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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 0-16063
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1318471
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 621-1351
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
(NONE) (NONE)
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
(Partially Incorporated into Part IV)
(1) Form S-1 Registration Statement declared effective on July 10, 1986
(No. 33-2928).
(2) Form 10-K Annual Reports for fiscal years ended December 31, 1986,
December 31, 1988, December 31, 1989, December 31, 1990 and December
31, 1992, respectively.
(3) Form 8-A Registration Statement filed July 24, 1987.
(4) Form 10-Q Quarterly Report for period ended September 30, 1988 and
September 30, 1996, respectively.
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 Six Limited Partnership (the "Partnership")
is a Washington limited partnership consisting of two general partners (the
"General Partners") and approximately 1,880 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 5 cable television systems
owned by 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 January 22, 1986 and began operations in
1986 with the acquisition of the cable television systems serving the
communities of and contiguous areas surrounding Starkville, Maben and Mathiston,
Mississippi (the "Starkville System"), six additional communities in central
Mississippi (the "Philadelphia System"), and the community of and contiguous
areas surrounding Highlands, North Carolina (the "Highlands System"). In July
1988, the Partnership completed its purchase of the cable television systems
serving Sandersville and Heidelberg, Mississippi and certain areas of Jones
County and Jasper County, Mississippi (the "Sandersville System"). In December
1995, the Partnership purchased the cable television system serving Sapphire
Valley, Cedar Creek and certain areas of Jackson County, North Carolina (the
"Sapphire Valley System")(collectively herein referred to as the "Systems"). As
of December 31, 1996, the total number of basic subscribers served by the
Systems was 24,115, and the partnership's penetration rate (basic subscribers as
a percentage of homes passed) was approximately 76% as compared to an industry
average of
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approximately 66%, as reported by the PAUL KAGAN ASSOCIATES, INC. The
Partnership's properties are located in rural areas which, to some extent, do
not offer consistently acceptable off-air network signals. This factor, combined
with the existence of fewer entertainment alternatives than in large markets
contributes to a larger proportion of the population subscribing to cable
television (higher penetration).
The Partnership has 24 non-exclusive franchises to operate the Systems.
These franchises, which will expire at various dates through the year 2017, have
been granted by local, county, state and other governmental authorities in the
areas in which the Systems currently operate. Annual franchise fees are paid to
the granting governmental authorities. These fees vary between 2% and 5% of the
respective gross revenues of the system 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
Starkville and Philadelphia, Mississippi and Highlands, North Carolina. The
following is a description of these areas:
Starkville, MS: The City of Starkville is the home of Mississippi State
University with an enrollment of approximately 12,000 students. The university's
10 colleges and schools comprise 58 departments that offer more than 120 majors.
Mississippi State is also the largest employer in Starkville, with nearly 1,300
faculty members or professionals and 1,450 support staff. Also located in
Starkville is the Mississippi Research and Technology Park, which is a
long-range economic development project initiated through the joint efforts of
the City of Starkville, Oktibbeha County, Mississippi State University and the
local business community. The park is located on approximately 220 acres across
from the entrance to the university and will enhance high-technology research
for application to the economic sector. The developers and businesses that
comprise the park intend to work hand in hand with research efforts at the
university, and companies that locate in the park will have the benefit of
university facilities and faculty. Certain information regarding the Starkville,
MS system as of December 31, 1996 is as follows:
Basic Subscribers 8,483
Tier Subscribers 2,790
Premium Subscribers 3,816
Estimated Homes Passed 10,845
Philadelphia, MS and Sandersville, MS: The Philadelphia System and the
Sandersville System encompass eight communities and six counties located in
central Mississippi. These systems are operated as three separate profit centers
grouped as follows:
Profit Center #1 - Philadelphia, Mississippi
Profit Center #2 - Kosciusko and Carthage, Mississippi
Profit Center #3 - Forest, Morton, Raleigh and Sandersville,
Mississippi
The local economies of the communities included in the Philadelphia
System are based primarily in manufacturing. The region has excellent highway
and railroad transportation, a year-round mild climate, and the availability of
a trained, cost-effective labor force. One of the main industries in the area is
poultry. Nearly two million birds are dressed weekly in the city of Forest,
which ranks as the second-largest producer of broilers in the nation. Other
industries in the area include apparel, ready mix concrete, frozen food
products, lumber, small appliances, electronic assembly, meat processing and
steel. Certain information regarding the Philadelphia, MS and Sandersville, MS
systems as of December 31, 1996 is as follows:
Philadelphia Kosciusko Forest
Basic Subscribers 3,877 4,322 4,761
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Tier Subscriber 1,031 1,017 755
Premium Subscribers 1,313 1,105 1,599
Estimated Homes Passed 4,315 5,345 6,970
Highlands and Sapphire Valley, NC: Located on a high plateau of the
Blue Ridge Mountains where the corners of Georgia, North Carolina and South
Carolina meet, Highlands has long offered a cool and beautiful summer retreat
for the affluent families from such southern cities as Atlanta, New Orleans and
Tampa. The Highlands region is almost encircled by the 200,000 acres of the End
National Forest, and boasts a lush mixture of hardwoods and evergreens because
of an abundant rainfall. Highlands has an average altitude of over 4,000 feet,
and thus maintains a temperate summer climate. The influx of tourists increases
Highland's year-round population of approximately 2,000 to over 20,000 between
May and October.
