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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, 1996
[ ] 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 0-16718
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1366564
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(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
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Securities registered pursuant to including Section 12(b) of the Act:
Title of each 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
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(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 [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
(Partially Incorporated into Part IV)
(1) Form S-1 Registration Statement declared effective on August 6, 1987
(No. 33-13879).
(2) Form 10-K Annual Reports for fiscal years ended December 31, 1987,
December 31, 1988, December 31, 1990, December 31, 1992 and December
31, 1993 respectively.
(3) Form 10-Q Quarterly Reports for periods ended June 30, 1989,
September 30, 1989 and March 31, 1993, respectively.
(4) Form 8-K dated September 27, 1993
(5) Form 8-K dated March 1, 1996
This filing contains ____ pages. Exhibits Index appears on page _____.
Financial Statements/Schedules Index appears on page _____.
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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 Seven Limited Partnership (the "Partnership")
is a Washington limited partnership consisting of two general partners (the
"General Partners") and approximately 2,906 limited partners as of December 31,
1996. Northland Communications Corporation, a Washington corporation, is the
Managing General Partner of the Partnership (referred to herein as "Northland"
or the "Managing General Partner"). FN Equities Joint Venture, a California
general partnership, is the Administrative General Partner of the Partnership
(the "Administrative 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 5 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. Northland
is a subsidiary of Northland Telecommunications Corporation ("NTC"). Other
subsidiaries of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and
principally involved in the direct ownership of cable television
systems. Owner of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally
involved in the production and development of local programming.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 as the
holding company for the following entities:
CABLE TELEVISION BILLING, INC. - formed in June 1987 and principally
involved in the development and production of computer software used
in connection with the billing and financial recordkeeping for cable
systems owned or managed by Northland or Northland Cable Television,
Inc.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally
involved in the production and development of video commercial
advertisements.
NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company for
the following entity:
STATESBORO MEDIA, INC. - formed in April 1995 and principally
involved in acquiring and operating an AM radio station serving the
community of Statesboro, GA and surrounding areas.
The partnership was formed on April 17, 1987 and began operations in 1987
with the acquisition of a cable television system serving two communities in
Texas and one system in Washington. Subsequently, in 1988, the Partnership
acquired another cable television system in Washington and sold a sub-system in
Texas. In 1993, the Partnership purchased a cable television system in Bayview,
Washington. In 1996, the Partnership purchased cable television systems serving
Vidalia, Georgia and Sandersville, Georgia. (Collectively, the cable television
systems are referred to herein as the "Systems".) As of December 31, 1996, the
total number of basic subscribers served by the Systems was 32,051, and the
partnership's penetration rate (basic subscribers as a percentage of homes
passed) was approximately 67% as compared to an industry average of
approximately 66%, as reported by PAUL KAGAN AND ASSOCIATES, INC.
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The Partnership has 18 non-exclusive franchises to operate the Systems.
These franchises, which will expire at various dates through 2021, have been
granted by local and county authorities in the areas in which the Systems
operate. Annual franchise fees are paid to the granting governmental
authorities. These fees vary between 1% 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 Brenham
and Bay City, Texas, Camano Island and Sequim, Washington, as well as Vidalia
and Sandersville, Georgia. The following is a description of these areas:
Brenham, TX: Brenham, Texas, with a population of approximately 12,000 is
strategically located about midway between Houston and Austin. The population
has grown steadily over the last 15 years at a rate of two and one-half percent
per year. The city of Brenham serves as a hub for commerce, trade and services
to the surrounding counties of Burleson, Waller, Lee, Fayette, Austin, Colorado
and Grimes. Brenham's proximity to Houston makes it a gateway through which
international trade and commerce proceed to Austin, San Antonio and other
western cities. A main line of the Santa Fe Railway also services the city.
Certain information regarding the Brenham, TX system as of December 31, 1996 is
as follows:
Basic Subscribers 4,239
Tier Subscribers 1,256
Premium Subscribers 1,409
Estimated Homes Passed 5,615
Bay City, TX: The Bay City system serves the communities of Bay City,
Markham, Matagorda, Van Vleck and certain unincorporated areas of Matagorda
county in southeast Texas. The local economies of the communities included in
the Bay City system are based primarily in agriculture, chemical manufacturing
and petroleum processing. Rich, productive agricultural lands are located along
the banks of the Colorado River in the Bay City area. Rice is the major crop.
There is an abundance of recreational and sporting activities in the Bay
City area, including freshwater and deep-sea fishing. The Gulf of Mexico,
Matagorda Beach, the Colorado River, bays and bayous combine to meet the
recreational needs of both tourists and residents. Certain information regarding
the Bay City, TX system as of December 31, 1996 is as follows:
Basic Subscribers 5,649
Tier Subscribers 2,218
Premium Subscribers 1,964
Estimated Homes Passed 8,640
Camano Island, WA: Camano Island is approximately 16 miles long and six
miles wide with a year-round population of over 6,000. Located in the Puget
Sound, north of Seattle and five miles west of Stanwood, Washington, the island
is connected to the mainland by a bridge which provides easy access to
neighboring communities. The Camano Island system also serves the communities of
Stanwood, WA and Bayview, WA.
Camano Island is currently experiencing growth at a rate of 200 to 250 new
homes per year. The island is primarily residential with neighborhood grocery
stores, service stations, restaurants and other incidental services. The
neighboring mainland community of Stanwood provides the area with an education
system, additional shopping and medical services. Many employed residents of
Camano Island work in the neighboring cities of Everett (an industrial center),
Stanwood and Mount Vernon (mainly agricultural), while
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many have chosen Camano Island as a retirement residence. Certain information
regarding the Camano Island, WA system as of December 31, 1996 is as follows:
Basic Subscribers 7,031
Tier Subscribers 2,612
Premium Subscribers 2,372
Estimated Homes Passed 9,671
Sequim, WA: Clallam County's population is approximately 53,400, with
approximately 17,300 residing in the city of Port Angeles, WA, the county seat.
Sequim is located approximately 15 miles east of Port Angeles. The county's work
force is concentrated in the lumber/wood products, logging, tourism,
aerospace/aviation, fishing and education industries. Some of the most
productive forest land in the United States is located on the Olympic Peninsula,
and timber has been the traditional mainstay of Clallam County's economy. A
natural deep-water harbor and relative proximity to the Far East have encouraged
international trade development for the county's products. The Olympic National
Park, ferry access to Victoria, British Columbia, Canada, sport fishing, and
other scenic and recreational attractions bring a steady stream of tourists
through Clallam County. Certain information regarding the Sequim, WA system as
of December 31, 1996 is as follows:
Basic Subscribers 5,706
Tier Subscribers 3,072
Premium Subscribers 722
Estimated Homes Passed 7,034
Vidalia, GA: Located approximately 15 miles south of Interstate 16, the
city of Vidalia is in Toombs County and lies midway between Savannah and Macon.
With a population of approximately 11,500, Vidalia is home of the Vidalia Sweet
Onion and provides services and support for the surrounding agricultural and
light manufacturing industries. Nearby Lyons, with a population of approximately
4,500 is the county seat of Toombs County. Certain information regarding the
Vidalia, GA system as of December 31, 1996 is as follows:
Basic Subscribers 6,013
Premium Subscribers 3,690
Estimated Homes Passed 12,416
Sandersville, GA: Located midway between Augusta and Macon, Sandersville
is the county seat of Washington County. Major employers with operations in the
communities served by the Sandersville system include kaolin processors,
transportation, both trucking and rail and a variety of light manufacturers.
Certain information regarding the Sandersville, GA system as of December 31,
1996 is as follows:
Basic Subscribers 3,413
Premium Subscribers 2,663
Estimated Homes Passed 4,656
The Partnership had 56 employees as of December 31, 1996. Management of
these systems is handled through offices located in the towns of Brenham and Bay
City, Texas, as well as Vidalia and Sandersville, Georgia. The Sequim and Camano
systems share the costs of offices maintained by affiliates of the Partnership
pursuant to the terms of operating management agreements. Pursuant to the
Agreement of Limited Partnership, the Partnership reimburses the Managing
General Partner for time spent by the Managing 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
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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, CNN or The Discovery
Channel. "Tier subscribers" are households that subscribe to an additional level
of programming service, 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
Due to factors such as the non-exclusivity of the Partnership's
franchises, recent regulatory changes and Congressional action, the rapid pace
of technological developments, and the adverse publicity received by the cable
industry over recent years regarding the lack of competition, there is a
substantial likelihood that the Partnership's systems will be subject to a
greater degree of competition in the future.
Other Entertainment Alternatives The Partnership's systems compete with
other communications and entertainment media, including conventional
over-the-air television broadcasting stations. Cable television service was
first offered as a means of improving television reception in markets where
terrain factors or remoteness from major cities limited the availability of
over-the-air television broadcasts. In some of the areas served by the
Partnership's systems, several of the broadcast television channels can be
adequately received off-air. The extent to which cable television service is
competitive with broadcast stations depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than is available off-air.
