental fees and licenses, headquarters’ supplies and expenses, pay television expenses, equipment and vehicle charges, operating salaries and expenses, administrative salaries and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by affiliates in rendering the services. The costs of certain services are charged directly to the Partnership, based upon the personnel time spent by the employees rendering the service. The cost of other services is allocated to the Partnership and affiliates based upon relative size and revenue. Management believes that the methods used to allocate services to the Partnership are reasonable. Amounts charged to the Partnership by the General Partner for these services were $287,458, $253,701 and $222,222 for the years ended December 31, 2002, 2001 and 2000, respectively.
The Partnership has entered into operating management agreements with certain affiliates managed by the General Partner. Under the terms of these agreements, the Partnership or an affiliate serves as the executive managing agent for certain cable television systems and is reimbursed for certain operating and administrative expenses. The Partnership paid $228,962, $233,340 and $243,509, net of payment received, under the terms of these agreements during 2002, 2001 and 2000, respectively.
Northland Cable Service Corporation (NCSC), an affiliate of the General Partner, was formed to provide billing system support to cable systems owned and managed by the General Partner. In addition NCSC provides technical support associated with the build out and upgrade of Northland affiliated cable systems. Cable Ad Concepts, a subsidiary of NCSC, assists in the development of local advertising as well as billing for video commercial advertisements to be cablecast on Northland affiliated cable systems. In 2002, 2001 and 2000 the partnership paid $82,627, $93,110 and $74,958 for these services. Of the 2002 amount, $24,222 was capitalized related to the build out and upgrade of cable systems.
In 1997, the Partnership began paying monthly program license fees to Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the rights to distribute programming developed and produced by NCN. Total license fees charged by NCN during 2000 were $8,196. As of January 1, 2001, NCN stopped providing these services to the Partnership.
23
Table of Contents
Management believes that all of the above transactions are on terms as favorable to the Partnership as could be obtained from unaffiliated parties for comparable goods or services.
As disclosed in the Partnership’s Prospectus (which has been incorporated by reference), certain conflicts of interest may arise between the Partnership and the General Partner and its affiliates. Certain conflicts may arise due to the allocation of management time, services and functions between the Partnership and existing and future partnerships as well as other business ventures. The General Partner has sought to minimize these conflicts by allocating costs between systems on a reasonable basis. Each limited partner may have access to the books and non-confidential records of the Partnership. A review of the books will allow a limited partner to assess the reasonableness of these allocations. The Agreement of Limited Partnership provides that any limited partner owning 10% or more of the Partnership units may call a special meeting of the Limited Partners, by giving written notice to the General Partner specifying in general terms the subjects to be considered. In the event of a dispute between the General Partner and Limited Partners, which cannot be otherwise resolved, the Agreement of Limited Partnership provides steps for the removal of a General Partner by the Limited Partners.
(b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and Secretary of the General Partner, is a partner of the law firm of Ryan, Swanson & Cleveland, PLLC, which has rendered and is expected to continue to render legal services to the General Partner and the Partnership.
(c) INDEBTEDNESS OF MANAGEMENT. None.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this report, an evaluation was performed under the supervision and with the participation of the Partnership’s management, including the Chief Executive Officer and President (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures (as defined in Rule 13a-14(c) of the Exchange Act). Based on and as of the time of such evaluation, the Partnership’s management, including the Chief Executive Officer and President (Principal Financial and Accounting Officer), concluded that the Partnership’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Partnership required to be included in the Partnership’s reports filed or submitted by it under the Exchange Act. There have been no significant changes in the Partnership’s internal controls or in other factors that could significantly affect internal controls subsequent to the time of such evaluation.
24
Table of Contents
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS:
| SEQUENTIALLY | ||||
| NUMBERED | ||||
| PAGE | ||||
| Independent Auditors’ Reports | F.1 | |||
| Report of Prior Independent Public Accountants | F.2 | |||
| Balance Sheets—December 31, 2002 and 2001 | F.3 | |||
| Statements of Operations for the years ended December 31, 2002, 2001 and 2000 | F.4 | |||
| Statements of Changes in Partners’ Capital (Deficit) for the years ended December 31, 2002, 2001 and 2000 | F.5 | |||
| Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 | F.6 | |||
| Notes to Financial Statements—December 31, 2002 | F.7 | |||
(b) REPORTS ON FORM 8-K:
Form 8-K filed on March 25, 2003 announcing the sale of the La Conner, Washington system to Wave Division Networks, LLC
(c) EXHIBITS:
| 4.1 | Amended and Restated Agreement of Limited Partnership(1) | |
| 4.2 | Amendment to Agreement of Limited Partnership dated December 20, 1990(4) | |
| 10.1 | Agreement of Purchase and Sale with Santiam Cable Vision, Inc.(1) | |
| 10.2 | Agreement for Sale of Assets between Valley Cable T.V., Inc. and Northland Telecommunications Corporation(1) | |
| 10.3 | Form of Services and Licensing Agreement with Cable Television Billing, Inc.(1) | |
| 10.4 | Management Agreement with Northland Communications Corporation(1) | |
| 10.5 | First, Second and Third Amendment to Agreement of Purchase and Sale with Santiam Cable Vision, Inc.(1) |
25
Table of Contents
(c) EXHIBITS:
| 10.6 | Operating Management Agreement with Northland Cable Properties Seven Limited Partnership(1) | |
| 10.7 | Assignment and Transfer Agreement with Northland Telecommunications Corporation for the purchase of the LaConner System(2) | |
| 10.8 | Gates Franchise(1) | |
| 10.9 | Stayton Franchise(1) | |
| 10.10 | Mill City Franchise(1) | |
| 10.11 | Detroit Franchise(1) | |
| 10.12 | Idanha Franchise(1) | |
| 10.13 | Lyons Franchise(1) | |
| 10.14 | Marion County Franchise(1) | |
| 10.15 | Turner Franchise(1) | |
| 10.19 | Amendment dated August 4, 1989 to Revolving Credit and Term Loan Agreement with Security Pacific Bank of Washington, N.A.(3) | |
| 10.20 | Revolving Credit and Term Loan Agreement with National Westminster Bank USA dated as of December 20, 1990(4) | |
| 10.21 | Note in the principal amount of up to $7,000,000 to the order of National Westminster Bank USA(4) | |
| 10.22 | Borrower Assignment with National Westminster Bank USA(4) | |
| 10.23 | Borrower Security Agreement with National Westminster Bank USA(4) | |
| 10.24 | Agreement of Purchase and Sale with TCI Cablevision of Nevada, Inc.(4) | |
| 10.25 | First Amendment dated May 28, 1992 to Revolving Credit and Term Loan Agreement with National Westminster Bank USA.(5) | |
| 10.26 | Franchise Agreement with the City of Turner, OR effective March 21, 1991(5) | |
| 10.27 | Franchise Agreement with the City of Lyons, OR effective April 8, 1991(5) | |
| 10.28 | Franchise Agreement with the City of Idanha, OR effective November 3, 1992(5) | |
| 10.29 | Agreement of Purchase with Alabama Television Cable Company(6) | |
| 10.30 | Credit Agreement between Northland Cable Properties Eight Limited Partnership and U.S. Bank of Washington, National Association and West One Bank, Washington dated November 10, 1994(6) | |
| 10.31 | Franchise Agreement with City of Aliceville, AL — Assignment and Assumption Agreement dated July 26, 1994. (7) | |