The Highlands area is perhaps best known for its exclusive golf clubs.
There are three beautiful golf courses in the Highlands area, the oldest being
the Highlands Country Club. About half the land in the Highlands area is under
private ownership; the rest is part of the End National Forest, and is open for
hiking, fishing, hunting, camping and other outdoor activities. The private land
near the golf courses consists largely of exclusive housing developments, many
of which feature rambling, ranch-style vacation homes with values ranging from
$200,000 to a half million dollars. The Great Smokey Mountains National Park and
the Blue Ridge Parkway are within easy driving distance of Highlands. Several
lakes in the area offer swimming, boating, skiing, fishing and other water
sports. Rafting is also popular in the area due to the close proximity of the
Chattooga and Cullasaja Rivers. Certain information regarding the Highlands and
Sapphire Valley, NC Systems as of December 31, 1996 is as follows:
Basic Subscribers 2,672
Premium Subscribers 518
Estimated Homes Passed 4,125
The Partnership had 35 employees as of December 31, 1996. Management of
these systems is handled through offices located in the towns of Starkville,
Forest, Sandersville, Kosciusko and Philadelphia, Mississippi and in Highlands,
North Carolina. 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 generally not considered
seasonal. The business of the Partnership is not dependent upon a single
customer or a few customers, the loss of any one or more of which would have a
material adverse effect on its business. No customer accounts for 10% or more of
revenues. No material portion of the Partnership's business is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of any governmental unit, except that franchise agreements may be
terminated or modified by the franchising authorities as noted above. During the
last year, the Partnership did not engage in any research and development
activities.
Partnership revenues are derived primarily from monthly payments
received from cable television subscribers. Subscribers are divided into three
categories: basic subscribers, tier subscribers and premium subscribers. "Basic
subscribers" are households that subscribe to the basic level of service, which
generally provides access to the three major television networks (ABC, NBC and
CBS), a few independent local stations, PBS (the Public Broadcasting System) and
certain satellite programming services, such as ESPN, CNN or The Discovery
Channel. "Tier subscribers" are households that subscribe to an additional level
of programming services the content of which varies from system to system.
"Premium subscribers" are households that subscribe to one or more "pay
channels" in addition to the basic service.
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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 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.
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
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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
televisions 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.
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
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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.
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
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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.
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 in 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
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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 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-per-channel 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
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local exchange carrier (i.e. local telephone company), 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,
as 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 current opinion is
that there is low probability of competition from telcos in rural areas 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 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
11
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 as 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 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
Starkville, Philadelphia, Kosciusko, Carthage, Forest, Morton, Raleigh and
Sandersville, Mississippi and in Highlands and Sapphire Valley, North Carolina.
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 land on which towers and antennas are
located. The Partnership's cable plant passed approximately 31,600 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.
