1
FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-29354, eff. 7-1-91)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[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, 1999
[ ] 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
----------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1423516
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, 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
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
(Partially Incorporated into Part IV)
(1) Form S-1 Registration Statement declared effective on March 16, 1989 (No.
33-25892).
2
(2) Form 10-K Annual Reports for fiscal years ended December 31, 1989,
December 31, 1990, December 31, 1992 and December 31, 1994, respectively.
(3) Form 10-Q Quarterly Report for period ended June 30, 1989 and March 3,
1995.
(4) Form 8-K dated November 11, 1994.
(5) Form 8-K dated June 30, 1995.
(6) Form 8-K date January 5, 1996.
This filing contains _______ pages. Exhibits Index appears on page ______.
Financial Statements/Schedules Index appears on page ______.
2
3
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 975 limited partners as of December 31, 1999. Northland
Communications Corporation, a Washington corporation, is the Managing General
Partner of the Partnership (referred to herein as "Northland" or the "Managing
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 4 limited partnerships. 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.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and principally
involved in the development and production of computer software used in billing
and financial recordkeeping for 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. As of December 31, 1999, the total number of basic subscribers served by
the Systems was 12,136, and the Partnership's penetration rate (basic
subscribers as a percentage of homes passed) was approximately 81%. The
Partnership's properties are located in rural areas which, to some extent, do
3
4
not offer consistently acceptable off-air network signals. 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).
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 Partnership serves the communities and surrounding areas of LaConner,
Washington, Aliceville, Alabama and Swainsboro, Georgia. The following is a
description of these areas:
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, 1999 is as
follows:
Basic Subscribers 2,158
Tier Subscribers 1,219
Premium Subscribers 556
Estimated Homes Passed 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, 1999 is as follows:
Basic Subscribers 6,822
Premium Subscribers 2,398
Estimated Homes Passed 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, as well as the county seat for Emanuel County. Certain information
regarding the Swainsboro, GA system as of December 31, 1999 is as follows:
Basic Subscribers 3,156
Tier Subscribers 856
Premium Subscribers 1,903
Estimated Homes Passed 3,900
The Partnership had 13 employees as of December 31, 1999. 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 three
categories: basic subscribers, tier subscribers and premium 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 programming services, such as ESPN,
4
5
CNN or The Discovery Channel. "Tier 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".
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 10 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.
5
6
markets for the foreseeable future. The same legislation reduced the compulsory
copyright fees paid by DBS companies and allowed them to continue offering
distant network signals to rural customers. In addition to emerging high-powered
DBS competition, cable television systems face competition from several
low-powered providers, whose service requires use of much larger home satellite
dishes. The availability of DBS equipment at reasonable prices, and the relative
attractiveness of the programming options offered by the cable television
industry and direct broadcast satellite competitors will impact the ability of
providers of DBS service providers to compete successfully with the cable
television industry.
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.
MULTICHANNEL 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 by the FCC, some
state governments and most local governments. The 1996 Telecommunications Act
has altered the regulatory structure governing the nation's communications
providers. It removes barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduces the
scope of cable rate regulation and encourages additional competition in the
video programming industry by allowing local telephone companies to provide
video programming in their own telephone service areas.
The 1996 Telecommunications Act requires the FCC to undertake a host of
implementing rulemakings. Moreover, Congress and the FCC have frequently
revisited the subject of cable regulation. Future legislative and regulatory
changes could adversely affect the Company's operations.
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.
6
7
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. 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. Local 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.
As of December 31, 1999, 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 packaged, non-"premium",
programming services typically containing satellite-delivered programming.
The 1996 Telecom Act, however, provides special rate relief for small cable
operators. For franchising units with less than 50,000 subscribers and owned by
an operator with less than one percent of the nation's cable subscribers (i.e.,
approximately 600,000 subscribers) that is not affiliated with any entities with
aggregate annual gross revenue exceeding $250 million, cable programming service
tier rate regulation was automatically eliminated. All of the Partnership's
systems qualify for this cable programming service tier deregulation. The
elimination of cable programming service tier regulation, which is the rate
regulation of a particular level of packaged programming services, typically
referring to the expanded basic level of services, in a prospective basis
affords 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. To the extent the Partnership's
systems remain rate regulated on the basic service tier, this regulatory option
affords the Partnership significant regulatory options.
The FCC and Congress have provided various forms of rate relief for smaller
cable systems owned by smaller operators. 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.
Regulation by the FCC of cable programming service tier rates for all
systems, regardless of size, became sunset pursuant to the 1996 Telecom Act on
March 31, 1999. Certain legislators, however, have called for new rate
regulations if unregulated cost rates increase dramatically. Should this occur,
all rate deregulation including that applicable to small operators like the
Partnership could be jeopardized. 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.
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
7
8
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 access.
Cable entry into telecommunications will be affected by the regulatory
landscape now being developed 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. In July 1997, the Eighth
Circuit Court of Appeals vacated certain aspects of the FCC's initial
interconnection order. However, most of that decision was reversed by the U.S.
Supreme Court in January 1999. The Supreme Court effectively upheld most of the
FCC interconnection regulations. 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
subject to administrative and judicial appeal. If the FCC's current list of
unbundled network elements is upheld on appeal, it could facilitate the
provision of telecommunications services by new entrants, including the
Partnership.