| 10.32 | Franchise Agreement with City of Carrollton, AL — Assignment and Assumption Agreement dated August 16, 1994. (7) | |
| 10.33 | Franchise Agreement with City of Eutaw, AL — Assignment and Assumption Agreement dated July 26, 1994. (7) |
26
Table of Contents
(c) EXHIBITS:
| 10.34 | Franchise Agreement with City of Gordo, AL — Assignment and Assumption Agreement dated August 1, 1994. (7) | |
| 10.35 | Franchise Agreement with Greene County, AL — Assignment and Assumption Agreement dated November 10, 1994. (7) | |
| 10.36 | Franchise Agreement with Town of Kennedy, AL — Assignment and Assumption Agreement dated August 15, 1994. (7) | |
| 10.37 | Franchise Agreement with Lamar County, AL — Assignment and Assumption Agreement dated August 8, 1994. (7) | |
| 10.38 | Franchise Agreement with City of Marion, AL — Assignment and Assumption Agreement dated August 1, 1994. (7) | |
| 10.39 | Franchise Agreement with Town of Millport, AL — Assignment and Assumption Agreement dated August 18, 1994. (7) | |
| 10.40 | Franchise Agreement with Pickens County, AL — Assignment and Assumption Agreement dated July 26, 1994. (7) | |
| 10.41 | Franchise Agreement with Town of Pickensville, AL — Assignment and Assumption Agreement dated August 2, 1994. (7) | |
| 10.42 | Franchise Agreement with City of Reform, AL — Assignment and Assumption Agreement dated August 1, 1994. (7) | |
| 10.43 | Asset Purchase and Sale Agreement between SCS Communications and Security, Inc. and Northland Cable Properties Eight Limited Partnership dated April 14, 1995. (8) | |
| 10.44 | Asset Purchase Agreement between Northland Cable Properties Eight Limited Partnership and TCI Cablevision of Georgia, Inc. dated November 17, 1995. (9) | |
| 10.45 | First Amendment to Amended and Restated Credit Agreement between Northland Cable Properties Eight Limited Partnership and U.S. Bank National Association dated March 30, 1998. (10) | |
| 10.46 | Second Amendment to Amended and Restated Credit Agreement between Northland Cable Properties Eight Limited Partnership and U.S. Bank National Association dated June 24, 2002. (11) | |
| 10.47 | Purchase and Sale Agreement between Northland Cable Properties Eight Limited Partnership and Wave Division Networks, LLC dated October 28, 2002. (12) | |
| 99.1 | Letter regarding representation of Arthur Andersen, LLP dated April 1, 2002. (13) | |
| 99 (a) | Certification of the Chief Executive Officer of Northland Communications Corporation, the General Partner, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | |
| 99 (b) | Certification of the President (as Principal Financial and Accounting Officer) of Northland Communications Corporation, the General Partner, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
| (1) | Incorporated by reference from the Partnership’s Form S-1 Registration Statement declared effective on March 16, 1989 (No. 33-25892). | |
| (2) | Incorporated by reference from the Partnership’s Form 10-Q Quarterly Report for the period ended June 30, 1989. | |
| (3) | Incorporated by reference from the Partnership’s Form 10-K Annual Report for the year ended December 31, 1989. | |
| (4) | Incorporated by reference from the Partnership’s Form 10-K Annual Report for the year ended December 31, 1990 |
27
Table of Contents
| (5) | Incorporated by reference from the Partnership’s Form 10-K Annual Report for the year ended December 31, 1992. | |
| (6) | Incorporated by reference from the Partnership’s Form 8-K dated November 11, 1994. | |
| (7) | Incorporated by reference from the Partnership’s Form 10-K Annual Report for the year ended December 31, 1994. | |
| (8) | Incorporated by reference from the Partnership’s Form 10-Q Quarterly Report for the period ended March 31, 1995. | |
| (9) | Incorporated by reference from the Partnership’s Form 8-K dated January 5, 1996. | |
| (10) | Incorporated by reference from the Partnership’s Form 10-K Annual Report for the year ended December 31, 1998. | |
| (11) | Incorporated by reference from the Partnership’s Form 10-Q Quarterly Report for the period ended June 30, 2002. | |
| (12) | Incorporated by reference from the Partnership’s Form 8-K dated March 11, 2003. | |
| (13) | Incorporated by reference from the Partnership’s Form 10-K Annual Report for the year ended December 31, 2001. |
28
Table of Contents
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP | |||
| By: | NORTHLAND COMMUNICATIONS CORPORATION | ||
| (Managing General Partner) | |||
| Date: 3-31-03 | By | /s/ JOHN S. WHETZELL John S. Whetzell, Chief Executive 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 dates indicated.
| SIGNATURES | CAPACITIES | DATE | ||||
| /s/ JOHN S. WHETZELL John S. Whetzell | Chief executive officer of registrant; chief executive officer and chairman of the board of directors of Northland Communications Corporation | 3-31-03 | ||||
| /s/ RICHARD I. CLARK Richard I. Clark | Director of Northland Communications Corporation | 3-31-03 | ||||
| /s/ JOHN E. IVERSON John E. Iverson | Secretary and Director of Northland Communications Corporation | 3-31-03 | ||||
| /s/ GARY S. JONES Gary S. Jones | President of Northland Communications Corporation | 3-31-03 | ||||
29
Table of Contents
CERTIFICATIONS
I, Gary Jones certify that:
| 1. | I have reviewed this annual report on Form 10-K of Northland Cable Properties Eight Limited Partnership; | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | ||
| b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and | ||
| c) | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and board of directors: |
| a) | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and | ||
| b) | Any fraud, whether or not material that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: 3-31-03
| /s/ | GARY S. JONES Gary S. Jones President (Principal Financial and Accounting Officer) |
30
Table of Contents
I, John Whetzell certify that:
| 1. | I have reviewed this annual report on Form 10-K of Northland Cable Properties Eight Limited Partnership; | |
| 2. | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; | ||
| b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and | ||
| c) | Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and board of directors: |
| a) | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and | ||
| b) | Any fraud, whether or not material that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: 3-31-03
| /s/ | JOHN S. WHETZELL John S. Whetzell Chief Executive Officer |
31
Table of Contents
EXHIBITS INDEX
| Exhibit | ||
| Number | Description | |
| 99 (a) | Certification of the Chief Executive Officer of Northland Communications Corporation, the General Partner, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | |
| 99 (b) | Certification of the President (as Principal Financial and Accounting Officer) of Northland Communications Corporation, the General Partner, Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 |
32
Table of Contents
Independent Auditors’ Report
The Partners
Northland Cable Properties Eight Limited Partnership:
We have audited the accompanying balance sheet of Northland Cable Properties Eight Limited Partnership (a Washington limited partnership) as of December 31, 2002, and the related statements of operations, changes in partners’ capital (deficit), and cash flows for the year ended December 31, 2002. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The 2001 and 2000 financial statements of Northland Cable Properties Eight Limited Partnership were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements, before the revision described in Note 2 to the financial statements, in their report dated January 31, 2002.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Northland Cable Properties Eight Limited Partnership as of December 31, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed above, the 2001 and 2000 financial statements of Northland Cable Properties Eight Limited Partnership were audited by other auditors who have ceased operations. As described in Note 2, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets, which was adopted by the Partnership as of January 1, 2002. In our opinion, the disclosures for 2001 and 2000 in Note 2 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of Northland Cable Properties Eight Limited Partnership other than with respect to such disclosures, and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.