Cable television systems also are susceptible to competition from other
video programming delivery systems (discussed below), from other forms of home
entertainment such as video cassette recorders, and, in varying degrees, from
sources of entertainment in the communities served, including motion picture
theaters, live theater and sporting events.
Overbuilds Recent federal legislation and court decisions have increased
the likelihood that incumbent cable operators will face instances of
"overbuilding". Overbuilding occurs when a cable operator who is not affiliated
with the incumbent franchise holder applies for and receives a second franchise
from the local franchising authority and constructs a cable system in direct
competition with that of the incumbent. None of the Partnership's franchises
provide for exclusivity. Overbuilding typically occurs where the overbuilder
believes it can attract a profitable share of the incumbent operator's customer
base. Overbuilding also may occur if the local franchising authority authorizes
construction of a governmentally owned and operated cable system. However,
Management believes that given the current regulatory environment related to
cable rates, the attractiveness of overbuilding may have been diminished.
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Wireless Services A variety of services, often generically referred to as
"wireless" cable, distribute video programming via omnidirectional low-power
microwave signals from a stationary transmitter to customers at fixed locations.
For many years such services faced governmental restrictions on the types of
programming they could distribute and were generally prevented, by regulatory
and technological reasons, from distributing the quantity of programming
distributed by cable operators. Wireless operators also faced difficulty in
obtaining access to certain programming produced by vendors affiliated with the
cable industry.
In recent years, the Federal Communications Commission (the "FCC") has
adopted policies for authorizing new technologies and providing a more favorable
regulatory environment for certain existing wireless technologies. Such policies
have the potential to create additional competition for cable television
systems. The FCC recently amended its regulations to enable multi-channel,
multi-point distribution services ("MMDS"), to compete more effectively with
cable television systems by making available additional channels to the MMDS
industry.
On December 10, 1992, the FCC commenced a rulemaking in which a new
wireless multichannel video service is proposed to be created. The proposed new
service is called the Local Multichannel Distribution Service ("LMDS") and will
operate in the 27.5 - 29.5 MHz frequency band. LMDS providers, as the FCC
currently proposes, would have no restrictions on the kinds of service that may
be offered. No major technological advances which would adversely affect the
Partnership's business have been made during 1996.
There can be no assurance, however, that future competition brought about
by MMDS, LMDS and other wireless technologies will not have a material adverse
effect on Partnership operations. As noted below, the recent Congressional
legislation, among other things, is designed to make programming that is
currently available to the cable television industry available to other
technologies to foster the growth of alternative video programming delivery
services.
Satellite Delivered Services Additional competition exists from private
cable television systems serving condominiums, apartment complexes and other
private residential developments. The operators of these private systems,
generally referred to as Satellite Master Antenna Television ("SMATV")
providers, often enter into exclusive agreements with apartment building owners
or homeowner's associations that preclude operators of franchised cable
television systems from serving residents of such private complexes. Due to the
widespread availability of reasonably priced satellite signal reception dishes
or earth stations, SMATV systems now can offer both improved reception of local
television station and many of the same satellite-delivered programming
services that are offered by franchised cable television systems. Moreover,
SMATV systems generally are free of the regulatory burdens imposed on franchised
cable television systems. Although a number of states and some municipalities
have enacted laws and ordinances to afford operators of franchised cable
television systems access to private complexes, several of such laws and
ordinances have been challenged successfully in the courts, and others are under
attack. Because the Partnership generally has been able to enter into access
agreements with owners of private complexes, in Management's opinion, successful
challenges to access statutes would not have a material adverse effect on the
operations of the Partnership.
Reasonably priced earth stations designed for private home use now enable
individual households to receive many of the satellite-delivered programming
services formerly available only to cable television subscribers. Many satellite
programmers now encode their signals in order to allow reception only by means
of authorized decoding equipment.
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Direct broadcast satellite ("DBS") service consists of satellite services
that focus on delivering programming services directly to homes using high-power
signals transmitted by satellites to receiving facilities located on the
premises of subscribers. With an antenna as small as 18 inches, a DBS customer
can receive a hundred or more programming signals. Using a national base of
subscribers, it is possible that DBS companies may be able to offer new and
highly specialized services which may not be available to the cable television
industry, but as channel capacity and penetration of cable television systems
increase, the cable industry is expected to have the ability to offer additional
services as well. Because DBS systems deliver their services using satellite
technology, they may not be able to economically provide services that are of
local interest to their subscribers, and may not be able to maintain a local
presence, which is considered a significant advantage in developing and
maintaining subscriber support.
During 1996, the Partnership did not experience any significant subscriber
loss to DBS. There can be no assurance, however, that future competition brought
about by DBS will not have a material adverse impact on Partnership operations.
Telephone Companies Federal law, FCC regulations and the 1982 federal
court consent decree (the "Modified Final Judgment") that settled the 1974
antitrust suit against AT&T all limit in various ways the provision of video
programming and other information services by telephone companies. Federal law
codifies FCC cross-ownership regulations which, among other things, prohibit
local telephone exchange companies including the seven Regional Bell Operating
Companies ("RBOCs"), from providing video programming directly to subscribers
within their local exchange service areas, except in rural areas or by specific
waiver of FCC rules. These statutory provisions and corresponding FCC
regulations are of particular competitive importance because these telephone
companies already own much of the plant necessary for cable television
operations, such as poles, underground conduits, associated rights-of-way and
connections to the home.
In July 1991, the U.S. District Court responsible for the Modified Final
Judgment lifted the prohibition on the provision of information services by the
RBOCs. As a result, the RBOCs were allowed to acquire or construct cable
television systems outside of their own service areas. Another federal court
held that the cable/telco cross-ownership prohibitions unconstitutionally
abridge the First Amendment rights of the RBOCs and other telephone companies.
Several RBOCs have entered into agreements to purchase cable television systems
outside their service areas. Management believes that such purchases of existing
cable television systems do not represent a significant competitive threat to
the Partnership
In July 1992, the FCC voted to authorize additional competition to cable
television by video programmers using broadband common carrier facilities
constructed by telephone companies. The FCC allowed telephone companies to take
ownership interests of up to 5% in such programmers. Several telephone companies
have sought approval from the FCC to build such systems and several experimental
systems have been approved by the FCC. No such systems were proposed in a
community in which the Partnership holds a cable franchise.
Recent Federal laws have significantly changed the restrictions on
telephone companies with respect to their ability to own and operate video
programming delivery systems within their own service areas. See "Regulation
- - The 1996 Act."
There can be no assurance that future competition brought on by telephone
company participation in the cable television industry will not have a material
adverse effect on the Partnership's operations.
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REGULATION
The Partnership's business is subject to intensive regulation at the
federal and local levels, and to a lesser degree, at the state level. The FCC,
the principal federal regulatory agency with jurisdiction over cable television,
is responsible for implementing federal policies such as rate regulation, cable
system relations with other communications media, cross-ownership, signal
carriage, equal employment opportunity and technical performance. Provisions of
regulatory events that have impacted the Partnership's operations are summarized
below.
The 1992 Cable Act. On October 5, 1992, Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), which significantly increased regulation of the cable television
industry. The 1992 Cable Act became generally effective on December 4, 1992,
although certain provisions became effective at later dates. The 1992 Cable Act
represented a significant change in the regulatory framework under which cable
television systems operate and has had and likely will continue to have a
significant impact on the cable industry and the Partnership's business.
Since the Cable Communications Policy Act of 1984 (the "1984 Cable Act")
became effective, and prior to the enactment of the 1992 Cable Act, rates for
cable services were unregulated for substantially all of the Partnership's
systems. Effective September 1, 1993, rate regulation was instituted for certain
cable television services and equipment in communities that are not subject to
"effective competition" as defined in the legislation. Effective competition is
defined by this law to exist only where (i) fewer than 30 percent of the
households in the franchise area subscribe to the cable service of a cable
system; (ii) there are at least two unaffiliated multichannel video programming
distributors serving the franchise area meeting certain penetration criteria; or
(iii) a multichannel video programming distributor is available to 50 percent of
the homes in the franchise area and is operated by the franchising authority.
Virtually all cable television systems in the United States, including all of
the Partnership's systems, are not subject to effective competition under this
definition and therefore are subject to rate regulation for basic service by
local franchising authority officials under the oversight of the FCC and subject
to rate regulation for their remaining programming services (other than those
offered for a per-channel or per-program charge) by the FCC.
The 1992 Cable Act requires each cable system to establish a basic service
tier consisting, at a minimum, of all local broadcast signals and all
non-satellite delivered distant broadcast signals which the system wishes to
carry, and all public, educational and governmental access programming. On April
1, 1993, the FCC adopted its initial regulations governing rates for the basic
service tier. Under the regulations adopted by the FCC on April 1, 1993, local
franchising authorities, after meeting certain requirements, were authorized to
require cable operators to reduce the rates for the basic service tier by up to
10 percent from the rates in effect on September 30, 1992, if those rates exceed
a per-channel benchmark established by the FCC. Local franchising authorities
also were empowered to regulate the rates charged for installation and lease of
the equipment used by subscribers to receive the basic service tier and the
installation and monthly use of connections for additional television sets.