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 FCC and
Congress that would require cable operators to provide access to unaffiliated
Internet service providers and online service providers. Certain Internet
service providers also are attempting to use existing commercial leased access
rules (originally designed for video programming) to gain access to cable system
delivery. A petition on this issue is now pending before the FCC. Finally, some
local franchising authorities are considering the imposition of mandatory
Internet access requirements as part of cable franchise renewals or transfers. A
federal district court in Portland, Oregon recently upheld the legal ability of
local franchising authority to impose these type of conditions, but an appeal
was filed with the Ninth Circuit Court of Appeals, oral argument has been held,
and the parties are awaiting a decision. 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 or develop for
providing Internet service.
TELEPHONE COMPANY 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 or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as 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 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. Co-located cable
systems are cable
8
9
systems serving an overlapping territory. 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 Telecommunications
Act also eliminates the three year holding period required under the 1992 Cable
Act's "anti-trafficking" provision. The 1996 Cable Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
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.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national video program services. Although the 1992 Cable
Act also precluded any cable operator from serving more than 30% of all U.S.
domestic cable subscribers, this provision has been stayed pending further
judicial review and FCC rulemaking.
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. More popular stations, such as
those affiliated with a national network, typically elect retransmission
consent, which is the broadcast signal carriage requirement that allows local
commercial television broadcast stations to negotiate for payments for granting
permission to the cable operator to carry the stations. 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. Retransmission consent demands may require substantial payments or other
concessions. Either option has a potentially adverse effect on the Partnership's
business.
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 such as market conditions, the
introduction of digital broadcasts, channel capacity and similar matters when
these arrangements are renegotiated. (As of the date of this filing,
retransmission consent agreements are pending with certain broadcasters
affecting systems serving approximately 6,864 basic subscribers. Although the
Partnership expects to reach agreement with the broadcasters, no assurances can
be given that such agreements can be obtained or that they will not result in
increased operating costs to the Partnership.)
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. A rulemaking
is now pending at the FCC regarding the imposition of dual digital and analog
must carry.
ACCESS CHANNELS
9
10
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. The Partnership believes that requests
for commercial leased access carriages have been relatively limited. A new
request has been forwarded to the FCC, however, requesting that unaffiliated
Internet service providers be found eligible for commercial leased access.
Although the Partnership does not believe this use is in accord with the
governing statute, a contrary ruling could lead to substantial leased activity
by Internet service providers and disrupt the Partnership's plans for Internet
service.
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 to all of the
existing program access requirements, and subjecting terrestrially delivered
programming to the program access requirements. Terrestrially delivered
programming is programming delivered other than by satellite. 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, but allowing such contracts when held by new entrants.
In another proceeding, the FCC has preempted restrictions on the deployment of
private antenna on rental property within the exclusive use of a tenant, such as
balconies and patios. This ruling by the FCC may limit the extent to which the
Partnership along with multiple dwelling unit owners may enforce certain aspects
of multiple dwelling unit agreements which otherwise prohibit, for example,
placement of digital broadcast satellite receiver antennae in multiple dwelling
unit areas under the exclusive occupancy of a renter. These developments may
make it even more difficult for the Partnership to provide service in multiple
dwelling unit complexes.
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,
10
11
- lottery programming,
- political programming,
- 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. 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. We cannot predict the outcome
of this legislative activity. 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
11
12
for past and future use of association-controlled music, the Partnership does
not believe these license fees will be significant to the Partnership's business
and operations.
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 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 failed 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.
Historically, most franchises have been renewed for and consents granted to
cable operators that have provided satisfactory services and have complied with
the terms of their franchise.
Under the 1996 Telecom Act, cable operators are not required to obtain
franchises for the provision of telecommunications services, and local
franchising authorities are prohibited from limiting, restricting, or
conditioning the provision of these services. In addition, local franchising
authorities may not require a cable operator to provide any telecommunications
service or facilities, other than institutional networks under certain
circumstances, as a condition of an initial franchise grant, a franchise
renewal, or a 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 a cable operator 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, 1999. 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.)
12
13
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
13
14
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, 1999, is as
follows:
Limited Partners: 975
General Partners: 1
(c) During 1999, 1998, 1997, 1996 and 1995, the Partnership made no cash
distributions.