| /s/ KPMG LLP |
Seattle, Washington
January 31, 2003, except as to note 11, which is as of March 11, 2003
F.1
Table of Contents
Report of Prior Independent Public Accountants
To the Partners of
Northland Cable Properties Eight Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties Eight Limited Partnership (a Washington limited partnership) as of December 31, 2001 and 2000, and the related statements of operations, changes in partners’ capital (deficit) and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northland Cable Properties Eight Limited Partnership as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
| /s/ Arthur Andersen LLP |
Seattle, Washington
January 31, 2002
This audit report of Arthur Andersen LLP, our former independent public accountants, is a copy of the original report dated January 31, 2002 rendered by Arthur Andersen LLP on our financial statements included in our Form 10-K filed on April 1, 2002, and has not been reissued by Arthur Andersen LLP since that date. We are including this copy of the January 31, 2002 Arthur Andersen LLP audit report pursuant to Rule 2-02 (e) of Regulation S-X under the Securities Act of 1933.
F.2
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Balance Sheets
December 31, 2002 and 2001
| 2002 | 2001 | ||||||||||
Assets | |||||||||||
| Cash | $ | 374,112 | 272,876 | ||||||||
| Accounts receivable | 161,056 | 151,517 | |||||||||
| Due from affiliates | 27,587 | 7,848 | |||||||||
| Prepaid expenses | 29,332 | 56,107 | |||||||||
| Investment in cable television properties: | |||||||||||
| Property and equipment | 13,879,446 | 13,380,617 | |||||||||
| Less accumulated depreciation | (8,837,511 | ) | (7,657,591 | ) | |||||||
| 5,041,935 | 5,723,026 | ||||||||||
| Franchise agreements (net of accumulated amortization of $2,714,553) | 3,895,073 | 3,895,073 | |||||||||
| Goodwill (net of accumulated amortization of $49,832) | 108,577 | 108,577 | |||||||||
| Total investment in cable television properties | 9,045,585 | 9,726,676 | |||||||||
| Loan fees (net of accumulated amortization of $58,142 and $50,840 in 2002 and 2001, respectively) | 3,800 | 11,086 | |||||||||
| Total assets | $ | 9,641,472 | 10,226,110 | ||||||||
Liabilities and Partners’ Capital (Deficit) | |||||||||||
| Liabilities: | |||||||||||
| Accounts payable and accrued expenses | $ | 439,157 | 534,135 | ||||||||
| Due to General Partner and affiliates | 34,990 | 39,168 | |||||||||
| Deposits | 5,312 | 4,722 | |||||||||
| Subscriber prepayments | 212,587 | 215,503 | |||||||||
| Term loan | 8,213,663 | 8,828,957 | |||||||||
| Interest rate swap agreements | — | 49,964 | |||||||||
| Total liabilities | 8,905,709 | 9,672,449 | |||||||||
| Commitments and contingencies | |||||||||||
| Partners’ capital (deficit): | |||||||||||
| General Partner: | |||||||||||
| Contributed capital | 1,000 | 1,000 | |||||||||
| Accumulated deficit | (73,861 | ) | (75,682 | ) | |||||||
| (72,861 | ) | (74,682 | ) | ||||||||
| Limited partners: | |||||||||||
| Contributed capital, net (19,087 units) | 8,120,820 | 8,120,820 | |||||||||
| Accumulated deficit | (7,312,196 | ) | (7,492,477 | ) | |||||||
| 808,624 | 628,343 | ||||||||||
| Total liabilities and partners’ capital (deficit) | $ | 9,641,472 | 10,226,110 | ||||||||
See accompanying notes to financial statements.
F.3
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Statements of Operations
Years ended December 31, 2002, 2001, and 2000
| 2002 | 2001 | 2000 | ||||||||||||
| Revenue | $ | 5,112,896 | 5,132,726 | 5,148,191 | ||||||||||
| Expenses: | ||||||||||||||
| Operating (including $112,922, $112,843, and $71,438, net, paid to affiliates in 2002, 2001, and 2000, respectively), excluding depreciation and amortization expense recorded below | 474,132 | 457,087 | 493,975 | |||||||||||
| General and administrative (including $616,646, $623,671, and $644,859, paid to affiliates in 2002, 2001, and 2000, respectively) | 1,317,136 | 1,265,497 | 1,248,737 | |||||||||||
| Programming (including $100,902, $100,273, and $89,998, net, paid to affiliates in 2002, 2001, and 2000, respectively) | 1,485,525 | 1,371,517 | 1,353,409 | |||||||||||
| Depreciation and amortization expense | 1,219,550 | 1,539,868 | 1,523,444 | |||||||||||
| 4,496,343 | 4,633,969 | 4,619,565 | ||||||||||||
| Operating income | 616,553 | 498,757 | 528,626 | |||||||||||
| Other income (expense): | ||||||||||||||
| Interest expense | (446,052 | ) | (688,204 | ) | (828,204 | ) | ||||||||
| Interest income | 2,235 | 11,004 | 11,247 | |||||||||||
| Amortization of loan fees and other, net | (29,156 | ) | (51,618 | ) | (28,760 | ) | ||||||||
| (Loss) gain on disposal of assets | (11,442 | ) | (39,944 | ) | 156,205 | |||||||||
| Unrealized gain (loss) on interest rate swap agreements | 49,964 | (49,964 | ) | — | ||||||||||
| Net income (loss) | $ | 182,102 | (319,969 | ) | (160,886 | ) | ||||||||
| Allocation of net income (loss): | ||||||||||||||
| General Partner | $ | 1,821 | (3,200 | ) | (1,609 | ) | ||||||||
| Limited partners | 180,281 | (316,769 | ) | (159,277 | ) | |||||||||
| Net income (loss) per limited partnership unit | 10 | (17 | ) | (8 | ) | |||||||||
See accompanying notes to financial statements.