12
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: 1,880
General Partners: 2
(c) During 1996, the Partnership made cash distributions of
$74,540 to limited partners and $753 to the Managing General Partner. The
limited partners have received in the aggregate in the form of cash
distributions $3,817,998 on total initial contributions of $15,000,000 as of
December 31, 1996. As of December 31, 1996, the Partnership had repurchased
$84,475 of limited partnership units (141 units at $500 per unit and 43 units at
$325 per unit). Future distributions depend upon results of operations, leverage
ratios and compliance with financial covenants required by the Partnership's
lender, but are expected to remain at their current level.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
Revenue $ 9,262,702 $ 8,611,947 $ 7,888,216 $ 7,409,849 $ 6,871,520
Operating income 1,379,166 1,123,277 995,174 918,527 653,295
Loss on retirement
of assets 0 (22,067) 0 0
Net income (loss) 381,451 206,173 (4,301) (252,338) (715,262)
Net income (loss)per limited
partner unit
(weighted average) 13 7 0 (8) (24)
Cumulative tax losses
per limited partner
unit (342) (345) (355) (365) (375)
December 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Total assets $ 13,253,610 $ 14,778,671 $ 15,023,419 $ 16,841,618 $ 18,155,444
Notes payable 11,952,321 13,914,689 14,224,201 15,566,824 16,513,153
Total liabilities 13,365,510 15,196,729 15,346,477 16,832,903 17,588,502
General partners'
deficit (128,294) (131,356) (130,406) (127,348) (121,806)
Limited partners'
(deficit)capital 16,394 (286,702) (192,652) 136,063 688,748
Distributions per
limited partner unit 3 10 10 10 13
Cumulative distribu-
tions per limited
partner unit 124 125 115 105 95
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1996 AND 1995
Total revenue reached $9,262,702 for the year ended December 31, 1996,
representing an increase of approximately 8% over 1995. This increase is due to
rate increases placed into effect during the third quarter of 1996 and a
significant increase in tier service revenue and a full year of operating the
Sapphire Valley System. Of the 1996 revenue, $6,719,482 (73%) is derived from
subscriptions to basic services, $893,292 (10%) from subscriptions to premium
services, $363,132 (4%) from advertising, $403,929 (4%) from subscriptions to
tier services, $323,627 (3%) from service maintenance revenue, $288,606 (3%)
from installation charges and $270,634 (3%) 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 $22.24 $21.53 $20.67 $19.45 $18.75
Tier Rate 6.35 5.95 5.60 5.60 3.90
HBO Rate 11.25 11.10 10.75 10.75 9.35
Cinemax Rate 8.50 8.25 8.10 8.10 7.90
Showtime Rate 8.45 8.45 8.45 8.45 7.55
Movie Channel Rate -- 7.00 7.00 7.00 7.00
Disney Rate 6.00 6.75 7.40 7.40 7.40
Additional
Outlet Rate -- -- -- -- 3.00
Service Contract
Rate 2.65 2.65 2.80 3.00 --
Operating expenses totaled $879,045 for the year ended December 31,
1996, representing an increase of approximately 4% as compared to 1995. The
increase is primarily attributable to higher salary and benefit costs which are
the major component of operating expenses. Employee wages are reviewed annually
and, in most cases, increased based on cost of living adjustments and other
factors. Therefore, Management expects operating expenses to increase in future
years.
General and administrative expenses totaled $2,250,200 for the year
ended December 31, 1996, representing an increase of approximately 5% over 1995.
This net increase is due to higher revenue based expenses such as franchise
fees, copyright fees and management fees as a result of revenue gains discussed
above. Significant general and administrative expenses are based on revenues. In
addition, legal fees increased over the prior year due to costs associated with
the purchase of the system in Sapphire Valley. The aforementioned increases were
offset by a decrease in discretionary incentive compensation. As the
Partnership's revenue increases the trend of increased administrative expenses
is expected to continue.
Programming expenses totaled $2,041,844 for the year ended December 31,
1996 representing an increase of approximately 7% over 1995. This is mainly the
result of increased costs charged by various program suppliers, a full year
programming costs associated with the acquisition of the Sapphire Valley System
and new channel launches. Programming expenses consist mainly of payments made
to the suppliers of various cable programming services. Since these costs are
based on the number of subscribers served, future subscriber increases will
cause the trend of increasing programming costs to continue.
14
Rate increases from program suppliers, as well as new fees associated with the
launch of additional channels will also contribute to increased programming
costs.
Depreciation and amortization expense increased approximately 4% as
compared to 1995. This is mainly due to the Sapphire Valley System being
acquired at the end of 1995 offset by certain assets becoming fully depreciated.
Interest expense decreased from $1,027,088 in 1995 to $1,010,190 in
1996 (approximately 2%). The Partnership's average senior debt balance decreased
from approximately $14,027,910 during 1995 to $12,895,821 during 1996. The
Partnership's effective interest rate increased to approximately 7.83% in 1996
compared to 7.32% in 1995.
1995 AND 1994
Total revenue reached $8,611,947 for the year ended December 31, 1995,
representing an increase of approximately 9% over 1994. This increase is due to
rate increases placed into effect the latter part of 1995, an approximate 4%
increase in basic subscribers (December 31, 1995 as compared to December 31,
1994), significant increases in tier and premium service revenues as well as
advertising revenues. Of the 1995 revenue, $6,151,203 (71%) is derived from
subscriptions to basic services, $870,018 (10%) from subscriptions to premium
services, $382,033 (5%) from advertising, $321,896 (4%) from subscriptions to
tier services, $312,375 (4%) from service maintenance revenue, $294,802 (3%)
from installation charges and $279,620 (3%) from other sources.