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS:
Revenue $ 4,974,846 $ 4,876,464 $ 4,665,100 $ 4,499,588 $ 3,529,252
Operating income (loss) 466,394 310,189 304,133 374,200 46,771
Gain (loss) on sale of
assets 0 0 0 0 (11,627)
Gain on sale of system 0 0 0 0 3,391,978
Net income (loss) (403,306) (634,150) (682,930) (705,502) 2,669,199
Net income (loss) per
limited partner unit
(weighted average) (21) (33) (35) (37) 138
Cumulative tax losses
per limited partner
unit (520) (520) (520) (470) (398)
DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Total assets $ 12,044,826 $ 13,197,193 $ 13,826,582 $ 15,093,913 $ 9,682,978
Notes payable 10,272,182 10,625,000 10,925,000 11,375,000 5,618,000
Total liabilities 11,010,310 11,759,371 11,754,610 12,339,011 6,222,574
General partner's
deficit (69,873) (65,840) (59,498) (52,669) (45,614)
Limited partner's
capital 1,104,389 1,503,662 2,131,470 2,807,571 3,506,018
Distribution per
limited partner unit 0 0 0 0 0
Cumulative distributions
per limited partner unit 0 0 0 0 0
14
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1999 AND 1998
Total revenue reached $4,974,846 for the year ended December 31, 1999,
representing an increase of approximately 2% over 1998. This increase is
primarily attributable to rate increases during 1999. Of the 1999 revenue,
$3,782,420 (76%) is derived from subscriptions to basic services, $432,515 (9%)
from subscriptions to premium services, $193,167 (4%) from subscriptions to tier
services, $124,594 (2%) from installation charges, $50,344 (1%) from service
maintenance revenue, and $391,806 (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):
1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- --------
Basic Rate $ 25.95 $ 24.65 $ 23.65 $ 22.85 $ 20.75 $ 19.80
Tier Rate 7.95 7.40 7.20 6.20 4.60 3.50
HBO Rate 10.50 10.50 11.00 9.70 11.25 11.35
Cinemax Rate 7.50 8.00 8.00 7.80 9.00 9.10
Showtime Rate 8.25 7.00 6.00 9.30 -- 10.45
Disney Rate 8.60 8.60 8.50 8.20 9.00 9.40
Encore Rate 1.50 1.50 -- -- -- --
Starz 6.75 7.00 -- -- -- --
Service
Contract Rate 2.05 2.10 2.15 2.15 2.45 2.65
Operating expenses totaled $500,673 for the year ended December 31, 1999,
representing a decrease of approximately 2% over 1998. The reduction of
personnel in the Aliceville, Alabama system resulted in reduced salary and
benefit costs. 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 $1,188,209 for the year ended
December 31, 1999, representing an increase of approximately 5% from 1998. This
increase is due to increased salaries and benefits, copyright fees, franchise
fees and administrative overhead.
Programming expenses totaled $1,245,586 for the year ended December 31, 1999,
representing an increase of approximately 2% over 1998. This increase is due to
increased costs charged by various program suppliers. As programming costs are
based on the number of subscribers served, future subscriber increases will
cause the trend of programming expense increases to continue. In addition, 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.
Depreciation and amortization expense decreased from $1,701,823 in 1998 to
$1,573,984 in 1999 (approximately 8%). This is primarily due to organization
costs becoming fully amortized in 1998, offset by depreciation and amortization
on plant, equipment and intangible assets acquired during 1999.
Interest expense decreased from $908,651 in 1998 to $819,119 in 1999
(approximately 10%). The Partnership's average bank debt balance decreased from
approximately $10,775,000 in 1998 to $10,448,591 in 1999, due to principal
payments made in 1999, net of additional loan proceeds of $182,000. In addition,
the Partnership's effective interest rate decreased from 8.22% in 1998 to 7.855%
in 1999.
In 1999, the Partnership generated a net loss of $403,306. The operating
losses incurred by the Partnership historically are a result of significant
non-cash charges to income for depreciation and amortization. Prior to the
deduction for these non-cash items, the Partnership has generated positive
operating income in each year in the three year period ending December 31, 1999.
Management
15
16
anticipates that this trend will continue, and that the Partnership will
continue to generate net operating losses after depreciation and amortization
until a majority of the Partnership's assets are fully depreciated.
1998 AND 1997
Total revenue reached $4,876,464 for the year ended December 31, 1998,
representing an increase of approximately 5% over 1997. This increase was
primarily attributable to rate increases during 1998. Of the 1998 revenue,
$3,687,185 (76%) is derived from subscriptions to basic services, $442,162 (9%)
from subscriptions to premium services, $168,569 (3%) from subscriptions to tier
services, $113,380 (2%) from installation charges, $47,444 (1%) from service
maintenance revenue, and $417,724 (9%) from other sources.
Operating expenses totaled $513,323 for the year ended December 31, 1998,
representing an increase of approximately 2% over 1997. Increases in salary and
benefit costs contributed to the overall increase in operating 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 $1,130,734 for the year ended
December 31, 1998, representing a decrease of approximately 1% from 1997. This
decrease is due to reduced copyright fees, insurance, audit fees and utilities.
Programming expenses totaled $1,220,395 for the year ended December 31, 1998,
representing an increase of approximately 8% over 1997. This increase is due to
increased costs charged by various program suppliers. As programming costs are
based on the number of subscribers served, future subscriber increases will
cause the trend of programming expense increases to continue. In addition, 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.
Depreciation and amortization expense increased from $1,577,434 in 1997 to
$1,701,823 in 1998 (approximately 8%). This is primarily due to depreciation and
amortization on plant, equipment and intangible assets acquired during 1998.
Interest expense decreased from $965,873 in 1997 to $908,651 in 1998
(approximately 6%). The Partnership's average bank debt balance decreased from
approximately $11,150,000 in 1997 to $10,775,000 in 1998, due to principal
payments made in 1998. In addition, the Partnership's effective interest rate
decreased from 8.38% in 1997 to 8.22% in 1998.
In 1998, the Partnership generated a net loss of $634,150. The operating
losses incurred by the Partnership historically are a result of significant
non-cash charges to income for depreciation and amortization. Prior to the
deduction for these non-cash items, the Partnership has generated positive
operating income in each year in the three year period ending December 31, 1998.