A local franchising authority seeking to regulate basic service rates must
certify to the FCC that, among other things, it has adopted regulations
consistent with the FCC's rate regulation guidelines and criteria. If a local
franchising authority's certification is deficient or subsequently is revoked,
then the FCC is required to regulate the cable operator's basic service rates
until the local franchising authority is properly certified or until such time
as effective competition exists within the cable system's franchise area.
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As part of the implementation of the new regulations, the FCC froze all
rates in effect on April 5, 1993 until May 15, 1994, except rates for premium
and pay-per-view programming services and equipment. On February 22, 1994, the
FCC adopted rules that modified, among other things, the FCC's benchmark system
for determining the maximum rates for regulated services on cable systems not
subject to effective competition. In addition to adopting new, lower benchmark
levels, the FCC's regulations (i) allowed local franchising authorities to
require cable operators to reduce the rate for the basic service tier by up to
17 percent from the rates in effect on September 30, 1992 if those rates exceed
the new per-channel benchmarks by that amount, and (ii) allowed the FCC, in
response to a complaint, to require cable operators to reduce the rates for
CPST's by up to 17 percent from the rates in effect on September 30, 1992 if
those rates exceed the new per-channel benchmarks by that amount.
Under the 1992 Cable Act, cable systems may not require subscribers to
purchase any service tier other than the basic tier as a condition of access to
video programming offered on a per-channel or per-program basis. Cable systems
are allowed a 10-year phase-in period to the extent necessary to implement the
required technology to facilitate such access. The FCC may grant extensions of
the 10-year time period, if deemed necessary.
The 1992 Cable Act also provides that the consent of most television
stations (except satellite-delivered television stations that were provided to
the cable television industry as of May 1, 1991, and noncommercial stations)
would be required before a cable system could retransmit their signals.
Alternatively, a television station could elect to exercise must-carry rights.
Must-carry rights entitle a local broadcast station to demand carriage on a
cable system, and a system generally is required to devote up to one-third of
its channel capacity for the carriage of local stations. Litigation challenging
the constitutionality of the mandatory broadcast signal carriage requirements of
the 1992 Cable Act is currently pending before the United States Supreme Court.
The must-carry rules will remain in effect during the pendency of the
proceedings before the United States Supreme Court. If must-carry requirements
withstand judicial review, the requirements may cause displacement of more
attractive programming. If retransmission consent requirements withstand
judicial review and broadcast stations require significant monetary payments for
cable system carriage of their signals, the cost of such signal carriage may
adversely affect the Partnership's operations.
In addition, the 1992 Cable Act (i) requires cable programmers under
certain circumstances to offer their programming to present and future
competitors of cable television such as multichannel multipoint distribution
services ("MMDS"), satellite master antenna systems ("SMATV") and direct
broadcast satellite system operators; (ii) prohibits new exclusive contracts
with program suppliers without FCC approval; (iii) bars municipalities from
granting exclusive franchises and from unreasonably refusing to grant additional
competitive franchises; (iv) permits municipal authorities to operate a cable
system without a franchise; (v) regulates the ownership by cable operators of
other media such as MMDS and SMATV; (vi) bars, subject to several stated
exceptions, cable operators from selling or transferring ownership in a cable
system for a three-year period following the acquisition or initial construction
of the system; and (vii) prohibits a cable operator from charging a customer for
any service or equipment that the subscriber has not affirmatively requested.
In response to the 1992 Cable Act, the FCC has imposed or will impose new
regulations in the areas of customer service, technical standards, compatibility
with other consumer electronic equipment such as "cable ready" television sets
and video cassette recorders, equal employment opportunity, privacy, rates for
leased access channels, obscene or indecent programming, limits on national
cable system ownership concentration, standards for
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limiting the number of channels that a cable television system operator could
program with programming services controlled by such operator and disposition of
a customer's home wiring.
The 1992 Cable Act and subsequent FCC rulings have generally increased the
administrative and operational expenses of cable television systems as a result
of additional regulatory oversight by the FCC and local franchise authorities.
There have been several lawsuits filed by cable operators and programmers in
federal court challenging various aspects of the 1992 Cable Act. The litigation
concerning the must-carry rules is described above. Appeals also have been filed
in connection with litigation resulting from the FCC's rate regulation
rulemaking decisions. The Partnership cannot determine at this time the outcome
of pending FCC rulemakings, the litigation described herein, or the impact of
any adverse judicial or administrative decisions on the Partnership's systems or
business.
The 1996 Act. On February 8, 1996, the Telecommunications Act of 1996 (the
"1996 Act") was enacted which 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 FCC issues new regulations
which, in some cases, may not be completed for several 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 certain provisions affecting the cable
television industry follows.
FCC regulation of rates for cable programming service tiers (i.e., cable
programming carried on a level other than the basic service tier or offered on a
pay-perchannel or pay-per-view basis) ("CPST") has been eliminated for small
cable systems served by small companies. Small cable systems are those having
50,000 or fewer subscribers served by companies with fewer than one percent of
national cable subscribers (approximately 600,000). All of the Partnership's
cable systems qualify as small cable systems. Basic service tier rates remain
subject to regulation 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 by the local exchange
carrier, its affiliates, or any multichannel video programming distributor which
uses the facilities of the local exchange carrier. No penetration criteria
exists that triggers the presence of effective competition under these
circumstances.
The 1996 Act allows telephone companies to offer video programming
directly to customers in their service areas immediately upon enactment. They
may provide video programming as a cable operator fully subject to the 1996 Act,
or a radio-based multichannel programming distributor not subject to any
provisions of the 1996 Act, or through non-franchised "open video systems"
offering non-discriminatory capacity to unaffiliated programmers, subject to
selected provisions of the 1996 Act. Although management's opinion is that the
probability of competition from telcos in rural areas is unlikely in the near
future, there are no assurances such competition will not materialize.
The 1996 Act encompasses various other aspects of providing cable
television service including prices for equipment, discounting of 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 PEG and leased access
channels.
Other Regulatory Developments In November 1991, the FCC released a Report
and Order in which it concluded, among other things, that the 1984 Cable Act and
the FCC's regulatory cross-ownership restrictions do not prohibit interexchange
carriers (i.e., long distance telephone companies) from acquiring cable
television systems or entering into joint ventures with cable
11
operators in areas where such interexchange carriers provide their long distance
telephone services. The FCC also concluded that a local exchange carrier (i.e.,
the local telephone company) that provides a common carrier-based system to
distribute video programming to subscribers and a third party programmer using
such common carrier services are not required by federal law to obtain a cable
television franchise from the local franchising authority in order to provide
such video programming services to the public. The FCC's decision described in
the preceding sentence has been appealed and these appeals are currently
pending.
In 1989, the FCC issued new syndicated exclusivity and network
non-duplication rules which enable local television broadcasters to compel cable
television operators to delete certain programming on distant broadcast signals.
Those rules took effect January 1, 1990. Under the rules, all television
broadcasters, including independent stations, can compel cable television
operators to delete syndicated programming from distant signals if the local
broadcaster negotiated exclusive rights to such programming. Local network
affiliates may insist that a cable television operator delete a network
broadcast on a distant signal. The rules made certain distant signals a less
attractive source of programming for the Partnership's systems, since much of
such distant signals' programming may have to be deleted.
The FCC currently regulates the rates and conditions imposed by public
utilities for use of their poles, unless, under the Federal Pole Attachments
Act, state public service commissions are able to demonstrate that they regulate
the cable television pole attachment rates. In the absence of state regulation,
the FCC administers pole attachment rates through the use of a formula which it
has devised. The validity of this FCC function was upheld by the United States
Supreme Court.
Copyright Cable television systems are subject to federal copyright
licensing, covering carriage of television broadcast signals. In exchange for
paying a percentage of their revenues to a federal copyright royalty pool, cable
television operators obtain a compulsory license to retransmit copyrighted
materials from broadcast signals. Existing Copyright Office regulations require
that compulsory copyright payments be calculated on the basis of revenue derived
from any service tier containing broadcast retransmission. Although the FCC has
no formal jurisdiction over this area, it has recommended to Congress to
eliminate the compulsory copyright scheme altogether. The Copyright Office has
similarly recommended such a repeal. Without the compulsory license, cable
television operators would need to negotiate rights from the copyright owners
for each program carried on each broadcast station in each cable system's
channel lineup. Such negotiated agreements could increase the cost to cable
television operators of carrying broadcast signals. Thus, given the uncertain
but possible adoption of this type of copyright legislation, the nature or
amount of the Partnership's future payments for broadcast signal carriage cannot
be predicted at this time.
Local Regulation Cable television systems are generally operated pursuant
to franchises, permits or licenses issued by a municipality or other local
government entity. Each franchise generally contains provisions governing fees
to be paid to the franchising authority, sale or transfer of the franchise,
territory of the franchise, design and technical performance of the system, use
and occupancy of public streets and number and types of cable television
services provided. Franchises are usually issued for fixed terms and must
periodically be renewed. There can be no assurance that the franchises for the
Partnership's systems will be renewed as they expire, although the Partnership
believes that its cable systems generally have been operated in a manner that
satisfies the standards of the 1984 Cable Act, as amended by the 1992 Cable Act,
for franchise renewal. In the event the franchises are renewed, the Partnership
cannot predict the impact of any new
12
or different conditions that might be imposed by the franchising authorities in
connection with such renewals.