Operating expenses totaled $844,840 for the year ended December 31,
1995, remaining relatively constant as compared to 1994. Increases in salary and
benefit costs were offset by technician positions not being filled for portions
of 1995.
General and administrative expenses totaled $2,135,917 for the year
ended December 31, 1995, representing an increase of approximately 7% over 1994.
This is due to increases in revenue based expenses such as franchise fees and
management fees as a result of revenue gains discussed above and increased
salary and benefit expenses.
Programming expenses totaled $1,909,473 for the year ended December 31,
1995 representing an increase of approximately 25% over 1994. This is mainly the
result of increased costs charged by various program suppliers.
Depreciation and amortization expense increased approximately 3% as
compared to 1994. This is mainly due to certain assets being fully amortized
offset by depreciation expense on new assets placed in service during 1995.
Interest expense increased from $991,902 in 1994 to $1,027,088 in 1995
(approximately 4%). The Partnership's average senior debt balance decreased from
approximately $14,842,500 during 1994 to $14,027,910 during 1995. The
Partnership's effective interest rate increased to approximately 7.32% in 1995
compared to 6.68% in 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.
15
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 34% 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
provided from operations. The Partnership generates cash on a monthly basis
through the monthly billing of subscribers for cable services. Losses from
uncollectible accounts have not been material. During 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.
As of the date of this filing, the Partnership's term loan balance was
$11,920,821. As of the date of this filing, interest rates on the credit
facility were as follows: $1,463,321 at LIBOR based rate of 7.34% expiring March
27, 1997; and $10,457,500 fixed at 7.36% under the terms of a swap agreement
with the Partnership's lender expiring March 28, 1997. The above rates include a
margin paid to the lender based on overall leverage, and may increase or
decrease as 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 maximum
ratio of Senior Debt to Annualized Operating Cash Flow of 3.00 to 1, and a
minimum rate of Annual Operating Cash Flow to Interest Expense of 3.00 to 1.
As of December 31, 1996, the Partnership was not in compliance with the
requirements for limited partnership distributions made. The Partnership has
received a waiver from the creditor for these covenant violations and is in
compliance with all other covenants.
16
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 $1,100,000 in
capital expenditures. These expenditures included the purchase of a vehicle and
fiber upgrades in the Starkville, MS system, purchase of microwave equipment
for a signal link between the Kosciusko, MS and Starkville, MS systems,
purchase of advertising insertion equipment in the Kosciusko, MS system, a tier
launch in the Forest, MS system, storm damage repairs in the Highlands, NC
system and various line extensions in all of the systems.
Management estimates that the Partnership will spend approximately
$1,100,000 on capital expenditures during 1997. These expenditures include the
continuation of the fiber network for data transmission and a vehicle
replacement in the Starkville, MS system, upgrade of a portion of the system to
450 MHz in the Philadelphia, MS system, upgrade of a portion of the system to
330 MHz in the Kosciusko, MS system, purchase of a vehicle in the Forest, MS
system, purchase of advertising equipment and deployment of fiber in the
Highlands, NC system, and various line extensions and channel additions in all
of the 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.
17
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 business ethics
committee. Mr. Barrett is a graduate of Princeton University magna cum laude and
of the Harvard University Graduate School of Business Administration.
18
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
feasibility studies and on-site market surveys. Mr. Clark has assisted in the
design and maintenance of financial and budget computer programs, and he has
prepared documents for major cable television companies in franchising and
budgeting projects through the application of these programs. In 1979, Mr. Clark
graduated cum laude from Pacific Lutheran University with a Bachelor of Arts
degree in accounting.
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 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.
19
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 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
20
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 Managing General Partner during 1996 as indicated in Note 3 of
the Notes to Financial Statements--December 31, 1996 (see Items 13(a) and
14(a)(1) below). In addition, cash distributions were made to the Managing
General Partner in 1996 (see Item 5(c) above).
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 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 a 20% interest in the Partnership at such time as the limited partners have
received 100% of their aggregate cash contributions. 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 in the Partnership
until such time as the limited partners have received 100% of their aggregate
cash contributions, 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 term loan agreement between the
Partnership and its lender.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Managing General
Partner receives a management fee equal to 6% 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 entered into an operating agreement with Northland
Premier Cable Limited Partnership ("Premier"), an affiliated partnership
organized and managed by Northland. Under the terms of this agreement, Premier
serves as the exclusive managing agent for the Highlands NC system, and is
reimbursed for certain operating and administrative 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.
Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides
the production and development of video commercial advertisements and
advertising sales support.
22
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 $555,762 $516,473 $473,293
Operating expense reimbursements 511,719 488,303 385,519
Software installation and
billing service fees to CTB 69,750 56,672 54,941
Programming fees to NCN 165,297 156,653 68,631
Reimbursements to CAC for
services 39,656 41,529 17,565
Reimbursements to Premier 139,408 119,398 112,805
Amounts due to General Partner
and affiliates at year end 180,998 108,344 87,702
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.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
SEQUENTIALLY
NUMBERED
PAGE
----
(1)...............................................................FINANCIAL STATEMENTS:
Report of Independent Public Accountants.......................................____
Balance Sheets--December 31, 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 Amended and Restated Certificate and
Agreement of Limited Partnership dated
November 3, 1986(3)
10.1 Agreement of Purchase and Sale with
Highlands Community Cable Television,
Inc.(2)
10.2 Mississippi State University Contract(2)
10.3 Mathiston Franchise(2)
10.4 Maben Franchise(2)
10.5 Starkville Franchise(2)
10.6 Oktibbeha County Franchise(2)
10.7 Raleigh Franchise(2)
10.8 Philadelphia Franchise(2)
10.9 Neshoba Franchise(2)
10.10 Mississippi Band of Choctaw Indians
Franchise(2)
10.11 Carthage Franchise(2)
10.12 Kosciusko Franchise(2)
10.13 Morton Franchise(2)
10.14 Forest Franchise(2)
24
10.15 Scott County Franchise(2)
10.16 Highlands Franchise(2)
10.17 Macon County Franchise(2)
10.18 Jackson County Franchise(2)
10.19 Heidelberg Franchise(2)
10.20 Jasper County Franchise(2)
10.21 Jones County Franchise(2)
10.22 Sandersville Franchise(2)
10.23 Golf Properties Franchise(2)
10.24 Management Agreement dated as of October 10,
1986(2)
10.25 Credit Agreement with National Westminster
Bank USA dated as of October 31, 1986
("Credit Agreement")(1)
10.26 First Amendment to Credit Agreement dated as
of December 12, 1986(5)
10.27 Second Amendment to Credit Agreement dated
as of October 26, 1987(5)
10.28 Third Amendment to Credit Agreement dated as
of September 26, 1988(5)
10.29 Agreement of Purchase and Sale with
Starkville TV Cable Company(1)
10.30 Agreement of Purchase and Sale between
Northland Telecommunications Corporation and
Seemore TV, Inc.(1)
10.31 Agreement of Purchase and Sale between
Northland Telecommunications Corporation and
Central Cable TV, Inc.(1)
10.32 Agreement of Purchase and Sale between
Northland Telecommunications Corporation and
Clear Vision TV Company of Kosciusko, A
Corporation(1)
10.33 Agreement of Purchase and Sale between
Northland Telecommunications Corporation and
Scott Cable TV, Inc.(1)
10.34 Agreement of Purchase and Sale with SCAN,
Inc. and South Central Antenna Network Inc.
dated July 18, 1988(4)
10.35 Fourth Amendment to Credit Agreement dated
as of March 31, 1989(6)
10.36 Fifth Amendment to Credit Agreement dated as
of February 15, 1990(6)
10.37 Leake County Franchise(7)
25
10.38 Sixth Amendment to Credit Agreement dated as
of May 28, 1992(8)
10.39 Loan Agreement with First Union Bank of
North Carolina dated as of February 16,
1993(8)
10.40 Asset Purchase Agreement between TCI
Cablevision of Georgia, Inc. and Northland
Cable Properties Six Limited Partnership,
date July 19, 1996(9)
(1) Incorporated by reference from the
Partnership's Form S-1 Registration Statement
declared effective on July 10, 1986 (No.
33-2928).
(2) Incorporated by reference from the
partnership's Form 10-K Annual Report for the
fiscal year ended December 31, 1986.
(3) Incorporated by reference from the
partnership's Form 8-A Registration Statement
filed July 24, 1987.
(4) Incorporated by reference from the
partnership's Form 10-Q Quarterly Report for
the period ended September 30, 1988.
(5) Incorporated by reference from the
partnership's Form 10-K Annual Report for the
fiscal year ended December 31, 1988.
(6) Incorporated by reference from the
partnership's Form 10-K Annual Report for the
fiscal year ended December 31, 1989.