Management anticipates that this trend will continue, and that the Partnership
will continue to generate net operating losses after depreciation and
amortization until a majority of the Partnership's assets are fully depreciated.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the Partnership's primary source of liquidity was cash flow from
operations. The Partnership generates cash on a monthly basis through the
monthly billing of subscribers for cable services. Losses from uncollectible
accounts have not been material. During 1999, cash generated from monthly
billings was sufficient to meet the Partnership's needs for working capital,
capital expenditures and debt service. Management estimates for 2000 that cash
generated from monthly subscriber billings is sufficient to meet the
Partnership's working capital needs, as well as meeting the debt service
obligations of its bank loan.
As of the date of this filing, the Partnership's term loan balance was
$10,272,182. Certain fixed rate agreements in effect as of September 30, 1999
expired during the fourth quarter of 1999, and the Partnership entered into new
fixed rate agreements. Currently, the interest rates on the credit facility are
as follows: $7,300,000 fixed at 7.74% under the terms of a swap agreement with
the Partnership's lender, expiring December 31, 2000; and $2,475,000 at LIBOR
based rate of 8.14% expiring June 13, 2000 and $300,000 at LIBOR based rate of
8.18375% expiring March 31, 2000 and $182,000 fixed at 8.25%. The balance of
$15,182 bears interest at the prime rate plus 0.25% (currently 9.0%). 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.
16
17
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. 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.
Gains or losses associated with changes in fair values of these swaps and the
underlying notional principal amounts are deferred and recognized against
interest expense over the term of the agreements in the Partnership's statements
of operations.
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 notional amounts of these interest rate
swaps are $7,300,000 at December 31, 1999. Notional amounts do not represent
amounts exchanged by the parties and, thus, are not a measure of exposure to the
Partnership through its use of derivatives. The exposure in a derivative
contract is the net difference between what each party is required to pay based
on the contractual terms against the notional amount of the contract, which in
the Partnership's case are interest rates. The use of derivatives does not have
a significant effect on the Partnership's result of operations or its financial
position.
Expected Maturity Date
2000 2001 2002 2003 2004 Total
Liabilities
Debt Maturity $ 670,241 $ 873,950 $ 8,616,179 $ 28,218 $ 83,594 $ 10,272,182
Debt Interest Payments 799,920 731,961 643,675 8,141 5,749 2,189,446
Average Interest Rate 7.855% 7.855% 7.855% 7.855% 7.855% 7.855%
Interest Rate Swaps
Variable to Fixed
Notional Amount $7,000,000 $7,000,000
Average Pay Rate* 5.740% 5.740%
Average Receive Rate* 5.509% 5.509%
*plus an applicable margin, currently 2.0%
It is the Partnership's policy to renegotiate swap agreements on or near
expiration.
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 5.50 to 1 and a Cash flow to Debt Service
Ratio of 1.25 to 1, a limitation on the maximum amount of capital expenditures
of $700,000, excluding costs for the office site in LaConner, Washington, among
other restrictions. The General Partner submits quarterly debt compliance
reports to the Partnership's creditor under this agreement. At December 31,
1999, the Partnership was out of compliance with its capital expenditure limits;
however, an appropriate waiver has been obtained from the Partnership's
creditor.
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 Act. Because of the deregulatory nature of the 1996 Act,
the Partnership does not expect the future rate of inflation to have a material
adverse impact on operations.
CAPITAL EXPENDITURES
During 1999, the Partnership incurred approximately $980,000 in capital
expenditures. These expenditures included the construction on a new office
building, digital advertising insertion equipment and the continued system
upgrade to 400 MHz in the LaConner, WA system; a series of quality assurance
projects, digital advertising insertion equipment, a vehicle replacement,
channel additions and line extensions in the Aliceville, AL system; and the
initial phase of a fiber backbone project in the Swainsboro, GA system. The
LaConner office building is being financed by a revolving note with maximum
borrowings of up to $310,000 converting
17
18
to a fixed rate note upon completion of construction. All other capital
expenditures for 1999 were financed through cash provided by operations.
Management estimates that the Partnership will spend approximately $720,000
on capital expenditures in 2000. These expenditures include a continuing system
upgrade to 400 MHz, a vehicle replacement and completion of the new office
building for the LaConner, WA system; the start of a system upgrade, office
remodel, channel additions and continuing quality assurance projects in the
Aliceville, AL system; and the completion of a fiber backbone which will lead to
a future system upgrade to 450 MHz, a vehicle replacement and various line
extensions in the Swainsboro, GA system.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended
December 31, 1999, 1998 and 1997 are included as a part of this filing (see Item
14(a)(1) below).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The Managing 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.
JOHN S. WHETZELL (AGE 58). Mr. Whetzell is the founder of Northland
Communications Corporation and has been President since its inception and a
Director since March 1982. Mr. Whetzell became Chairman of the Board of
Directors in December 1984. He also serves as President 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 25 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 63). Mr. Iverson is the Assistant Secretary of Northland
Communications Corporation and has served on the Board of Directors since
December 1984. He also serves on the Board of Directors of Northland
Telecommunications Corporation and each of its subsidiaries. He is currently a
member of the law firm of Ryan, Swanson & Cleveland, PLLC, Northland's general
counsel. He is a member of the Washington State Bar Association and American Bar
Association and has been practicing law for more than 35 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 42). Mr. Clark has served as Vice President of
Northland since March 1982. He has served on the Board of Directors of both
Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. He also serves as Vice President and Director of
all subsidiaries of Northland Telecommunications Corporation. Mr. Clark was
elected Treasurer in April 1987, prior to which he served as Secretary from
March 1982. Mr. Clark was an original incorporator of Northland and 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 19 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.