Summary The foregoing does not purport to be a summary of all present and
proposed federal, state and local regulations and legislation relating to the
cable television industry. Other existing federal 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, however, that the final form of regulation will not have a
material adverse impact on partnership operations.
ITEM 2. PROPERTIES
The Partnership's cable television systems are located in and around
Brenham and Bay City, Texas; Camano Island, Sequim, Stanwood, and Bayview,
Washington, and Vidalia and Sandersville, 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 48,000 homes as of December 31, 1996. Management believes
that the Partnership's plant passes all areas which are currently economically
feasible to service. Future line extensions depend upon the density of homes in
the area as well as available capital resources for the construction of new
plant. (See Part II. Item 7. Liquidity and Capital Resources.)
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
13
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, 1996, is
as follows:
Limited Partners: 2,906
General Partners: 2
(c) During 1996, the Partnership made cash distributions of $124,180 to
the limited partners and $1,254 to the Managing General Partner. The limited
partners have received in the aggregate in the form of cash distributions
$3,108,554 on total initial contributions of $24,893,000 as of December 31,
1996. As of December 31, 1996, the Partnership had repurchased $65,000 in
limited partnership units ($500 per unit). Future distributions depend upon
results of operations, leverage ratios, and compliance with financial covenants
required by the Partnership's lender.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
--------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS:
Revenue $ 11,310,000 $ 8,526,053 $ 7,757,306 $ 6,768,601 $ 6,016,984
Operating income (loss) (87,913) 40,080 (91,965) (713,339) (1,237,271)
Loss on disposal of
assets (10,146) (17,626) 0 (43,013) (31,583)
Net loss (2,215,885) (1,205,316) (1,265,325) (2,014,094) (2,493,393)
Net loss per limited
partner unit
(weighted average) (44) (24) (25) (40) (50)
Cumulative tax losses
per limited partner
unit (402) (405) (415) (425) (433)
December 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Total assets $ 28,031,666 $ 14,520,969 $ 17,549,748 $ 20,172,231 $ 18,640,643
Notes payable 31,200,000 16,056,381 17,537,318 18,465,537 14,547,895
Total liabilities 33,009,681 17,149,665 18,461,214 19,316,433 15,268,766
General partners'
deficit (262,249) (238,836) (221,764) (204,092) (178,931)
Limited partners'
(deficit)capital (4,715,766) (2,389,860) (689,702) 1,059,890 3,550,808
Distributions per
limited partner unit 2.50 10 10 10 10
Cumulative distribu-
tions per limited
partner unit 62.50 60 50 40 30
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1996 AND 1995
Total revenue reached $11,310,000 for the year ended December 31, 1996,
representing an increase of approximately 33% over 1995. This is mainly due to
the acquisition of the Vidalia, GA and Sandersville, GA systems during 1996 and
rate increases placed into effect August 1996. Of the 1996 revenue, $8,096,959
(72%) is derived from subscriptions to basic service, $1,020,948 (9%) from
subscriptions to premium services, $774,441 (6%) from subscriptions to tier
services, $288,040 (3%) from installation charges, $287,585 (3%) from service
maintenance revenue and $842,026 (7%) 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):
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Basic Rate $ 22.45 $ 21.80 $ 20.90 $ 19.90 $ 19.20
Tier Rate 7.30 6.85 5.75 5.75 4.60
HBO Rate 10.05 10.65 10.25 10.25 10.68
Cinemax Rate 8.50 8.15 8.15 8.15 9.25
Showtime Rate 8.00 10.20 9.40 9.70 9.85
Movie Channel Rate 7.40 9.25 8.95 8.95 9.43
Disney Rate 7.20 7.50 7.50 8.30 8.60
Additional
Outlet Rate -- -- -- -- 3.15
Service Contract
Rate 3.05 2.85 2.80 3.00 --
Operating expenses totaled $1,068,153 for the year ended December 31,
1996, representing an increase of approximately 31% over 1995. The increase is
primarily attributable to the acquisition of the Vidalia and Sandersville
systems as well as increased 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 the trend of increases in operating
expenses to continue.
General and administrative expenses totaled $2,733,645 for the year ended
December 31, 1996, representing an increase of approximately 34% over 1995. This
is mainly due to the acquisition of the Vidalia and Sandersville systems,
increases in salary and benefit costs, and increases in revenue based expenses,
such as franchise fees and management fees. Significant administrative expenses
are based on Partnership revenues (franchise fees, copyright fees and management
fees). Therefore, as the Partnership's revenues increase, the trend of increased
administrative expenses is expected to continue.
Programming expenses totaled $2,748,609 for the year ended December 31,
1996, representing an increase of approximately 41% over 1995. This is due to
the acquisition of the Vidalia and Sandersville systems, increases in costs
charged by various program suppliers, as well as the addition of new channels.
Programming expenses mainly consist of payments made to suppliers of various
cable programming services. As these costs are based on the number of
subscribers served, future subscriber increases will cause the trend of
15
programming expense increases to continue. Moreover, rate increases from program
suppliers, as well as fees due to the launch of additional channels, will
contribute to the trend of increased programming costs.
Depreciation and amortization expense increased 32% over the prior year due to
the acquisition of the Vidalia and Sandersville systems. In addition, certain
assets became fully depreciated during the year and were offset by fixed asset
purchases.
Interest expense for the year ended December 31, 1996 increased approximately
73% as compared to 1995. The Partnership's average bank debt balance increased
from approximately $16,797,000 during 1995 to $23,628,000 during 1996 mainly due
to borrowings to finance the Vidalia and Sandersville acquisitions. The
Partnership's effective interest rate during 1996 was approximately 8.16% as
compared to a rate of approximately 7.35% during 1995.
The operating losses incurred by the Partnership are historically 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, which has increased in each year in the three year
period ending December 31, 1996. 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.
1995 AND 1994
Total revenue reached $8,526,053 for the year ended December 31, 1995,
representing an increase of approximately 10% over 1994. This is mainly due to
the launch of tier service in the Camano, WA system and rate increases placed
into effect in April 1995. Of the 1995 revenue, $5,994,967 (70%) is derived from
subscriptions to basic service, $740,233 (9%) from subscriptions to premium
services, $591,089 (7%) from subscriptions to tier services, $246,083 (3%) from
installation charges, $301,599 (3%) from service maintenance revenue and
$652,082 (8%) from other sources.
Operating expenses totaled $814,106 for the year ended December 31, 1995,
representing an increase of approximately 10% over 1994. The increase is
primarily attributable to higher system maintenance expenses and increased
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 the trend of increases in operating expenses to continue.
General and administrative expenses totaled $2,035,931 for the year ended
December 31, 1995, representing an increase of approximately 8% over 1994. This
is mainly due to increased salary and benefit costs, and increases in revenue
based expenses, such as franchise fees and management fees. Significant
administrative expenses are based on Partnership revenues (franchise fees,
copyright fees and management fees). Therefore, as the Partnership's revenues
increase, the trend of increased administrative expenses is expected to
continue.
Programming expenses totaled $1,952,044 for the year ended December 31,
1995, representing an increase of approximately 26% over 1994. This is due to
increased costs charged by various program suppliers, as well as the addition of
new channels. Programming expenses mainly consist of payments made to suppliers
of various cable programming services. As these costs are based on the number of
subscribers served, future subscriber increases will cause the trend of
programming expense increases to continue. Moreover, rate increases from program
suppliers, as well as fees due to the launch of additional channels, will
contribute to the trend of increased programming costs.
16
Depreciation and amortization expense remained consistent with the prior
year due to certain assets becoming fully depreciated during the year offset by
fixed asset purchases.
Interest expense for the year ended December 31, 1995 increased
approximately 5% as compared to 1994. The Partnership's average bank debt
balance decreased from approximately $17,994,000 during 1994 to $16,797,000
during 1995 mainly due to scheduled principal repayments. The Partnership's
effective interest rate during 1995 was approximately 7.35% as compared to a
rate of approximately 6.53% during 1994.
EFFECTS OF REGULATION
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Act"). The 1992 Act and
subsequent revisions and rulemakings substantially re-regulated the cable
television industry. The regulatory aspects of the 1992 Act included giving the
local franchising authorities and the FCC the ability to regulate rates for
basic services, equipment charges and additional CPST's when certain conditions
were met. All of the Partnership's cable systems were potentially subject to
rate regulation. The most significant impact of rate regulation was the
inability to raise rates for regulated services as costs of operation rose
during an FCC imposed rate freeze from April 5, 1993 to May 15, 1994.