(7) Incorporated by reference from the
partnership's Form 10-K Annual Report for the
fiscal year ended December 31, 1990.
(8) Incorporated by reference from the
partnership's Form 10-K Annual Report for the
fiscal year ended December 31, 1992.
(9) Incorporated by reference from the
partnership's Form 10-Q Quarterly Report for
the period ended September 30, 1996.
(b) REPORTS ON FORM 8-K. No Partnership reports on Form 8-K have been
filed for the fourth quarter of the fiscal year ended December 31, 1996.
26
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CABLE PROPERTIES SIX 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
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Six Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Six 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 Six
Limited Partnership as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
Seattle, Washington,
February 24, 1997
28
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---- ----
CASH $ 414,975 $ 348,690
ACCOUNTS RECEIVABLE 326,275 288,090
PREPAID EXPENSES 80,941 86,771
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 18,741,912 17,698,218
Less- Accumulated depreciation (12,797,004) (11,168,699)
------------ ------------
5,944,908 6,529,519
Franchise agreements (net of accumulated
amortization of $9,373,117 in 1996 and
$8,377,945 in 1995) 6,362,606 7,357,778
Organization costs (net of accumulated
amortization of $1,493,990 in 1996 and
$1,489,436 in 1995) 30,335 10,896
Noncompetition agreements and other intangibles
(net of accumulated amortization of $866,427
in 1996 and $796,345 in 1995) 93,570 156,927
------------ ------------
Total investment in cable television
properties 12,431,419 14,055,120
------------ ------------
Total assets $ 13,253,610 $ 14,778,671
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
1996 1995
---- ----
LIABILITIES:
Accounts payable and accrued expenses $ 702,322 $ 627,210
Due to General Partner and affiliates 180,998 108,344
Deposits 114,199 131,696
Subscriber prepayments 415,670 414,790
Notes payable 11,952,321 13,914,689
----------- -----------
Total liabilities 13,365,510 15,196,729
----------- -----------
COMMITMENTS AND CONTINGENCIES(Note 7)
PARTNERS' CAPITAL (DEFICIT):
General partners-
Contributed capital, net (37,565) (36,812)
Accumulated deficit (90,729) (94,544)
----------- -----------
(128,294) (131,356)
----------- -----------
Limited partners-
Contributed capital, net -
29,816 units in 1996 and 1995 8,998,444 9,072,984
Accumulated deficit (8,982,050) (9,359,686)
----------- -----------
16,394 (286,702)
----------- -----------
Total liabilities and partners' capital
(deficit) $13,253,610 $14,778,671
=========== ===========
The accompanying notes are an integral part of these balance sheets.
29
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---- ---- ----
REVENUE $ 9,262,702 $ 8,611,947 $ 7,888,216
----------- ----------- -----------
EXPENSES:
Operating (including $159,470, $105,727 and $93,445 paid to
affiliates in 1996, 1995 and 1994, respectively) 8 879,045 844,840 835,889
General and administrative (including $1,057,206, $1,003,288 and $875,714
paid to affiliates in 1996, 1995 and 1994, respectively) 2,250,200 2,135,917 1,997,289
Programming (including $205,316, $198,182 and $86,196 paid
to affiliates in 1996, 1995 and 1994, respectively) 2,041,844 1,909,473 1,531,220
Depreciation and amortization 2,712,447 2,598,440 2,528,644
----------- ----------- -----------
7,883,536 7,488,670 6,893,042
----------- ----------- -----------
Operating income 1,379,166 1,123,277 995,174
OTHER INCOME (EXPENSE):
Interest income 16,855 16,846 14,494
Insurance recovery 148,318 93,138 --
Interest expense (1,010,190) (1,027,088) (991,902)
Other expense (152,698) -- (22,067)
----------- ----------- -----------
Net income (loss) $ 381,451 $ 206,173 $ (4,301)
=========== =========== ===========
ALLOCATION OF NET INCOME (LOSS):
General partners $ 3,815 $ 2,062 $ (43)
=========== =========== ===========
Limited partners $ 377,636 $ 204,111 $ (4,258)
=========== =========== ===========
NET INCOME PER LIMITED PARTNERSHIP UNIT $ 13 $ 7 $ --
=========== =========== ===========
The accompanying notes are an integral part of these statements.