JAMES E. HANLON (AGE 66). Since June 1985, Mr. Hanlon has been a Divisional
Vice President for Northland and is currently responsible for the management of
systems serving subscribers in Texas, Alabama and parts of Mississippi. Prior to
his association with Northland, he served as Chief Executive of M.C.T.
Communications, a cable television company, from 1981 to June 1985. His
responsibilities included supervision of the franchise, construction and
operation of a cable television system located near Tyler, Texas. From 1979 to
1981, Mr. Hanlon was President of the CATV Division of Buford Television, Inc.,
and from 1973 to 1979, he served as President and General Manager of Suffolk
Cablevision in Suffolk County, New York. Mr. Hanlon has also served as Vice
President and Corporate Controller of Viacom International, Inc. and Division
Controller of New York Yankees, Inc. Mr. Hanlon has a Bachelor of Science degree
in Business Administration from St. Johns University.
JAMES A. PENNEY (AGE 45). Mr. Penney is Vice President and General Counsel
for Northland Telecommunications Corporation and each of its subsidiaries and
has served in this role since September 1985. He was elected Secretary in April
1987. Mr. Penney is responsible for advising all Northland systems with regard
to legal and regulatory matters, and also is involved in the acquisition and
financing of new cable systems. From 1983 until 1985 he was associated with the
law firm of Ryan, Swanson &
19
20
Cleveland, Northland's general counsel. Mr. Penney holds a Bachelor of Arts
Degree from the University of Florida and a Juris Doctor from The College of
William and Mary, where he was a member of The William and Mary Law Review.
GARY S. JONES (AGE 42). Mr Jones is Vice President for Northland. Mr. Jones
joined Northland in March 1986 as Controller and has been Vice President of
Northland Telecommunications Corporation and each of its subsidiaries since
October 1986. 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 54). Mr. Dyste has served as Vice President- Technical
Services of Northland Telecommunications Corporation and each of its
subsidiaries since April 1987. 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 and current member
of the Mount Rainier Chapter of the Society of Cable Television 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 56). Mr. Johnson has served as Divisional Vice President
for Northland's Statesboro, Georgia regional office since March 1994. He is
responsible for the management of systems serving subscribers in 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 29 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 44). Mr. Ferrer is a Vice President of Northland. He
joined Northland in March 1984 as Assistant Controller and was promoted to
Assistant treasurer in 1986. Mr. Ferrer became Vice President of Northland
Communications Corporation in 1988 and in December of 1998, he was promoted to
Vice President of Northland Telecommunications Corporation. Mr. Ferrer is
responsible for coordinating all of Northland's property tax filings, insurance
requirements and system programming contracts as well as interest rate
management and other treasury functions. Prior to joining Northland, he was a
Certified Public Accountant with 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 35). 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
program analysis. 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.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation was
paid to the General Partner and affiliates during 1999 as indicated in Note 3 to
the Notes to Financial Statements--December 31, 1999 (see Items 14(a)(1) and
13(a) below).
20
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1999 is as follows:
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
----------------- -------------------- ------------------ ------------
General Partner's Northland (See Note A) (See Note A)
Interest Communications
Corporation
1201 Third Avenue
Suite 3600
Seattle,
Washington 98101
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
Managing 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 Managing 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 Managing General Partner also receives reimbursement of normal operating and
general and administrative expenses incurred on behalf of the Partnership.
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.
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.
See Note 3 of the Notes to Financial Statements--December 31, 1999 for
disclosures regarding transactions with the General Partner and affiliates.
21
22
The following schedule summarizes these transactions:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
Partnership management fees $ 248,851 $ 243,823 $ 233,249
Operating expense reimbursements 244,730 270,368 275,758
Software installation and
billing service fees to NCSC 40,276 41,275 35,791
Reimbursements (to)/from
Affiliates (99,498) (39,028) (47,598)
Local Advertising Services 23,233 18,218 27,936
Local Programming Services 33,615 49,365 22,247
Amounts due to (from) General
Partner and affiliates at year end 5,592 81,682 34,201
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 Assistant
Secretary of the Managing General Partner, is a member of the law firm of Ryan,
Swanson & Cleveland, PLLC, which has rendered and is expected to continue to
render legal services to the Managing General Partner and the Partnership.
(c) INDEBTEDNESS OF MANAGEMENT. None.
22
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
SEQUENTIALLY
NUMBERED
PAGE
------------
(1) FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................................... ____
Balance Sheets--December 31, 1999 and 1998.................................. ____
Statements of Operations for the years ended December 31, 1999, 1998
and 1997................................................................... ____
Statements of Changes in Partners' Capital (Deficit) for the years ended
December 31, 1999, 1998 and 1997.......................................... ____
Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997.............................................................. ____
Notes to Financial Statements--December 31, 1999............................ ____
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)
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)
23
24
EXHIBITS:
--------
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)
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)
24
25
EXHIBITS:
--------
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)
- ------------
(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
(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.