F.4
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Statements of Changes in Partners’ Capital (Deficit)
Years ended December 31, 2002, 2001, and 2000
| General | Limited | ||||||||||||
| Partner | partners | Total | |||||||||||
| Balance, December 31, 1999 | $ | (69,873 | ) | 1,104,389 | 1,034,516 | ||||||||
| Net loss | (1,609 | ) | (159,277 | ) | (160,886 | ) | |||||||
| Balance, December 31, 2000 | (71,482 | ) | 945,112 | 873,630 | |||||||||
| Net loss | (3,200 | ) | (316,769 | ) | (319,969 | ) | |||||||
| Balance, December 31, 2001 | (74,682 | ) | 628,343 | 553,661 | |||||||||
| Net income | 1,821 | 180,281 | 182,102 | ||||||||||
| Balance, December 31, 2002 | $ | (72,861 | ) | 808,624 | 735,763 | ||||||||
See accompanying notes to financial statements.
F.5
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000
| 2002 | 2001 | 2000 | ||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income (loss) | $ | 182,102 | (319,969 | ) | (160,886 | ) | ||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization expense | 1,219,550 | 1,539,868 | 1,523,444 | |||||||||||||
| Amortization of loan fees | 12,973 | 12,061 | 29,660 | |||||||||||||
| Loss (gain) on disposal of assets | 11,442 | 39,944 | (156,205 | ) | ||||||||||||
| Unrealized (gain) loss on interest rate swap agreements | (49,964 | ) | 49,964 | — | ||||||||||||
| Changes in certain assets and liabilities: | ||||||||||||||||
| Accounts receivable | (9,539 | ) | 444 | (40,620 | ) | |||||||||||
| Due from affiliates | (19,739 | ) | 994 | (6,397 | ) | |||||||||||
| Prepaid expenses | 26,775 | 15,182 | 409 | |||||||||||||
| Accounts payable and accrued expenses | (53,651 | ) | 97,890 | (78,304 | ) | |||||||||||
| Due to General Partner and affiliates | (4,178 | ) | 11,592 | 19,539 | ||||||||||||
| Deposits | 590 | 400 | (3,630 | ) | ||||||||||||
| Subscriber prepayments | (2,916 | ) | 10,682 | (2,769 | ) | |||||||||||
| Net cash provided by operating activities | 1,313,445 | 1,459,052 | 1,124,241 | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Purchase of property and equipment | (591,228 | ) | (932,821 | ) | (601,348 | ) | ||||||||||
| Proceeds from sale of property | — | 8,000 | 342,854 | |||||||||||||
| Net cash used in investing activities | (591,228 | ) | (924,821 | ) | (258,494 | ) | ||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from term loan | — | — | 97,400 | |||||||||||||
| Principal payments on term loan | (615,294 | ) | (864,071 | ) | (676,554 | ) | ||||||||||
| Loan fees | (5,687 | ) | — | — | ||||||||||||
| Net cash used in financing activities | (620,981 | ) | (864,071 | ) | (579,154 | ) | ||||||||||
| Increase (decrease) in cash | 101,236 | (329,840 | ) | 286,593 | ||||||||||||
| Cash, beginning of year | 272,876 | 602,716 | 316,123 | |||||||||||||
| Cash, end of year | $ | 374,112 | 272,876 | 602,716 | ||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||||
| Cash paid during the year for interest | $ | 466,679 | 697,653 | 808,176 | ||||||||||||
See accompanying notes to financial statements.
F.6
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| (1) | Organization and Partners’ Interests |
| (a) | Formation and Business | ||
| Northland Cable Properties Eight Limited Partnership (the Partnership), a Washington limited partnership, was formed on September 21, 1988, and began operations on March 8, 1989. The Partnership was formed to acquire, develop and operate cable television systems. Currently, the Partnership owns systems serving the cities of La Conner, Washington and certain surrounding areas; Aliceville, Alabama and certain surrounding areas; and Swainsboro, Georgia and certain surrounding areas. The Partnership has 17 nonexclusive franchises to operate these cable systems for periods, which will expire at various dates through 2019, with one franchise extending to 2044. | |||
| Northland Communications Corporation (the General Partner or Northland) is the General Partner of the Partnership. Certain affiliates of the Partnership also own and operate other cable television systems. In addition, Northland manages cable television systems for other limited partnerships for which it is general partner. | |||
| The Partnership is subject to certain risks as a cable television operator. These include competition from alternative technologies (i.e., satellite), requirements to renew its franchises, availability of capital and term loan covenants. | |||
| (b) | Contributed Capital, Commissions, and Offering Costs | ||
| The capitalization of the Partnership is set forth in the accompanying statements of changes in partners’ capital (deficit). No limited partner is obligated to make any additional contribution. | |||
| Northland contributed $1,000 to acquire its 1% interest in the Partnership. | |||
| Pursuant to the Partnership Agreement, brokerage fees of $1,004,693 paid to an affiliate of the General Partner and other offering costs of $156,451 paid to the General Partner were recorded as a reduction of limited partners’ capital upon formation of the Partnership. |
| (2) | Summary of Significant Accounting Policies |
| (a) | Acquisition of Cable Television Systems | ||
| Cable television system acquisitions are accounted for as purchase transactions and their cost is allocated to the estimated fair market value of net tangible assets acquired and identifiable intangible assets, including franchise agreements. Any excess is allocated to goodwill. | |||
| (b) | Accounts Receivable | ||
| Accounts receivable consist primarily of amounts due from customers for cable television or advertising services provided by the Partnership, and are stated at net realizable value. Receivables are written-off when the Partnership deems specific customer invoices to be uncollectible. |
(Continued)
F.7
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| (c) | Property and Equipment | ||
| Property and equipment are recorded at cost. Costs of additions and substantial improvements, which include materials, labor and other indirect costs associated with the construction of cable transmission and distribution facilities, are capitalized. Indirect costs include employee salaries and benefits, travel and other costs. These costs are estimated based on historical information and analysis. The Partnership periodically performs evaluations of these estimates as warranted by events or changes in circumstances. | |||
| In accordance with Statement of Financial Accounting Standards (SFAS) No. 51,Financial Reporting by Cable Television Companies, the Partnership also capitalizes costs associated with initial customer installations. The costs of disconnecting service or reconnecting service to previously installed locations are charged to operating expense in the period incurred. Costs for repairs and maintenance are also charged to operating expense, while equipment replacements, including the replacement of drops, are capitalized. | |||
| At the time of retirements, sales or other dispositions of property, the original cost and related accumulated depreciation are removed from the respective accounts, and the gains and losses are included in the statement of operations. | |||
| Depreciation of property and equipment is calculated using the straight-line method over the following estimated service lives: |
| Buildings | 20 | years | |
| Distribution plant | 10 | years | |
| Other equipment and leasehold improvements | 5-20 | years |
| The Partnership recorded depreciation expense of $1,219,550, $1,142,842 and $1,101,279 in 2002, 2001 and 2000, respectively. | |||
| The Partnership periodically evaluates the depreciation periods of property and equipment to determine whether events or circumstances warrant revised estimates of useful lives. The Partnership also reviews the carrying value of its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. As of December 31, 2002, there has been no indication of such impairment. | |||
| (d) | Intangible Assets | ||