30
NORTHLAND CABLE PROPERTIES SIX 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 $(127,348) $ 136,063 $ 8,715
Repurchase of limited partnership units - (25,975) (25,975)
Cash distributions ($10 per limited partnership unit) (3,015) (298,482) (301,497)
Net loss (43) (4,258) (4,301)
--------- --------- ---------
BALANCE, December 31, 1994 (130,406) (192,652) (323,058)
Cash distributions ($10 per limited partnership unit) (3,012) (298,161) (301,173)
Net income 2,062 204,111 206,173
--------- --------- ---------
BALANCE, December 31, 1995 (131,356) (286,702) (418,058)
Cash distributions ($2.50 per limited partnership unit) (753) (74,540) (75,293)
Net income 3,815 377,636 381,451
--------- --------- ---------
BALANCE, December 31, 1996 $(128,294) $ 16,394 $(111,900)
========= ========= =========
The accompanying notes are an integral part of these statements.
31
NORTHLAND CABLE PROPERTIES SIX 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 income (loss) $ 381,451 $ 206,173 $ (4,301)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization expense 2,712,447 2,598,440 2,528,644
Insurance recovery (148,318) (93,138) --
Other expense 152,698 -- 22,067
(Increase) decrease in operating assets:
Accounts receivable (38,185) (67,656) (24,141)
Prepaid expenses 5,830 17,412 13,355
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 75,112 144,329 (225,881)
Due to General Partner and affiliates 72,654 20,642 54,300
Deposits (17,497) (7,084) (1,780)
Subscriber prepayments 880 (6,823) 29,558
----------- ----------- -----------
Net cash provided by operating activities 3,197,072 2,812,295 2,391,821
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,058,030) (1,084,971) (902,858)
Acquisition of cable system -- (1,267,300) --
Proceeds from insurance recovery 148,318 126,291 --
Hold-back note payable -- 31,500 --
Purchase of other intangibles (183,414) -- --
----------- ----------- -----------
Net cash used in investing activities (1,093,126) (2,194,480) (902,858)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 1,235,821 --
Principal payments on notes payable (1,962,368) (1,576,833) (1,342,623)
Distributions to partners (75,293) (301,173) (301,497)
Repurchase of limited partnership units -- -- (25,975)
Loan fees and other costs -- (4,015) (2,860)
----------- ----------- -----------
Net cash used in financing activities (2,037,661) (646,200) (1,672,955)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 66,285 (28,385) (183,992)
CASH, beginning of year 348,690 377,075 561,067
----------- ----------- -----------
CASH, end of year $ 414,975 $ 348,690 $ 377,075
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,051,135 $ 986,883 $ 1,030,119
=========== =========== ===========
The accompanying notes are an integral part of these statements.
32
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Six Limited Partnership (the Partnership), a
Washington limited partnership, was formed on January 22, 1986. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on November 3, 1986 by acquiring a cable television
system in Mississippi. Subsequently, additional cable television systems were
acquired in Mississippi and North Carolina. The Partnership has 24 nonexclusive
franchises to operate cable systems for periods which will expire at various
dates through 2017.
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 paid to the General
Partner were 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 $126,661 to the General
Partner for costs incurred on the Partnership's behalf and a fee of $975,000 as
compensation for selecting and arranging for the purchase of the cable
television systems.
33
-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 5-10 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 the franchise and other determinable intangible costs;
then any excess would have been allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, organization costs and noncompetition
agreements and other intangibles are being amortized using the straight-line
method over the following estimated useful lives:
Franchise agreements 9-20 years
Organization costs 5 years
Noncompetition agreements and other
intangibles 5-10 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.
Reclassifications
Certain reclassifications have been made to conform prior years' data with the
current year presentation.
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 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.
34
-3-
3. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner receives a fee for managing the Partnership equal to 6% 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 $555,762, $516,473 and $473,293 in 1996, 1995 and 1994,
respectively.
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. Thereafter, the general partners receive 25% and the limited
partners are allocated 75% of partnership income and losses. Prior to the
general partners receiving a distribution in any year, the limited partners must
receive distributions equal to at least 50% of their allocable share of net
income for such year, based on projections by the Managing General Partner of
the net income of the Partnership for the year. If cash distributions to the
general partners are deferred because of this 50% limitation, those deferred
cash distributions will be paid to the general partners in subsequent years or
upon liquidation of the Partnership. 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 $15,000,000
($500 per partnership unit). As of December 31, 1996, $3,817,997 ($127.50 per
partnership unit) has been distributed to the limited partners, and the
Partnership has repurchased $84,475 of limited partnership units (141 units at
$500 per unit and 43 units at $325 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 amount
charged to the Partnership by the General Partner for these services was
$511,719, $488,303 and $385,519 for 1996, 1995 and 1994, respectively.