(b) REPORTS ON FORM 8-K. No Partnership reports on Form 8-K have been filed
during the fourth quarter of the fiscal year ended December 31, 1999.
25
26
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: By /s/ John S. Whetzell
-------------------- --------------------------------------
John S. Whetzell, President
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 Chief executive officer of registrant; _________
- -------------------------------- chief executive officer and chairman of the
John S. Whetzell board of directors of Northland Communications
Corporation
/s/ Richard I. Clark Director of Northland Communications _________
- -------------------------------- Corporation
Richard I. Clark
/s/ John E. Iverson Director of Northland Communications _________
- -------------------------------- Corporation
John E. Iverson
/s/ Gary S. Jones Vice President and principal accounting _________
- -------------------------------- officer of Northland Communications
Gary S. Jones Corporation
26
27
EXHIBITS INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------- ------------
27.0 Financial Data Schedule.
27
28
NORTHLAND CABLE PROPERTIES EIGHT
LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH AUDITORS' REPORT
29
REPORT OF 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,
1999 and 1998, 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, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties
Eight Limited Partnership as of December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Seattle, Washington,
January 28, 2000
30
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
------------ ------------
CASH $ 316,123 $ 800,110
ACCOUNTS RECEIVABLE 111,341 108,011
DUE FROM AFFILIATES 2,445 26,295
PREPAID EXPENSES 71,698 60,971
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 12,366,457 11,454,452
Less- Accumulated depreciation (5,682,821) (4,641,375)
------------ ------------
6,683,636 6,813,077
Franchise agreements (net of accumulated
amortization of $2,539,971 in 1999 and
$2,145,760 in 1998)
4,665,011 5,059,222
Loan fees and other intangibles (net of
accumulated amortization of $594,610 in
1999 and $504,157 in 1998)
78,075 209,050
Goodwill (net of accumulated amortization of
$41,912 in 1999 and $37,952 in 1998)
116,497 120,457
------------ ------------
Total investment in cable television
properties 11,543,219 12,201,806
------------ ------------
Total assets $ 12,044,826 $ 13,197,193
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES:
Accounts payable and accrued expenses $ 514,549 $ 778,917
Due to General Partner and affiliates 8,037 107,977
Deposits 7,952 10,002
Subscriber prepayments 207,590 237,475
Term loan 10,272,182 10,625,000
------------ ------------
Total liabilities 11,010,310 11,759,371
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' CAPITAL (DEFICIT):
General Partner-
Contributed capital 1,000 1,000
Accumulated deficit (70,873) (66,840)
------------ ------------
(69,873) (65,840)
------------ ------------
Limited partners-
Contributed capital, net -
19,087 units 8,120,820 8,120,820
Accumulated deficit (7,016,431) (6,617,158)
------------ ------------
1,104,389 1,503,662
------------ ------------
Total liabilities and partners'
capital (deficit) $ 12,044,826 $ 13,197,193
============ ============
The accompanying notes are an integral part of these balance sheets.
31
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
REVENUE $ 4,974,846 $ 4,876,464 $ 4,665,100
----------- ----------- -----------
EXPENSES:
Operating (including $60,576, $30,156 and $52,697,
net, paid to affiliates in 1999, 1998 and 1997,
respectively) 500,673 513,323 505,658
General and administrative (including $500,749,
$496,332 and $489,975 paid to affiliates in
1999, 1998 and 1997, respectively) 1,188,209 1,130,734 1,143,911
Programming (including $71,510, $2,066 and $40,219,
net, paid to affiliates in 1999, 1998 and 1997,
respectively) 1,245,586 1,220,395 1,133,964
Depreciation and amortization 1,573,984 1,701,823 1,577,434
----------- ----------- -----------
4,508,452 4,566,275 4,360,967
----------- ----------- -----------
Operating income 466,394 310,189 304,133
OTHER INCOME (EXPENSE):
Interest income 14,875 15,817 21,328
Interest expense (819,119) (908,651) (965,873)
Other expense (65,456) (51,505) (42,518)
----------- ----------- -----------
Net loss (403,306) $ (634,150) $ (682,930)
=========== =========== ===========
ALLOCATION OF NET LOSS:
General Partner $ (4,033) $ (6,342) $ (6,829)
=========== =========== ===========
Limited partners $ (399,273) $ (627,808) $ (676,101)
=========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (21) $ (33) $ (35)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
32
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
General Limited
Partner Partners Total
----------- ----------- -----------
BALANCE, December 31, 1996 $ (52,669) $ 2,807,571 $ 2,754,902
Net loss (6,829) (676,101) (682,930)
----------- ----------- -----------
BALANCE, December 31, 1997 (59,498) 2,131,470 2,071,972
Net loss (6,342) (627,808) (634,150)
----------- ----------- -----------
BALANCE, December 31, 1998 (65,840) 1,503,662 1,437,822
Net loss (4,033) (399,273) (403,306)
----------- ----------- -----------
BALANCE, December 31, 1999 $ (69,873) $ 1,104,389 $ 1,034,516
=========== =========== ===========
The accompanying notes are an integral part of these statements.