| Effective January 1, 2002, the Partnership adopted SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 required that the Partnership cease amortization of goodwill and any other intangible assets determined to have indefinite lives, and established a new method of testing these assets for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value or if the fair value of intangible assets with indefinite lives falls below their carrying value on an annual basis. The amortization of existing goodwill ceased on December 31, 2001. The Partnership determined that its franchise agreements met the definition of indefinite lived assets due to the history of obtaining franchise renewals, among other considerations. Accordingly, amortization of these assets also ceased on December 31, 2001. The Partnership tested these intangibles for impairment at January 1, 2002 and again during the fourth quarter of 2002 and determined that the fair value of the |
(Continued)
F.8
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| assets exceeded their carrying value. The Partnership will continue to test these assets for impairment annually, or more frequently as warranted by events or changes in circumstances. The book value of the Partnership’s intangible assets is presented in the following table: |
| December 31, 2002 | December 31, 2001 | ||||||||||||||||||||||||
| Gross | Net | Gross | �� | Net | |||||||||||||||||||||
| Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||
| Franchise agreements | $ | 6,609,626 | (2,714,553 | ) | 3,895,073 | 6,609,626 | (2,714,553 | ) | 3,895,073 | ||||||||||||||||
| Goodwill | 158,409 | (49,832 | ) | 108,577 | 158,409 | (49,832 | ) | 108,577 | |||||||||||||||||
| 6,768,035 | (2,764,385 | ) | 4,003,650 | 6,768,035 | (2,764,385 | ) | 4,003,650 | ||||||||||||||||||
| Definite-lived intangible assets: | |||||||||||||||||||||||||
| Loan fees | 61,942 | (58,142 | ) | 3,800 | 61,926 | (50,840 | ) | 11,086 | |||||||||||||||||
| $ | 6,829,977 | (2,822,527 | ) | 4,007,450 | 6,829,961 | (2,815,225 | ) | 4,014,736 | |||||||||||||||||
| As required by SFAS No. 142, the statement has not been retroactively applied to the results for the periods prior to adoption. A reconciliation of net loss for the years ended December 31, 2001 and 2000, as if amortization of goodwill and franchise agreements had not been recorded is presented below: |
| 2001 | 2000 | |||||||
| Net loss: | ||||||||
| Reported net loss | $ | (319,969 | ) | (160,886 | ) | |||
| Add back: amortization of franchise agreements | 383,648 | 383,648 | ||||||
| Add back: amortization of goodwill | 3,960 | 3,960 | ||||||
| Adjusted net income | $ | 67,639 | 226,722 | |||||
| Net loss per limited partnership unit: | ||||||||
| Reported net loss per limited partnership unit | $ | (17 | ) | (8 | ) | |||
| Add back: amortization of franchise agreements | 20 | 20 | ||||||
| Add back: amortization of goodwill | — | — | ||||||
| Adjusted net income per limited partnership unit | $ | 3 | 12 | |||||
(Continued)
F.9
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| As of December 31, 2002, intangible assets subject to amortization consist of loan fees, which are being amortized using the straight-line method over periods of one to five years (current weighted average remaining useful life one year). The Partnership recorded amortization expense of $12,973, $409,087 and $451,825 in 2002, 2001 and 2000, respectively. Amortization of loan fees is expected to be $3,800 in 2003. | |||
| (e) | Self Insurance | ||
| The Partnership began self-insuring for aerial and underground plant in 1996. Beginning in 1997, the Partnership began making quarterly contributions into an insurance fund maintained by an affiliate which covers all Northland entities and would defray a portion of any loss should the Partnership be faced with a significant uninsured loss. To the extent the Partnership’s losses exceed the fund’s balance, the Partnership would absorb any such loss. If the Partnership were to sustain a material uninsured loss, such reserves could be insufficient to fully fund such a loss. The capital cost of replacing such equipment and physical plant, could have a material adverse effect on the Partnership, its financial condition, prospects and debt service ability. | |||
| Amounts paid to the affiliate, which maintains the fund for the Partnership and its affiliates, are expensed as incurred and are included in the statements of operations. To the extent a loss has been incurred related to risks that are self-insured, the Partnership records an expense and an associated liability for the amount of the loss, net of any amounts to be drawn from the fund. During 2001, and 2000, respectively, the Partnership was charged $1,749, and $7,185 by the fund. Management suspended contributions during 2001 based on its assessment that the current balance would be sufficient to meet potential claims. As of December 31, 2002, the fund (related to all Northland entities) had a balance of $562,420. | |||
| (f) | Revenue Recognition | ||
| Cable television service revenue, including service and maintenance, is recognized in the month service is provided to customers. Advance payments on cable services to be rendered are recorded as subscriber prepayments. Revenues resulting from the sale of local spot advertising are recognized when the related advertisements or commercials appear before the public. Local spot advertising revenues earned were $230,430, $186,144, and $212,485 in 2002, 2001, and 2000, respectively. | |||
| (g) | Derivatives | ||
| The Partnership has only limited involvement with derivative instruments and does not use them for trading purposes. They are used to manage well-defined interest rate risks. The Partnership periodically enters into interest rate swap agreements with major banks or financial institutions (typically its bank) in which the Partnership pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. | |||
| The Partnership is exposed to credit related losses in the event of nonperformance by counterparties to financial instruments but does not expect any counterparties to fail to meet their obligations, as the Partnership currently deals only with its bank. The exposure in a derivative contract is the net difference between what each party is required to pay based on the contractual terms against the notional amount of the contract, which in the Partnership’s case, are interest rates. |
(Continued)
F.10
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| Effective January 1, 2001 the Partnership adopted SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended. Accordingly, the Partnership records all derivative instruments on the balance sheet at fair value. Depending on the nature of the hedge, the changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets or liabilities through earnings or are recognized in other comprehensive income until the hedged item is recognized in earnings. | |||
| The Partnership has elected not to designate its interest rate swap agreements as hedges under SFAS No. 133. Agreements in place of December 31, 2001 expired during 2002, and the Partnership elected not to enter into any new agreements. | |||
| (h) | Advertising Costs | ||
| The Partnership expenses advertising costs as they are incurred. Advertising costs were $128,084, $120,795 and $126,841 in 2002, 2001 and 2000, respectively. | |||
| (i) | Segment Information | ||
| The Partnership follows SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information. The Partnership manages its business and makes operating decisions at the operating segment level. Following the operating segment aggregation criteria in SFAS No. 131, the Partnership reports business activities under a single reporting segment, telecommunications services. Additionally, all of its activities take place in the United States of America. | |||
| (j) | Concentration of Credit Risk | ||
| The Partnership is subject to concentrations of credit risk from cash investments on deposit at various financial institutions that at times exceed insured limits by the Federal Deposit Insurance Corporation. This exposes the Partnership to potential risk of loss in the event the institution becomes insolvent. | |||
| Financial instruments consist of cash, interest rate swap agreements and term loans. The fair value of cash approximates its carrying value. The fair value of interest rate swap agreements is the estimated amount that a bank would receive or pay to terminate the swap agreement at the reporting date and is equal to their carrying value. The fair value of the term loans approximates their carrying value because of their variable interest rate nature (note 7). | |||