In 1996, 1995 and 1994, the Partnership paid billing service fees to an
affiliate, amounting to $69,750, $56,672 and $54,941, respectively.
35
-4-
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 and
administrative expenses. The Partnership paid $139,408, $119,398 and $112,805,
net, under the terms of these agreements during 1996, 1995 and 1994,
respectively.
In July 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 paid to NCN during 1996, 1995 and 1994 were $165,297, $156,653 and $68,631,
respectively.
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 $39,656, $41,529 and $17,565 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 $ 91,111 $ 45,921
Reimbursable operating costs and other 47,127 56,814
Due to affiliates, net 42,760 5,609
-------- --------
$180,998 $108,344
======== ========
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
December 31,
------------------------
1996 1995
---- ----
Land and buildings $ 482,230 $ 478,859
Distribution plant 16,980,774 16,146,036
Other equipment 968,861 933,500
Leasehold improvements 38,945 38,945
Construction in progress 271,102 100,878
----------- -----------
18,741,912 17,698,218
Less- Accumulated depreciation 12,797,004 11,168,699
----------- -----------
$ 5,944,908 $ 6,529,519
=========== ===========
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
36
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5. NOTES PAYABLE:
Notes payable consists of the following:
December 31,
------------------------
1996 1995
---- ----
Revolving credit and 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 7.36% (weighted
average). Graduated principal payments due quarterly until maturity on
December 31, 2000
$11,920,821 $13,870,821
Other notes payable, bearing interest rates ranging up to 10.00%, with varying
repayment schedules 31,500 43,868
----------- -----------
$11,952,321 $13,914,689
=========== ===========
The Partnership has a revolving credit facility with its creditor allowing for
borrowings not to exceed $2,000,000 until the maturity of the term loan
agreement on December 31, 2000. At December 31, 1996, the Partnership had
$1,235,821 outstanding on its revolving credit facility.
Annual maturities of notes payable after December 31, 1996 are as follows:
1997 $ 2,406,700
1998 2,875,200
1999 3,500,000
2000 3,170,421
-----------
$11,952,321
===========
Under the terms of the revolving credit and term loan agreement, the Partnership
has agreed to restrictive covenants which require the maintenance of certain
ratios, including Annual Operating Cash Flow to Interest Expense Ratio of less
than 3.00 to 1 and Senior Debt to Annualized Operating Cash Flow Ratio of 3.0 to
1, among other restrictions. The General Partner submits quarterly debt
compliance reports to the Partnership's creditor under this agreement. Terms of
the loan agreement limited the amount of cash distributions paid during 1996 to
a maximum of $75,000. Actual cash distributions paid in 1996 were $75,293 for
which an appropriate waiver has been obtained from the Partnership's creditor.
The Partnership has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates. At December 31, 1996, the Partnership had
outstanding an interest rate swap agreement with its bank, having a notional
principal amount of $11,920,000. This agreement effectively changes the
Partnership's interest rate exposure to a fixed rate of 5.61%, plus an
applicable margin based on certain financial covenants (the margin at December
31, 1996 was 1.75%). The maturity date of the swap is March 28, 1997.
At December 31, 1996, the counterparty would have been required to pay the
Partnership approximately $3,404 to settle these agreements based on fair value
estimates received from financial institutions.
37
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6. INCOME TAXES:
Income taxes payable have not been recorded in the accompanying financial
statements because they are obligations of the partners. The federal and state
income tax returns of the Partnership are prepared and filed by the General
Partner.
The tax returns, the qualification of the Partnership as such for tax purposes,
and the amount of distributable partnership income or loss are subject to
examination by federal and state taxing authorities. If such examinations result
in changes with respect to the Partnership's qualification or in changes with
respect to the income or loss, the tax liability of the partners would likely be
changed accordingly.
Taxable income to the limited partners was approximately $74,540, $298,000 and
$298,000 for the three years in the period ended December 31, 1996 and is
different from that reported in the statements 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 income (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 a deduction
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.
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 income from other
passive activities. In addition, disallowed losses can be carried forward
indefinitely to offset future income from passive activities. Disallowed losses
can be used in full when the taxpayer recognizes gain or loss upon the
disposition of his entire interest in the passive activity.
38
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7. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $132,342, $122,178 and $113,357 in 1996, 1995
and 1994, respectively. Minimum lease payments through the end of the lease
terms are as follows:
1997 $ 8,083
1998 4,958
1999 2,083
2000 2,083
2001 2,083
Thereafter 4,220
-------
$23,510
=======
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.
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.
39
-8-
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.
40
EXHIBITS INDEX
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
27.0 Financial Data Schedule.