33
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (403,306) $ (634,150) $ (682,930)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization expense 1,573,984 1,701,823 1,577,434
Amortization of loan fees 53,506 51,505 42,518
Loss on sale of property 11,950 -- --
(Increase) decrease in operating assets:
Accounts receivable (3,330) (6,239) 3,605
Due from affiliates 23,850 (26,295) --
Prepaid expenses (10,727) 1,482 138
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (264,369) 153,344 45,751
Due to General Partner and affiliates (99,940) 73,776 (231,277)
Deposits (2,050) (2,198) (5,600)
Subscriber prepayments (29,885) 79,839 56,725
----------- ----------- -----------
Net cash provided by operating activities 849,683 1,392,887 806,364
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (979,928) (672,390) (738,043)
Increase in intangibles -- (27,153) --
Proceeds from sale of property 2,175 -- --
----------- ----------- -----------
Net cash used in investing activities (977,753) (699,543) (738,043)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 182,000 -- --
Principal payments on note payable (534,818) (300,000) (450,000)
Loan fees (3,099) (56,255) --
----------- ----------- -----------
Net cash used in financing activities (355,917) (356,255) (450,000)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH (483,987) 337,089 (381,679)
CASH, beginning of year 800,110 463,021 844,700
----------- ----------- -----------
CASH, end of year $ 316,123 $ 800,110 $ 463,021
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 854,903 $ 1,066,353 $ 986,979
=========== =========== ===========
The accompanying notes are an integral part of these statements.
34
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND PARTNERS' INTERESTS:
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 city 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.
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 to partnership capital.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred.
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold improvements 5-20 years
35
-2-
The Partnership periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated undiscounted future cash inflows
attributable to the asset, less estimated undiscounted future cash outflows, is
less than the carrying amount, an impairment loss is recognized.
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocated the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to noncompetition agreements, franchise agreements and
other intangibles; then the excess is allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, loan fees and other intangibles, and
goodwill are being amortized using the straight-line method over the following
estimated useful lives:
Franchise agreements 8-40 years
Loan fees and other intangibles 1-5 years
Goodwill 40 years
Revenue Recognition
Cable television service revenue, including service maintenance and installation
revenues, 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 $142,053, $153,797, and
$154,578 in 1999, 1998 and 1997, respectively.
Derivatives
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. As discussed in Note 6, the Partnership 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.
Gains or losses associated with changes in fair values of these swaps and the
underlying notional principal amounts are deferred and recognized against
interest expense over the term of the agreements in the Partnership's statements
of operations.
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 notional amounts of these interest rate
swaps is $7,300,000 at December 31, 1999. These notional amounts do not
represent amounts exchanged by the parties and, thus, are not a measure of
exposure to the Partnership through its use of derivatives. The exposure in a
derivative contract is the net difference between what each party is required to
pay based on the contractual terms against the notional amount of the contract,
which in the Partnership's case are interest rates.
36
-3-
The use of derivatives does not have a significant effect on the Partnership's
result of operations or its financial position.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133 - In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the statement of
operations, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that are subject to hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133 - an Amendment to
FASB Statement No. 133," the effective date of SFAS No. 133 has been deferred
until fiscal years beginning after January 15, 2000. SFAS No. 133 cannot be
applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at the company's election, before January 1, 1999).
The Partnership has not yet quantified the impacts of adopting SFAS No. 133 on
the financial statements and has not determined the timing or method of adoption
of SFAS No. 133. However, the statement could increase volatility in earnings
and other comprehensive income.
Staff Accounting Bulletin (SAB) No. 101 - In November of 1999, the SEC released
SAB No. 101 "Revenue Recognition in Financial Statements." This bulletin will
become effective for the quarter ended March 31, 2000. This bulletin establishes
more clearly defined revenue recognition criteria, than previously existing
accounting pronouncements, and specifically addresses revenue recognition
requirements for nonrefundable fees, such as installation fees, collected by a
company upon entering into an arrangement with a customer. The Partnership
believes that the effects of this bulletin will not have a material impact on
the Partnership's financial position or results of operations.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities 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.
37
-4-
3. TRANSACTIONS WITH THE 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. The amount of management fees charged by the
General Partner was $248,851, $243,823, and $233,249 for 1999, 1998 and 1997,
respectively.
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
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). As of December 31, 1999, the Partnership
has repurchased $12,500 of limited partnership units (50 units at $250 per
unit).
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
$244,730, $270,368, and $275,758 for the years ended December 31, 1999, 1998 and
1997, respectively.
In 1999, 1998 and 1997, the Partnership was charged software installation
charges and maintenance fees for billing system support provided by an
affiliate, amounting to $40,276, $41,275, and $35,791, respectively.
38
-5-
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 $99,498, $39,028, and $47,598
under the terms of these agreements during 1999, 1998 and 1997, respectively.
Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner was formed to
assist in the development of local advertising markets and the management and
training of local sales staff. CAC billed the Partnership $23,233, $18,218, and
$27,936 in 1999, 1998 and 1997, respectively, for these services.
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 were $33,615, $49,365 and $22,247 during 1999, 1998 and 1997,
respectively.