On February 8, 1996, the Communications Act of 1996 (the "1996 Act")
became law. The 1996 Act will eliminate all rate regulation on CPST's of small
cable systems, defined by the 1996 Act as systems serving fewer than 50,000
subscribers owned by operators serving fewer than 1% of all subscribers in the
United States (approximately 600,000 subscribers). All of the Partnership's
cable systems qualify as small cable systems. Many of the changes called for by
the 1996 Act will not take effect until the FCC issues new regulations, a
process that could take from several months to a few years depending on the
complexity of the required changes and the statutory time limits. Because of
this, the full impact of the 1996 Act on the Partnership's operations cannot be
determined at this time.
As of the date of this filing, the Partnership has received notification
that local franchising authorities with jurisdiction over approximately 28% of
total subscribers have elected to certify and no formal requests for rate
justifications have been received from franchise authorities. Based on
Management's analysis, the basic service tier rates charged by these systems are
within the maximum rates allowed under FCC rate regulations.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Partnership's primary source of liquidity was cash flow
from operations and credit available under the bank loan facility. 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 1996, cash generated from monthly billings was sufficient to
meet the Partnership's needs for working capital, capital expenditures
(excluding acquisitions) and debt service. Management's projections for 1997
show that the cash generated from monthly subscriber billings should be
sufficient to meet the Partnership's working capital needs, as well as meeting
the debt service obligations of its bank loan.
In February 1996, the Partnership amended its term loan agreement
increasing its overall credit limit to $35,000,000 to finance the acquisition of
the Vidalia and Sandersville systems. Terms of the credit agreement provide for
a $32,000,000 term loan payable in graduating quarterly
17
installments beginning September 30, 1996, and a $3,000,000 revolving credit
facility converting to a term loan on February 1, 1999 with graduating quarterly
installments of principal. Both facilities mature June 30, 2004.
At December 31, 1996, the Partnership's term loan balance was $31,200,000.
As of the date of this filing, interest rates on the credit facility were as
follows: $10,000,000 fixed at 7.92% under the terms of an interest rate swap
agreement with the Partnership's lender expiring March 6, 1998; $8,050,000 fixed
at 8.83% under the terms of a self-amortizing interest rate swap agreement with
the Partnership's lender expiring September 30, 1998; 7,300,000 fixed at 7.84%
under the terms of an interest rate swap agreement with the Partnership's lender
expiring January 16, 1998; and $5,600,000 fixed at 8.87% under the terms of an
interest rate swap agreement with the Partnership's lender expiring September
30, 1998. The balance of $250,000 bears interest at the prime rate plus 1.25%
(currently 9.50%). 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.
At December 31, 1996, the Partnership was required under the terms of its
credit agreement to maintain certain financial ratios including a Total Debt to
Annualized Cash Flow Ratio of 5.00 to 1 and an Annualized Cash Flow to Pro Forma
Debt Service Ratio of 1.20 to 1. At December 31, 1996, the Partnership was out
of compliance with its Total Debt to Annualized Cash Flow Ratio, 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 1996, the Partnership incurred approximately $1,200,000 in capital
expenditures. These expenditures included vehicle replacements and a new phone
system in the Brenham, TX system, storm damage repairs and commercial insertion
equipment in the Camano, WA system, interconnection of acquired systems,
commercial insertion equipment, launching of Northland Cable News and design and
land purchase related to new office construction in the Vidalia, GA system,
commercial insertion equipment and office computers in the Sandersville, GA
system, as well as line extensions in various systems.
Management estimates that the Partnership will spend approximately
$1,500,000 on capital expenditures during 1997. These expenditures include
distribution plant upgrades, line extensions, channel additions, commercial
insertion equipment and vehicle replacements in various systems.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended
December 31, 1996, 1995 and 1994 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
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; the Administrative General Partner of the Partnership is FN
Equities Joint Venture, a California general partnership.
Certain information regarding the officers and directors of Northland is
set forth below.
JOHN S. WHETZELL (AGE 55). 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 the subsidiaries.
He has been involved with the cable television industry for over 22 years and
currently serves as a director on the board of the Cable Telecommunications
Association, a national cable television association. 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 60). 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 partner in the law firm of Ryan, Swanson & Cleveland, 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 34 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.
ARLEN I. PRENTICE (AGE 59). Since July 1985, Mr. Prentice has served on
the Board of Directors of Northland Telecommunications Corporation, and he
served on the Board of Directors of Northland Communications Corporation between
March 1982 and July 1985. Since 1969, Mr. Prentice has been Chairman and Chief
Executive Officer of Kibble & Prentice, a diversified financial services firm.
Kibble & Prentice has four divisions, which include Estate Planning and Business
Insurance, Financial Planning and Investments, Employee Benefit Services, and
Property and Casualty Insurance. Mr. Prentice is a Chartered Life Underwriter,
Chartered Financial Consultant, past President of the Million Dollar Round Table
and a registered representative of Investment Management and Research. Mr.
Prentice has a Bachelor of Arts degree from the University of Washington.
MILTON A. BARRETT, JR. (AGE 62). Since April 1986, Mr. Barrett has
served on the Board of Directors of Northland Telecommunications
Corporation. In 1995, he retired from the Weyerhaeuser Company after
thirty-four years of service with that company. At the time of his
retirement he was a Vice President of Sales and Marketing as well as chairman
of Weyerhaeuser's
19
business ethics committee. Mr. Barrett is a graduate of Princeton University
magna cum laude and of the Harvard University Graduate School of Business
Administration.
RICHARD I. CLARK (AGE 39). 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 18 years. He has directed cable television
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.
ARTHUR H. MAZZOLA (AGE 74). Mr. Mazzola was elected to the Board of
Directors of Northland Telecommunications Corporation in April 1987. From
1985 to 1990, he was Senior Vice President of Benjamin Franklin Leasing
Company, Inc., an equipment lease financing company. Currently, Mr. Mazzola
is serving as Business Development Coordinator for the Bank of California.
Prior to his association with Benjamin Franklin Leasing Company, Mr. Mazzola
served as President of Federal Capital Corporation and Trans Pacific Lease
Company. Both of these companies also engaged exclusively in equipment lease
financing. Mr. Mazzola is a past Board Chairman and current Trustee of the
Pacific Northwest Ballet Association and current Board Member of the Dante
Alighieri Society. Mr. Mazzola attended Boston University School of Business
in 1943 where he studied economics.
TRAVIS H. KEELER (AGE 56). Mr. Keeler was elected to the Board of
Directors of Northland Telecommunications Corporation in April 1987. Since
May 1985, he has served as President of Overall Laundry Services, Inc., an
industrial laundry and garment rental firm. Mr. Keeler received a Bachelor
of Arts degree from the University of Washington in 1962.
JAMES E. HANLON (AGE 63). Since June 1985, Mr. Hanlon has been a
Divisional Vice President for Northland's Tyler, Texas regional office and is
currently responsible for the management of systems serving approximately
90,400 basic subscribers in Texas, Alabama and 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 42). 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
20
the acquisition and financing of new cable systems. From 1983 until 1985 he was
associated with the law firm of Ryan, Swanson & 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 39). 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 51). 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 performances
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 53). 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 approximately 62,000
basic 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 nearly 28 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.
JOHN T. WAECHTER (AGE 34). Mr. Waechter was promoted to Divisional
Vice President for Western operations on January 1, 1997. He is responsible for
the management of systems serving over 60,400 basic subscribers in California,
Oregon, Idaho and Washington. Mr. Waechter also serves as the Director of
Marketing and manages programming efforts for Northland. Prior to joining
Northland in July 1995, Mr. Waechter was employed with GTE, Northwest from 1987
to 1993 as Marketing and Sales Manager. Prior to his employment with GTE, Mr.
Waechter worked as Marketing Executive for the Xerox Corporation. He received a
Bachelor of Arts degree in Political Science and Economics from Whitman College
in 1984, and also attended the London School of Economics in 1983. Mr. Waechter
received his MBA from the University of Washington in 1995.
Certain information regarding the officers and directors of FN Equities
Joint Venture is set forth below:
MILES Z. GORDON (AGE 49). Mr. Gordon, President and Chief Executive
Officer of Financial Network Investment Corporation (FNIC), has a comprehensive
background in both the securities industry and securities law
21
and regulation. In 1972, he joined the Los Angeles office of the Securities and
Exchange Commission (SEC), and in 1974 he was appointed Branch Chief of the
Investment Company and Investment Advisors Examination Division. Mr. Gordon left
the SEC in 1978 to practice law. Within one year, he accepted a position as Vice
President of a major national securities broker/dealer firm headquartered in
Long Beach, California. He subsequently accepted the presidency of this firm in
early 1980. In 1983, he helped form and became President and Chief Executive
Officer of FNIC. This leading firm is now one of the largest independent
broker/dealers in the United States. A graduate of Michigan State University
(and current board member of the Visitors for the College of Social Science for
MSU), Mr. Gordon received his Juris Doctorate from the University of California
at Los Angeles School of Law. He presently serves as Chairman of the Securities
Industry Association Independent Contractor Firms Committee. Mr. Gordon was also
Chairman and a member of the NASD District Business Conduct Committee and a
former member of the NASD Board of Governors. He is past president of the
California Syndication Forum and has also served on several committees for the
Securities Industry Association. Mr. Gordon has appeared on television and radio
programs, been featured in numerous magazine and newspaper articles as an
industry spokesperson, and is a frequent speaker at many industry seminars and
conventions.