| (k) | Recently Issued Accounting Pronouncements | ||
| Statement of Financial Accounting Standards No. 143– In September 2001, the FASB issued SFAS No. 143,Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Statement No. 143 will be effective for the Partnership beginning January 1, 2003. The Partnership has not yet estimated the impact of implementation on its financial position or results of operations. |
(Continued)
F.11
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| Statement of Financial Accounting Standards No. 145– In April 2002, the FASB issued SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting for certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. SFAS No. 145 will be effective beginning January 1, 2003, except for the provisions relating to the amendment of SFAS No. 13, which will be effective for transactions occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a material impact on the Partnership’s financial statements. | |||
| Statement of Financial Accounting Standards No. 146- In September 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred and is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of SFAS No. 146 will not have a material impact on the Partnership’s financial statements. | |||
| FASB Interpretation No. 45 –In November 2002, the FASB issued FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.The interpretation establishes disclosure requirements for December 31, 2002 financial statements for companies that make certain types of guarantees. Beginning in 2003, the interpretation requires that companies record the fair value of certain types of guarantees as a liability in the financial statements. The Partnership has reviewed the interpretation and has concluded that its 2002 disclosures are adequate and does not expect the interpretation to have a material impact on the Partnership’s financial position or results of operations in 2003. | |||
| (l) | Estimates Used in Financial Statement Presentation | ||
| The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. | |||
| (m) | Reclassifications | ||
| Certain prior year amounts have been reclassified to conform to the current year presentation. |
| (3) | Income Allocation | |
| As defined in the limited partnership agreement, the General Partner is allocated 1% and the limited partners are allocated 99% of partnership net income, net losses, deductions and credits from operations until such time as the limited partners receive aggregate cash distributions equal to their aggregate capital contributions, plus the limited partners’ preferred return. Thereafter, the General Partner will be allocated 20% and the limited partners will be allocated 80% of partnership net income, net losses, deductions, and credits from operations. Cash distributions from operations will be allocated in accordance with the net income and net loss percentages then in effect. Prior to the General Partner receiving cash distributions from operations for any year, the limited partners must receive cash distributions in an amount equal to the |
(Continued)
F.12
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| lesser of (i) 50% of the limited partners’ allocable share of net income for such year or (ii) the federal income tax payable on the limited partners’ allocable share of net income on the then highest marginal federal income tax rate applicable to such net income. | ||
| The limited partners’ total initial contributions to capital were $9,568,500 ($500 per limited partnership unit), offset by $1,435,180 in offering costs. As of December 31, 2002, the Partnership has repurchased $12,500 of limited partnership units (25 units at $500 per unit). | ||
| (4) | Transactions with the General Partner and Affiliates |
| (a) | Management Fees | ||
| The General Partner receives a fee for managing the Partnership equal to 5% of the gross revenues of the Partnership, excluding revenues from the sale of cable television systems or franchises. Management fees charged by the General Partner were $255,645, $256,636, and $257,410 for 2002, 2001, and 2000, respectively, which are included as a component of general and administrative expenses in the accompanying statements of operations. | |||
| (b) | Reimbursements | ||
| The General Partner provides or causes to be provided certain centralized services to the Partnership and other affiliated entities. The General Partner is entitled to reimbursement from the Partnership for various expenses incurred by it or its affiliates on behalf of the Partnership allocable to its management of the Partnership, including travel expenses, pole and site rental, lease payments, legal expenses, billing expenses, insurance, governmental fees and licenses, headquarters’ supplies and expenses, pay television expenses, equipment and vehicle charges, operating salaries and expenses, administrative salaries and expenses, postage and office maintenance. | |||
| The amounts billed to the Partnership are based on costs incurred by the General Partner in rendering the services. The costs of certain services are charged directly to the Partnership, based upon the personnel time spent by the employees rendering the service. The cost of other services is allocated to the Partnership and affiliates based upon relative size and revenue. Management believes that the methods used to allocate services to the Partnership are reasonable. Amounts charged to the Partnership by the General Partner for these services were $287,458, $253,701, and $222,222 for the years ended December 31, 2002, 2001, and 2000, respectively. | |||
| The Partnership has entered into operating management agreements with certain affiliates managed by the General Partner. Under the terms of these agreements, the Partnership or an affiliate serves as the managing agent for certain cable television systems and is reimbursed for certain operating and administrative expenses. The Partnership paid $228,962, $233,340, and $243,509, net of payment received, under the terms of these agreements during 2002, 2001, and 2000, respectively. | |||
| Northland Cable Service Corporation (NCSC), an affiliate of the General Partner, was formed to provide billing system support to cable systems owned and managed by the General Partner. In addition NCSC provides technical support associated with the build out and upgrade of Northland affiliated cable systems. Cable Ad Concepts, a subsidiary of NCSC, assists in the development of local advertising as well as billing for video commercial advertisements to be cablecast on Northland affiliated cable systems. In 2002, 2001, and 2000, the Partnership paid $82,627, $93,110, and |
(Continued)
F.13
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| $74,958 for these services. Of the 2002 amount, $24,222 was capitalized related to the build out and upgrade of cable systems. | |||
| In 1997, the Partnership began paying monthly program license fees to Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the rights to distribute programming developed and produced by NCN. Total license fees charged by NCN during 2000 were $8,196. As of January 1, 2001, NCN stopped providing these services to the Partnership. | |||
| (c) | Due from Affiliates | ||
| The receivable from affiliates consists of the following: |
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| Reimbursable operating costs | $ | 27,859 | 8,335 | |||||
| Other amounts due from affiliates, net | (272 | ) | (487 | ) | ||||
| $ | 27,587 | 7,848 | ||||||
| (d) | Due to General Partner and Affiliates | ||
| The payable to the General Partner and affiliates consists of the following: |
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| Management fees | $ | (5,995 | ) | — | ||||
| Reimbursable operating costs | 35,691 | 19,527 | ||||||
| Other amounts due to General Partner and affiliates, net | 5,294 | 19,641 | ||||||
| $ | 34,990 | 39,168 | ||||||
| (5) | Property and Equipment |
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| Land and buildings | $ | 541,116 | 541,116 | |||||
| Distribution plant | 12,655,334 | 12,038,373 | ||||||