Due to General Partner and Affiliates
1999 1998
-------- --------
Management fees $ -- $ 41,962
Reimbursable operating costs -- 54,323
Other amounts due to affiliates, net 8,037 11,692
-------- --------
$ 8,037 $107,977
======== ========
4. PROPERTY AND EQUIPMENT:
December 31,
----------------------------
1999 1998
----------- -----------
Land and buildings $ 203,718 $ 205,171
Distribution plant 11,284,388 10,585,052
Other equipment 615,561 573,132
Construction in progress 262,790 91,097
----------- -----------
$12,366,457 $11,454,452
=========== ===========
39
-6-
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
December 31,
---------------------
1999 1998
-------- --------
Accounts payable $111,446 $338,505
Interest 10,049 45,833
Programmer license fees 141,993 130,695
Franchise fees 55,609 48,351
Pole rental 71,654 50,985
Other 123,798 164,548
-------- --------
$514,549 $778,917
======== ========
6. TERM LOAN:
December 31,
---------------------------
1999 1998
----------- -----------
Term loan, amended and restated on March 30, 1998, collateralized by a first
lien position on all present and future assets of the Partnership. Interest
rates vary based on certain financial covenants; currently 7.848% (weighted
average). Graduated principal payments plus interest are due quarterly until
maturity on December 31, 2002 $10,090,182 $10,625,000
Additional drawdown of the term loan issued under the Company's March 30, 1998
term loan, for a new office in LaConner, Washington, collateralized by a
first lien position on all present and future assets of the Partnership
Additional draws will be taken in 2000. The final loan balance will be
approximately $310,000. Interest is fixed at 8.25%. Fixed payments of
principal plus interest are due monthly until maturity on December 31, 2004 182,000 --
----------- -----------
$10,272,182 $10,625,000
=========== ===========
Annual maturities of term loan after December 31, 1999 are as follows:
2000 $ 670,241
2001 873,950
2002 8,616,179
2003 28,218
2004 83,594
-----------
$10,272,182
===========
40
-7-
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 5.50 to 1 and a Cash Flow to Debt Service Ratio of
1.25 to 1, and a limitation on the maximum amount of capital expenditures of
$700,000, excluding costs for the office site in LaConner, Washington, among
other restrictions. The General Partner submits quarterly debt compliance
reports to the Partnership's creditor under this agreement. At December 31,
1999, the Partnership was out of compliance with its capital expenditure limits;
however, an appropriate waiver has been obtained from the Partnership's
creditor.
The Partnership has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates. At December 31, 1999, the Partnership had
outstanding an interest rate swap agreement with its bank, having a notional
principal amount of $7,300,000. This agreement effectively changes the
Partnership's interest rate exposure to a fixed rate of 5.74%, plus an
applicable margin based on certain financial covenants (the margin at December
31, 1999 was 2.00%). The maturity date of the swap is December 31, 2000.
At December 31, 1999, the Partnership would have received from the counterparty
$45,056 to settle this agreement based on fair value estimates received from the
financial institution.
7. 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, 1999. 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 generally accepted accounting
principles. Traditionally, there are no other significant differences between
taxable income and the 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 general, 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.
In general, under current federal income tax laws, a partner's allocated share
of tax losses from a partnership is allowed as a deduction on his individual
income tax return only to the extent of the partner's adjusted basis in his
partnership interest at the end of the tax year. No losses will be allocated to
limited partners with negative basis.
41
-8-
In addition, current tax law does not allow a taxpayer to use losses from a
business activity in which he does 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 his entire interest in the passive activity.
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $122,851, $111,412 and $118,129 in 1999, 1998
and 1997, respectively. Minimum lease payments through the end of the lease
terms are as follows:
2000 $ 3,300
2001 3,300
2002 3,300
2003 3,100
2004 3,100
Thereafter 36,600
-------
$52,700
=======
Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted. This act dramatically changed federal telecommunications laws and the
future competitiveness of the industry. Many of the changes called for by the
1996 Act will not take effect until the Federal Communications Commission (FCC)
issues new regulations which, in some cases, may not be completed for a few
years. Because of this, the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Partnership's operations, follows.
Cable Programming Service Tier Regulation. FCC regulation of rates for cable
programming service tiers has been eliminated for small cable systems owned by
small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000) or more than $250 million in annual revenue.
The Partnership qualifies as a small cable company and all of the Partnership's
cable systems qualify as small cable systems. Basic tier rates remain subject to
regulations by the local franchising authority under most circumstances until
effective competition exists. The 1996 Act expands the definition of effective
competition to include the offering of video programming services directly to
subscribers in a franchised area served by a local telephone exchange carrier,
its affiliates or any multichannel video programming distributor which uses the
facilities of the local exchange carrier. The FCC has not yet determined the
penetration criteria that will trigger the presence of effective competition
under these circumstances.
42
-9-
Telephone Companies. The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act; as a radio-based multichannel
programming distributor not subject to any provisions of the 1996 Act; or
through nonfranchised "open video systems" offering nondiscriminatory capacity
to unaffiliated programmers, subject to select provisions of the 1996 Act.
Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross-ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public, Educational and Governmental and leased
access channels.
Self-Insurance
The 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. For 1999,
1998 and 1997, respectively, the Partnership was charged $7,304, $7,370 and
$7,346 by the fund. As of December 31, 1999, the fund had a balance of $360,815.