JOHN S. SIMMERS (AGE 46). Mr. Simmers, Executive Vice President and Chief
Operating Officer of Financial Network Investment Corporation (FNIC), has an
extensive background in the securities industry. He began his career as a
reporter for Dunn and Bradstreet, then joined the National Association of
Securities Dealers (NASD) in 1974. Knowledgeable in all aspects of broker/dealer
regulations, operations, and products, Mr. Simmers was responsible for reviewing
the activities of member firms in twelve states. Mr. Simmers left the NASD seven
years later to accept a position as Vice President of the securities
broker/dealer, retail, wholesale and investment advisory subsidiaries of a
publicly held investment company headquartered in Long Beach, California. He
left this firm in 1983 to help form and become Executive Vice President and
Chief Operating Officer of FNIC. This full service broker/dealer firm has
offices located across the United States. Mr. Simmers is a graduate of Ohio
State University. He served on the Board of Directors of the California
Association of Independent Broker/Dealers and was a member of the Real Estate
Securities and Syndication Institute, the NASD District Business Conduct
Committee (District 2 South), and the International Association for Financial
Planning Due Diligence Steering Committee, which was organized to work toward
improving the quality and consistency of due diligence in the securities
industry. Mr. Simmers currently serves as a member of the NASD Direct
Participation Programs Committee, and has spoken at numerous seminars and
conventions.
HARRY M. KITTER (AGE 41). Mr. Kitter has served as Controller for
Financial Network Investment Corporation since 1983. Prior to this association
from 1981 to 1983 he was employed as the Los Angeles Internal Audit Manager at
the Pacific Stock Exchange. From 1978 to 1981, he was Senior Accountant at
Arthur Young & Co., C.P.A. He holds an MBA from the University of Pittsburgh and
a bachelor's degree in economics from Lafayette College, Easton, Pennsylvania.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation
was paid to the General Partner during 1996 as indicated in Note 3 to the Notes
to Financial Statements--December 31, 1996 (see Items 14(a)(1) and 13(a) below).
In addition, cash distribution were made to the Managing General Partner in 1996
(see Item 5(c) above).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
22
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1996 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 Communications (See Note A) (See Note A)
Interest Corporation
1201 Third Avenue
Suite 3600
Seattle, Washington 98101
General Partner's FN Equities Joint Venture (See Note B) (See Note B)
Interest 2780 Skypark Dr.
Suite 300
Torrance, California 90505
Note A: Northland has a 1% interest in the Partnership, which
increases to 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.
Note B: FN Equities Joint Venture has no interest (0%) in the
Partnership until such time as the limited partners have received 100% of their
aggregate cash contributions plus a preferred return, at which time FN Equities
Joint Venture will have a 5% interest in the Partnership. The natural person who
exercises voting and/or investment control over these interests is John S.
Simmers.
(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 Partnership's term loan agreement.
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
Systems. The Managing General Partner also receives reimbursement of normal
operating and general and administrative expenses incurred on behalf of the
Partnership.
The Partnership has entered into operating management agreements with
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,
programming and administrative expenses.
The Partnership has also entered into an operating and management
agreement with NCTV, 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 NCTV's cable systems, and is reimbursed for
certain operating, administrative and programming costs.
Cable Television Billing, Inc. ("CTB"), an affiliate of Northland,
provides software installation and billing services to the Partnership's
Systems.
Northland Cable News, Inc. ("NCN"), an affiliate of Northland, provides
programming to the Partnership's systems.
23
Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides
the production and development of video commercial advertisements and
advertising sales support.
See Note 3 of the Notes to Financial Statements--December 31, 1996 for
disclosures regarding transactions with the General Partners and affiliates.
The following schedule summarizes these transactions:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- -------- --------
Partnership management fees $561,780 $421,821 $387,865
Operating expense reimbursements 591,262 503,181 472,617
Software installation and
billing service fees to CTB 96,267 44,606 38,787
Programming fees to NCN 115,432 172,698 64,836
Reimbursements to CAC for
services 57,597 41,668 13,012
Reimbursements to affiliates
(net) 101,549 51,780 9,021
Amounts due to General Partner
and affiliates at year end 94,264 82,363 40,387
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 Partners and their 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 Partners have 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
Partners specifying in general terms the subjects to be considered. In the event
of a dispute between the General Partners 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 partner of the law
firm of Ryan, Swanson & Cleveland, 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.
24
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, 1996 and 1995............____
Statements of Operations for the years
ended December 31, 1996, 1995 and 1994................____
Statements of Changes in Partners' Capital
(Deficit) for the years ended December 31,
1996, 1995 and 1994...................................____
Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994................____
Notes to Financial Statements--December 31,
1996..................................................____
(2) EXHIBITS:
4.1 Forms of Amended and Restated Certificate of
Agreement of Limited Partnership(1)
10.1 Brenham Franchise(2)
10.1 Amendment to Brenham Franchise(4)
10.3 Washington County Franchise(2)
10.4 Island County Franchise (Amended)(2)
10.5 Bay City Franchise(2)
10.6 Sweeney Franchise(2)
10.7 West Columbia Franchise(2)
10.8 Wharton Franchise(2)
10.9 Tenneco Development Corp. Franchise(3)
10.10 Sequim Franchise(1)
10.11 Clallam County Franchise(1)
10.12 Credit Agreement with National Westminster Bank USA(1)
10.13 First, Second and Third Amendments to Credit
Agreement with National Westminster Bank USA(3)
25
10.14 Amended and Restated Management Agreement with
Northland Communications Corporation(3)
10.15 Operating Management Agreement with Northland Cable
Television, Inc.(3)
10.16 Assignment and Transfer Agreement with Northland
Telecommunications Corporation dated May 24, 1989(4)
10.17 Agreement of Purchase and Sale with Sagebrush Cable
Limited Partnership(5)
10.18 Fourth, Fifth, Sixth and Seventh Amendments to Credit
Agreement with National Westminster Bank USA(6)
10.19 Franchise Agreement with the City of Sequim, WA
effective as of May 6, 1992(7)
10.20 Franchise Agreement with Clallam County, WA effective
as of May 29, 1992(7)
10.21 Eighth Amendment to Credit Agreement with National
Westminster Bank USA dated as of May 28, 1992(7)
10.22 Asset Purchase Agreement between Northland Cable
Properties Seven Limited Partnership (Buyer) and
Country Cable, Inc. (Seller)(8)
10.23 Amendment to Asset Purchase Agreement between
Northland Cable Properties Seven Limited Partnership
and Country Cable, Inc. dated September 14, 1993(9)
10.24 Commercial Loan Agreement between Seattle-First
National Bank and Northland Cable Properties Seven
Limited Partnership dated September 24, 1993(9)
10.25 Franchise Agreement with Island County, WA dated
October 4, 1993(10)
10.26 Franchise Agreement with Skagit County - Assignment
and Assumption Agreement dated September 27, 1993(10)
10.27 Franchise Agreement with Whatcom County - Assignment
and Assumption Agreement dated September 27, 1993(10)
10.28 Amendment to Commercial Loan Agreement dated March
15, 1994(10)
10.29 Operating and Management Agreement with Northland
Cable Television, Inc. dated November 1, 1994(11)
10.30 Asset Purchase Agreement between Northland Cable
Properties Seven Limited Partnership and Southland
Cablevision, Inc.(12)
10.31 Asset Purchase Agreement between Northland Cable
Properties Seven Limited Partnership and TCI
Cablevision of Georgia, Inc. (13)
10.32 Commercial Loan Agreement between Northland Cable
Properties Seven Limited Partnership and Seattle
First National Bank dated February 29, 1996(14)
26
- ----------
(1) Incorporated by reference from the Partnership's Form
S-1 Registration Statement declared effective on August
6, 1987
(2) Incorporated by reference from the partnership's Form
10-K Annual Report for the fiscal year ended December
31, 1987.
(3) Incorporated by reference from the partnership's Form
10-K Annual Report for the year ended December 31, 1988.
(4) Incorporated by reference from the partnership's Form
10-Q Quarterly Report for the period ended June 30,
1989.
(5) Incorporated by reference from the partnership's Form
10-Q Quarterly Report for the period ended September 30,
1989.
(6) Incorporated by reference from the partnership's Form
10-K Annual Report for the fiscal year ended December
31, 1990.
(7) Incorporated by reference from the partnership's Form
10-K Annual Report for the fiscal year ended December
31, 1992.
(8) Incorporated by reference from the partnership's Form
10-Q Quarterly Report for the period ended March 31,
1993
(9) Incorporated by reference from the partnership's Form
8-K dated September 27, 1993
(10) Incorporated by reference from the partnership's Form
10-K Annual Report for the fiscal year ended December
31, 1993.
(11) Incorporated by reference from the partnership's Form
10-K Annual Report for the fiscal year ended December
31, 1993.