| Other equipment | 672,649 | 591,644 | ||||||
| Construction in progress | 10,347 | 209,484 | ||||||
| $ | 13,879,446 | 13,380,617 | ||||||
(Continued)
F.14
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| (6) | Accounts Payable and Accrued Expenses |
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| Accounts payable | $ | 5,945 | 136,398 | |||||
| Program license fees | 156,894 | 186,628 | ||||||
| Pole rental | 123,481 | 56,455 | ||||||
| Franchise fees | 75,806 | 65,450 | ||||||
| Property taxes | 24,611 | 25,000 | ||||||
| Interest | — | 20,627 | ||||||
| Other | 52,420 | 43,577 | ||||||
| $ | 439,157 | 534,135 | ||||||
| (7) | Term Loan | |
| In June 2002, the Partnership amended its term loan agreement. The amendment provided for an extension of maturity to December 31, 2003, revised the amount of quarterly principal payments to $200,000 per quarter commencing September 30, 2002, adjusted the margin over LIBOR paid to the lender to a maximum of 3% and revised certain financial covenants. In February 2003, the Partnership further amended the agreement to extend the maturity until June 30, 2004. Details of the term loan are as follows: |
| December 31 | ||||||||
| 2002 | 2001 | |||||||
| Term loan, amended and restated on February 7, 2003, collateralized by a first lien position on all present and future assets of the Partnership. Interest rates vary based on certain financial covenants; 4.44% as of December 31, 2002. Principal payments plus interest are due quarterly until maturity on June 30, 2004. | $ | 7,970,139 | 8,570,139 | |||||
| Additional drawdown of the term loan issued under the Company’s February 7, 2003 amended restated term loan, for a new office in LaConner, Washington, collateralized by a first lien position on all present and future assets of the Partnership. Interest is fixed at 8.25% Fixed payments of principal plus interest are due monthly until maturity on December 31, 2004. | 243,524 | 258,818 | ||||||
| $ | 8,213,663 | 8,828,957 | ||||||
(Continued)
F.15
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| The Partnership intends to pursue a complete or partial asset sale during the remaining term of the amended credit agreement but no assurances can be given that such a transaction will occur. It is management’s opinion that the Partnership could renegotiate the terms of its term loan agreement prior to its maturity if asset sales sufficient to repay the outstanding bank debt are not completed by June 30, 2004. | ||
| Annual maturities of the term loan after December 31, 2002 are as follows: |
| 2003 | $ | 816,624 | ||
| 2004 | 7,397,039 | |||
| $ | 8,213,663 | |||
| Under the terms of the loan agreement, the Partnership has agreed to restrictive covenants which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of no more than 4.75 to 1, a Cash Flow Coverage Ratio of no less than 1.00 to 1, and a limitation on the maximum amount of annual capital expenditures of $1,200,000, among other restrictions. The General Partner submits quarterly debt compliance reports to the Partnership’s creditor under this agreement. At December 31, 2002, the Partnership was in compliance with the terms of the loan agreement. | ||
| (8) | Income Taxes | |
| Income taxes payable have not been recorded in the accompanying financial statements because they are obligations of the partners. The federal and state income tax returns of the Partnership are prepared and filed by the General Partner. | ||
| The tax returns, the qualification of the Partnership as such for tax purposes, and the amount of distributable partnership income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes with respect to the Partnership’s qualification or in changes with respect to the income or loss, the tax liability of the partners would likely be changed accordingly. | ||
| There was no taxable income to the limited partners in any of the three years in the periods ended December 31, 2002. Generally, subject to the allocation procedures discussed in the following paragraph, taxable income to the limited partners is different from that reported in the statements of operations principally due to differences in depreciation and amortization expense allowed for tax purposes and the amount recognizable under accounting principles generally accepted in the United States of America. Traditionally, there are no other significant differences between taxable income and net income reported in the statements of operations. | ||
| The Partnership agreement provides that tax losses may not be allocated to the Limited Partners if such loss allocation would create a deficit in the Limited Partners’ Capital Account. Such excess losses are reallocated to the General Partner (Reallocated Limited Partner Losses). In subsequent years, 100% of the Partnership’s net income is allocated to the General Partner until the General Partner has been allocated net income in amounts equal to the Reallocated Limited Partner Losses. |
(Continued)
F.16
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| Under current federal income tax laws, a partner’s allocated share of tax losses from a partnership is allowed as a deduction on their individual income tax return only to the extent of the partner’s adjusted basis in their partnership interest at the end of the tax year. No losses will be allocated to limited partners with negative basis. | ||
| In addition, current tax law does not allow a taxpayer to use losses from a business activity in which they do not materially participate (a “passive activity”, e.g., a limited partner in a limited partnership) to offset other income such as salary, active business income, dividends, interest, royalties and capital gains. However, such losses can be used to offset income from other passive activities. In addition, disallowed losses can be carried forward indefinitely to offset future income from passive activities. Disallowed losses can be used in full when the taxpayer recognizes gain or loss upon the disposition of their entire interest in the passive activity. | ||
| (9) | Commitments and Contingencies |
| (a) | Lease Arrangements | ||
| The Partnership leases certain tower sites, office facilities, and pole attachments under leases accounted for as operating leases. Rental expense, including month-to-month leases, was $133,555, $120,179, and $133,043 in 2002, 2001, and 2000, respectively. Minimum lease payments, excluding month-to-month leases, through the end of the lease terms are as follows: |
| 2003 | $ | 15,400 | ||
| 2004 | 10,725 | |||
| 2005 | 3,300 | |||
| 2006 | 3,300 | |||
| 2007 | 3,300 | |||
| Thereafter | 26,700 | |||
| $ | 62,725 | |||
| (b) | Effects of Regulation | ||
| The operation of a cable system is extensively regulated at the federal, local and, in some instances, state levels. The Cable Communication Policy Act of 1984, the Cable Television Consumer Protection and Competition Act of 1992 (the 1992 Cable Act), and the 1996 Telecommunications Act (the 1996 Telecom Act, and, collectively, the Cable Act) establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Act. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change. | |||
| Cable Rate Regulation– Although the FCC established the rate regulatory scheme pursuant to the 1992 Cable Act, local municipalities, commonly referred to as local franchising authorities, are primarily responsible for administering the regulation of the lowest level of cable service called the basic service tier. The basic service tier typically contains local broadcast stations and public, educational, and government access channels. Before a local franchising authority begins basic |
(Continued)
F.17
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| service rate regulation, it must certify to the FCC that it will follow applicable federal rules. Many local franchising authorities have voluntarily declined to exercise their authority to regulate basic service rates. | |||
| In a particular effort to ease the regulatory burden on small cable systems, the FCC created special rate rules applicable for systems with fewer than 15,000 subscribers owned by an operator with fewer than 400,000 subscribers. The special rate rules allow for a simplified cost-of-service showing for basic service tier programming. All of Northland’s systems are eligible for these simplified cost-of-service rules, and have calculated rates in accordance with those rules. | |||