(12) Incorporated by reference from the partnership's Form
8-K dated March 1, 1996.
(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, 1996.
27
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 SEVEN LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION
(Managing General Partner)
By /s/ John S. Whetzell Date:
----------------------------- -------
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, principal
- ---------------------- financial officer, and principal ---------
John S. Whetzell accounting officer of registrant;
chief executive officer, principal
financial officer and chairman
of the 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
28
EXHIBITS INDEX
Sequentially
Exhibit Numbered
Number Description Page
- ------- --------------------------------------- ------------
27.0 Financial Data Schedule
29
NORTHLAND CABLE PROPERTIES SEVEN LIMITED
PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Northland Cable Properties Seven Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Seven Limited Partnership (a Washington limited partnership) as of December 31,
1996 and 1995, 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, 1996. 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
Seven Limited Partnership as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
March 7, 1997
31
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
------------ -------------
CASH $ 648,440 $ 309,737
ACCOUNTS RECEIVABLE 401,225 227,249
PREPAID EXPENSES 117,533 61,141
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 22,438,833 17,470,098
Less- Accumulated depreciation (11,344,523) (9,415,089)
------------ ------------
11,094,310 8,055,009
Franchise agreements (net of
accumulated amortization of
$17,640,594 in 1996 and $14,953,551
in 1995) 14,272,012 5,389,915
Organization costs (net of accumulated
amortization of $1,513,205 in 1996
and $1,481,974 in 1995) 179,701 33,583
Loan fees and other intangibles (net
of accumulated amortization of
$4,251,481 in 1996 and $4,098,958 in
1995) 1,137,778 258,096
Goodwill (net of accumulated
amortization of $42,263 in 1996 and
$36,690 in 1995) 180,667 186,239
------------ ------------
Total investment in cable
television properties 26,864,468 13,922,842
------------ ------------
Total assets $ 28,031,666 $ 14,520,969
============ ============
LIABILITIES AND PARTNERS' DEFICIT
1996 1995
------------ -------------
LIABILITIES:
Accounts payable and accrued expenses $ 1,278,423 $ 733,096
Due to General Partner and affiliates 94,264 82,363
Deposits 36,511 41,793
Subscriber prepayments 400,483 236,032
Term loan 31,200,000 16,056,381
------------ ------------
Total liabilities 33,009,681 17,149,665
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' DEFICIT:
General partners-
Contributed capital (25,367) (24,113)
Accumulated deficit (236,882) (214,723)
------------ ------------
(262,249) (238,836)
------------ ------------
Limited partners-
Contributed capital, net -
49,656 units in 1996 and 49,672
units in 1995 18,735,576 18,867,756
Accumulated deficit (23,451,342) (21,257,616)
------------ ------------
(4,715,766) (2,389,860)
------------ ------------
Total liabilities and
partners' deficit $ 28,031,666 $ 14,520,969
============ ============
The accompanying notes are an integral part of these balance sheets.
32
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
REVENUE $11,310,000 $ 8,526,053 $ 7,757,306
----------- ----------- -----------
EXPENSES:
Operating (including $(4,499), $90,110
and $80,331, net, (received from)
paid to affiliates in 1996, 1995 and 1,068,153 814,106 741,435
1994, respectively)
General and administrative (including
$1,080,940, $927,255 and $800,157,
net, paid to affiliates in 1996,
1995 and 1994, respectively) 2,733,645 2,035,931 1,882,548
Programming (including $187,872,
$214,366 and $72,011, net, paid to
affiliates in 1996, 1995 and 1994,
respectively) 2,748,609 1,952,044 1,543,944
Depreciation and amortization 4,847,506 3,683,892 3,681,344
----------- ----------- -----------
11,397,913 8,485,973 7,849,271
----------- ----------- -----------
Operating (loss) income (87,913) 40,080 (91,965)
OTHER INCOME (EXPENSE):
Interest income 19,560 7,394 2,020
Interest expense (2,137,386) (1,235,164) (1,175,380)
Loss on disposal of assets (10,146) (17,626) --
----------- ----------- -----------
Net loss $(2,215,885) $(1,205,316) $(1,265,325)
=========== =========== ===========
ALLOCATION OF NET LOSS:
General partners $ (22,159) $ (12,053) $ (12,653)
=========== =========== ===========
Limited partners $(2,193,726) $(1,193,263) $(1,252,672)
=========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (44) $ (24) $ (25)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
33
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Limited
Partners Partners Total
---------- ----------- -----------
BALANCE, December 31, 1993 $(204,092) $ 1,059,890 $ 855,798
Cash distributions ($10 per limited
partnership unit) (5,019) (496,920) (501,939)
Net loss (12,653) (1,252,672) (1,265,325)
--------- ----------- -----------
BALANCE, December 31, 1994 (221,764) (689,702) (911,466)
Cash distributions ($10 per limited
partnership unit) (5,019) (496,895) (501,914)
Repurchase of limited partnership units -- (10,000) (10,000)
Net loss (12,053) (1,193,263) (1,205,316)
--------- ----------- -----------
BALANCE, December 31, 1995 (238,836) (2,389,860) (2,628,696)
Cash distributions ($2.50 per limited
partnership unit) (1,254) (124,180) (125,434)
Repurchase of limited partnership units -- (8,000) (8,000)
Net loss (22,159) (2,193,726) (2,215,885)
--------- ----------- -----------
BALANCE, December 31, 1996 $(262,249) $(4,715,766) $(4,978,015)
========= =========== ===========
The accompanying notes are an integral part of these statements.
34
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,215,885) $(1,205,316) $(1,265,325)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization expense 4,847,506 3,683,892 3,681,344
Loss on disposal of assets 10,146 17,626 --
(Increase) decrease in operating assets:
Accounts receivable (173,976) (31,744) (16,932)
Prepaid expenses (56,392) (12,565) 5,986
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 545,327 164,493 72,860
Due to General Partner and affiliates 11,901 41,976 626
Deposits (5,282) (11,492) (16,620)
Subscriber prepayments 164,451 (25,589) 16,134
------------ ----------- -----------
Net cash provided by operating activities 3,127,796 2,621,281 2,478,073
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable system (15,834,960) -- --
Purchase of property and equipment, net (1,153,862) (577,646) (878,740)
Purchase of other intangibles (177,349) -- --
------------ ----------- -----------
Net cash used in investing activities (17,166,171) (577,646) (878,740)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from term loan 15,943,619 -- --
Principal payments on term loan (800,000) (1,480,937) (928,219)
Loan fees and other (633,107) (4,098) (5,023)
Distributions to partners (125,434) (501,914) (501,939)
Repurchase of limited partnership units (8,000) (10,000) --
------------ ----------- -----------
Net cash provided by (used in) financing activities 14,377,078 (1,996,949) (1,435,181)
------------ ----------- -----------
INCREASE IN CASH 338,703 46,686 164,152
CASH, beginning of year 309,737 263,051 98,899
------------ ----------- -----------
CASH, end of year $ 648,440 $ 309,737 $ 263,051
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 2,086,230 $ 1,142,324 $ 1,140,484
============ =========== ===========
The accompanying notes are an integral part of these statements.
35
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Seven Limited Partnership (the Partnership), a
Washington limited partnership, was formed on April 17, 1987. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on September 1, 1987, by acquiring a cable
television system in Brenham, Texas. Additional acquisitions include systems
serving seven cities and three unincorporated counties in southeast Texas; a
system serving Camano Island, Washington; two systems serving certain
unincorporated portions of Clallam County, Washington; a system serving certain
portions of Skagit and Whatcom counties, Washington; two systems serving four
cities in or around Vidalia, Georgia; and a system serving two cities in or
around Sandersville, Georgia. The Partnership has 18 nonexclusive franchises to
operate the cable systems for periods which will expire at various dates through
2024.
Northland Communications Corporation is the Managing General Partner (the
General Partner) of the Partnership. Certain affiliates of the Partnership also
own and operate other cable television systems. In addition, the General Partner
manages cable television systems for other limited partnerships for which it is
General Partner.
FN Equities Joint Venture, a California joint venture, is the Administrative
General Partner of the Partnership.
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.
The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to partnership capital.
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate of
the Administrative General Partner and other offering costs are recorded as a
reduction of limited partners' capital. The Administrative General Partner
received a fee for providing certain administrative services to the Partnership.
Organization Costs
Organization costs originally included reimbursements of approximately $35,000
to the General Partner for costs incurred on the Partnership's behalf and fees
of $1,618,045 as compensation for selecting and arranging the purchase of the
cable television systems.
36
- 2 -
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Depreciation
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
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 and other intangibles and
franchise agreements; then, any excess was allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, organization costs, loan fees and other
intangibles and goodwill are being amortized using the straight-line method over
the following estimated useful lives:
Franchise agreements 12-25 years
Organization costs 5 years
Loan fees and other intangibles 5-8 years
Goodwill 40 years
Revenue Recognition
The Partnership recognizes revenue in the month service is provided to customers
and accounts for advance payments on services to be rendered as subscriber
prepayments.
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.
3. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner receives a fee for managing the Partnership equal to 5% of
the gross revenues of the Partnership, excluding revenues from the sale of cable
television systems or franchises. The amount of management fees charged by the
General Partner was $561,780, $421,821 and $387,865 for 1996, 1995 and 1994,
respectively.
37
- 3 -
Income Allocation
All items of income, loss, deduction and credit are allocated 99% to the limited
partners and 1% to the general partners until the limited partners have received
aggregate cash distributions in an amount equal to aggregate capital
contributions as defined in the limited partnership agreement. Thereafter, the
general partners receive 25% and the limited partners are allocated 75% of
partnership income and losses. 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's 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 using the then highest marginal federal
income tax rate applicable to such net income. Any distributions other than from
cash flow, such as from the sale or refinancing of a system or upon dissolution
of the Partnership, will be determined according to contractual stipulations in
the Partnership Agreement.
The limited partners' total initial contributions to capital were $24,893,000
($500 per partnership unit). As of December 31, 1996, $3,108,554 ($52.50 per
partnership unit) had been distributed to the limited partners and the
Partnership has repurchased $65,000 of limited partnership units ($500 per
unit).
Reimbursements
The General Partner provides certain centralized services to the Partnership and
other affiliated entities. As set forth in the Partnership Agreement, the
Partnership reimburses the General Partner for the cost of those services
provided by the General Partner to the Partnership. These services include
engineering, marketing, management services, accounting, bookkeeping, legal,
copying, office rent and computer services.
The amounts billed to the Partnership for these services are based on the
General Partner's cost. The cost of certain services is charged directly to the
Partnership, based upon actual time spent by employees of the General Partner.
The cost of other services is allocated to the Partnership and other affiliated
entities based upon their relative size, revenue and other factors. The amounts
charged to the Partnership by the General Partner for these services were
$591,262, $503,181 and $472,617 for 1996, 1995 and 1994, respectively.
In 1996, 1995 and 1994, the Partnership was charged software installation
charges and billing service fees by an affiliate, amounting to $96,267, $44,606
and $38,787, respectively.
The Partnership has entered into operating management agreements with 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, programming
and administrative expenses. The Partnership received $101,549, $51,780 and
$9,021, net, under the terms of these agreements during 1996, 1995 and 1994,
respectively.
In September 1994, the Partnership began paying monthly program license fees to
Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the
rights to distribute programming developed and produced by NCN. Total license
fees charged by NCN during 1996, 1995 and 1994 were $115,432, $172,698 and
$64,836, respectively.
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Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner, was formed
in 1993 and began operations in 1994. CAC was organized to assist in the
development of local advertising markets and management and training of local
sales staff. CAC billed the Partnership $57,597, $41,668 and $13,012 in 1996,
1995 and 1994, respectively, for these services.
Due to General Partner and Affiliates
The liability to the General Partner and affiliates consists of the following:
December 31,
-----------------------
1996 1995
--------- --------
Management fees $ 107,335 $ 39,894
Reimbursable operating costs 63,533 49,158
Due from affiliates, net (76,604) (6,689)
--------- --------
$ 94,264 $ 82,363
========= ========
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31,
---------------------------
1996 1995
----------- -----------
Land and buildings $ 399,746 $ 342,648
Distribution plant 20,610,596 16,114,550
Other equipment 1,387,748 982,207
Leasehold improvements 14,389 14,389
Construction in progress 26,354 16,304
----------- -----------
22,438,833 17,470,098
Less- Accumulated depreciation 11,344,523 9,415,089
----------- -----------
$11,094,310 $ 8,055,009
=========== ===========
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
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5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following:
December 31,
-----------------------
1996 1995
---------- --------
Programmer license fees $ 347,367 $ 66,278
Accrued franchise fees 211,939 126,863
Other 719,117 539,955
---------- --------
$1,278,423 $733,096
========== ========
6. TERM LOAN:
December 31,
---------------------------
1996 1995
----------- -----------
Term loan agreement, collateralized by a first
lien position on all present and future assets
of the Partnership. Interest rates vary based
on certain financial covenants; currently 8.32%
(weighted average). Graduated principal
payments due quarterly
until maturity on June 30, 2004 $31,200,000 $16,056,381
=========== ===========
Annual maturities of the term loan after December 31, 1996, are as follows:
1997 $ 2,080,000
1998 2,560,000
1999 2,880,000
2000 3,840,000
2001 4,480,000
Thereafter 15,360,000
-----------
$31,200,000
===========
Under the term loan agreement, the Partnership has agreed to restrictive
covenants which require the maintenance of certain ratios, including an
Annualized Cash Flow to Pro Forma Debt Service Ratio of 1.20 to 1 and a Total
Debt to Annualized Cash Flow Ratio of 5.00 to 1, among other restrictions. The
General Partner submits quarterly debt compliance reports to the Partnership's
creditor under this agreement. At December 31, 1996, the Partnership was out of
compliance with its Total Debt to Annualized Cash Flow Ratio, however, an
appropriate waiver has been obtained from the Partnership's creditor.
40
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The Partnership has entered into interest rate swap agreements to reduce the
impact of changes in interest rates. Interest rate swap transactions generally
involve the exchange of fixed and floating interest payment obligations without
the exchange of underlying principal amounts. At December 31, 1996, the
Partnership had outstanding four interest rate swap agreements with its bank,
having a notional principal amount of $30,950,000. These agreements effectively
change the Partnership's interest rate exposure to a fixed rate of 5.82%
(weighted average), plus an applicable margin based on certain financial
covenants (the margin at December 31, 1996 was 2.50%). The maturity date, the
fixed interest rate and the notional amount of each swap are as follows:
Notional
Maturity Date Fixed Rate Amount
------------------ ---------- ---------------
January 16, 1998 5.34% $ 7,300,000
March 6, 1998 5.42% $10,000,000
September 30, 1998 6.33% $ 8,050,000
September 30, 1998 6.37% $ 5,600,000
At December 31, 1996, the Partnership would have been required to pay
approximately $30,948 to settle these agreements based on fair value estimates
received from financial institutions.
7. INCOME TAXES:
Income taxes 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.
Taxable income to the limited partners was approximately $124,180, $497,000 and
$497,000 for the three years in the period ended December 31, 1996, and is
different from that reported in the statement of operations due to the
difference in depreciation expense allowed for tax purposes and that amount
recognized under generally accepted accounting principles. There were no other
significant differences between taxable income and the net loss reported in the
statements of operations.
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. Any excess losses over adjusted
basis may be carried forward to future tax years and are allowed as deductions
to the extent the partner has an increase in his adjusted basis in the
Partnership through either an allocation of partnership income or additional
capital contributions to the Partnership.
41
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In addition, the 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 other income from
passive activities. 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 amounts to $175,429, $145,062 and $134,702 in 1996, 1995
and 1994, respectively. Minimum lease payments through the end of the lease
terms are as follows:
1997 $32,180
1998 9,100
1999 7,900
2000 8,275
2001 8,100
Thereafter 26,925
-------
$92,480
=======
Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted which 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). 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
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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, or 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.
9. CABLE TELEVISION ACQUISITIONS:
On March 1, 1996, the Partnership acquired substantially all of the operating
assets and franchise rights of two cable systems serving approximately 6,500
basic subscribers in or around the communities of Vidalia, Higgston, Lyons,
Santa Claus and certain unincorporated areas of Montgomery County and Toombs
County, all in the state of Georgia (the Vidalia system). The purchase price of
the first system, owned by the Southland Cablevision, Inc. (Southland) and
representing approximately 2,700 basic subscribers, was $3,710,000. Of this
total, Southland received $3,410,000 at the closing date with the balance of
$300,000, net of certain purchase price adjustments, paid during September 1996.
The purchase price of the second system, owned by TCI Cablevision of Georgia,
Inc. and representing approximately 3,800 basic subscribers was $6,537,179. Of
this total, $6,210,804 was paid on the closing date with the balance of
$326,375, net of certain purchase price adjustments, paid during May 1996.
On September 13, 1996, the Partnership acquired substantially all of the
operating assets and franchise rights of the cable television systems serving
approximately 3,300 basic subscribers in or around the communities of
Sandersville, Tennille and nearby unincorporated areas of Washington County, all
in the state of Georgia (the Sandersville system), for a total purchase price of
$5,608,367. The system was owned by TCI Cablevision of Georgia, Inc. Of the
total purchase price, $5,328,497 was paid on the closing date. The balance of
$279,870 was deposited into an escrow account, to be paid once agreement is
reached regarding certain purchase price adjustments.
43
- 9 -
Pro forma operating results of the Partnership for December 31, 1996 and 1995,
assuming the acquisitions of the Vidalia and Sandersville systems had been made
at the beginning of 1995, follow:
1996 1995
----------- -----------
(unaudited) (unaudited)
Revenue $12,063,175 $11,366,515
=========== ===========
Net loss $(3,714,629) $(3,057,839)
=========== ===========
Net loss per limited
partnership unit $ (75) $ (62)
=========== ===========