| Electric Utility Entry into Telecommunications and Cable Television– The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, including cable television, notwithstanding the Public Utility Holding Company Act. Electric utilities must establish separate subsidiaries, known as “exempt telecommunications companies” and must apply to the FCC for operating authority. Like telephone companies, electric utilities have substantial resources at their disposal, and could be formidable competitors to traditional cable systems. Several of these utilities have been granted broad authority to engage in activities that could include the provision of video programming. | |||
| Must Carry and Retransmission Consent– The 1992 Cable Act contains broadcast signal carriage requirements. Broadcast signal carriage is the transmission of broadcast television signals over a cable system to cable customers. These requirements, among other things, allow local commercial television broadcast stations to elect once every three years between “must carry” status or “retransmission consent” status. Less popular stations typically elect must carry, which is the broadcast signal carriage rule that allows local commercial television broadcast stations to require a cable system to carry the station. Must carry requests can dilute the appeal of a cable system’s programming offerings because a cable system with limited channel capacity may be required to forego carriage of popular channels in favor of less popular broadcast station electing must carry. More popular stations, such as those affiliated with a national network, typically elect retransmission consent, which is the broadcast signal carriage rule that allows local commercial television broadcast stations to negotiate terms (such as mandating carriage of an affiliated cable network or a digital broadcast signal) for granting permission to the cable operator to carry the stations. Retransmission consent demands may require substantial payments or other concessions. | |||
| Access Channels– Local franchising authorities can include franchise provisions requiring cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires cable systems to designate a portion of their channel capacity, up to 15% in some cases, for commercial leased access by unaffiliated third parties. The FCC has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for commercial leased access use. | |||
| Inside Wiring– In an order issued in 1997, the FCC established rules that require an incumbent cable operator upon expiration of a multiple dwelling unit service contract to sell, abandon, or remove “home run” wiring that was installed by the cable operator in a multiple dwelling unit building. These inside wiring rules are expected to assist building owners in their attempts to replace existing cable operators with new programming providers who are willing to pay the building owner a fee, where this fee is permissible. |
(Continued)
F.18
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| State and Local Regulation– Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity in order to cross public rights-of-way. Federal law now prohibits local franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional or renew existing franchises. | |||
| Cable franchises generally are granted for fixed terms and in many cases include monetary penalties for noncompliance and may be terminable if the franchisee fails to comply with material provisions. The specific terms and conditions of franchises vary materially among jurisdictions. Each franchise generally contains provisions governing cable operations, service rates, franchising fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states subject cable systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although local franchising authorities have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, local franchising authorities cannot insist on franchise fees exceeding 5% of the system’s gross cable-related revenues, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. | |||
| Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the local franchising authority may seek to impose new and more onerous requirements, such as significant upgrades in facilities and service or increased franchise fees as a condition of renewal. Historically, most franchises have been renewed and transfer consents granted to cable operators that have provided satisfactory services and have complied with the terms of their franchise. |
| (10) | Cable System Disposals | |
| Effective January 1, 2002, the Partnership adopted SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and provides guidance on classification and accounting for such assets when held for sale. | ||
| On October 28, 2002, the Partnership executed a purchase and sale agreement to sell the operating assets and franchise rights of its cable system serving the community of La Conner, Washington to an unaffiliated party. | ||
| The terms of the purchase and sale agreement included a sales price of $2,056 per subscriber, and required that approximately $262,000 of the gross proceeds be placed in escrow to secure compliance with representations and warranties, to be released to the Partnership one year from the closing of the transaction. On December 23, 2002, an amendment to the purchase and sale agreement was executed, decreasing the sales price to $2,000 per subscriber at closing. The adjustment to the purchase price affects only the holdback portion of the proceeds, reducing the amount to approximately $170,000. After adjusting for the amended holdback and transaction related costs, management estimates that the net proceeds to be received upon closing will be approximately $2,900,000, all of which will be used to pay down amounts outstanding under the Partnership’s term loan agreement. |
(Continued)
F.19
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2002 and 2001
| As of December 31, 2002, the transaction was subject to certain closing conditions, including the prospective buyer obtaining and providing evidence of financing sufficient to complete the transaction. As the sale of the assets was not probable, the assets associated with the transaction were considered to be held for use, as defined in SFAS No. 144, at December 31, 2002. | ||
| In January 2003, the prospective buyer provided the Partnership with the evidence of financing discussed above. The transaction is expected to close by the end of March 2003, and is subject to customary closing conditions. | ||
| As of December 31, 2002, the La Conner system served approximately 1,600 subscribers. The total assets and liabilities as of December 31, 2002 to be sold or assumed in association with this transaction are as follows: |
| Property and equipment, net of accumulated depreciation of $2,028,616 | $ | 1,238,536 | ||
| Intangible assets, net of accumulated amortization of $716,725 | 682,581 | |||
| Other assets | 86,659 | |||
| Total assets to be sold | $ | 2,007,776 | ||
| Total liabilities to be assumed | $ | 75,095 | ||
| Summary operating results for the operations to be sold for the years ended December 31, 2002, 2001 and 2000 are as follows: |
| 2002 | 2001 | 2000 | |||||||||||
| Revenue | $ | 976,536 | 1,026,323 | 1,038,090 | |||||||||
| Expenses: | |||||||||||||
| Operating | (102,114 | ) | (72,071 | ) | (85,476 | ) | |||||||
| General and administrative | (265,587 | ) | (266,298 | ) | (251,976 | ) | |||||||
| Programming | (322,362 | ) | (300,001 | ) | (284,774 | ) | |||||||
| Depreciation and amortization | (173,897 | ) | (160,991 | ) | (146,450 | ) | |||||||
| Operating income | $ | 112,576 | 226,962 | 269,414 | |||||||||
| (11) | Subsequent Event | |
| On March 11, 2003, the Partnership sold the operating assets and franchise rights of its cable system serving the community of La Conner, Washington. The system was sold at a purchase price of approximately $3,200,000, which resulted in a gain. Net proceeds from the transaction were used to repay amounts outstanding under the term loan agreement. |
F.20