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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 0-18307
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1423516
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 621-1351
Securities registered pursuant to Section 12(b) of the Act:
Title of each reviewed class Name of each exchange on which registered
(NONE) (NONE)
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
(Partially Incorporated into Part IV)
(1) Form S-1 Registration Statement declared effective on March 16, 1989
(No. 33-25892).
(2) Form 10-K Annual Reports for fiscal years ended December 31, 1989,
December 31, 1990, December 31, 1992 and December 31, 1994,
respectively.
(3) Form 10-Q Quarterly Report for period ended June 30, 1989 and March
3, 1995.
(4) Form 8-K dated November 11, 1994.
(5) Form 8-K dated June 30, 1995.
(6) Form 8-K date January 5, 1996.
This filing contains ______ pages. Exhibits Index appears on page ______.
Financial Statements/Schedules Index appears on page ______.
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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 Eight Limited Partnership (the "Partnership")
is a Washington limited partnership consisting of one general partner and
approximately 969 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").
Northland was formed in March 1981 and is principally involved in the
ownership and management of cable television systems. Northland currently
manages the operations and is the General Partner for cable television systems
owned by 5 limited partnerships. Northland is also the parent company of
Northland Cable Properties, Inc. which was formed in February 1995 and is
principally involved in direct ownership of cable television systems. Northland
is a subsidiary of Northland Telecommunications Corporation ("NTC"). Other
subsidiaries of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and principally
involved in the direct ownership of cable television systems. Owner of
Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally
involved in the production and development of local programming.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 as the
holding company for the following entities:
CABLE TELEVISION BILLING, INC. - formed in June 1987 and principally
involved in the development and production of computer software used
in connection with the billing and financial recordkeeping for cable
systems owned or managed by Northland or Northland Cable Television,
Inc.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally
involved in the production and development of video commercial
advertisements.
NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company for
the following entity:
STATESBORO MEDIA, INC. - formed in April 1995 and principally
involved in acquiring and operating an AM radio station serving the
community of Statesboro, GA and surrounding areas.
The Partnership was formed on September 21, 1988 and began operations in
1989 with the acquisition of a cable television system serving various
communities and contiguous areas surrounding the Santiam Valley, Oregon (the
"Santiam System"). In May 1989, the Partnership acquired the cable television
systems serving the communities and surrounding areas of LaConner, Washington
(the "LaConner System") and the cable television systems serving the community
of and contiguous areas surrounding Elko County and Carlin, Nevada (the "Elko
System"). In April 1991, the Partnership sold the systems located in Elko County
and Carlin, Nevada. In November 1994, the Partnership purchased a cable
television system serving Aliceville, Alabama and several surrounding
communities (the "Aliceville System"). In June 1995, the Partnership sold the
Santiam System. In January 1996, the Partnership purchased a cable television
system serving Swainsboro, Georgia and several surrounding communities (the
"Swainsboro System"). As of December 31, 1996, the total number of basic
subscribers served by the Systems was 12,250, and the Partnership's penetration
rate (basic subscribers as a percentage of homes passed) was approximately 83%
as compared to an industry average of 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 17 non-exclusive franchises to operate the Systems.
These franchises, which will expire at various dates through the year 2019 (with
one franchise
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extending to 2044), have been granted by local and county authorities in the
areas in which the Systems operate. Annual franchise fees are paid to the
granting authorities. These fees vary between 2% and 5% and are generally based
on the respective gross revenues of the Systems in a particular community. The
franchises may be terminated for failure to comply with their respective
conditions.
The Partnership serves the communities and surrounding areas of La Conner,
Washington, Aliceville, Alabama and Swainsboro, Georgia. The following is a
description of these areas:
LaConner, WA: The La Conner system serves communities within three
counties in northwestern Washington along Puget Sound. La Conner was
predominately a fishing and farming community when founded in the late 1800's
and temporarily became a major trading port. Today, La Conner has become a
popular tourist area, with surrounding landscapes of pastoral farms and tulip
fields. Its main street, featuring wooden decks and courtyards, runs along the
Swinomish slough. The Swinomish Indian Reservation is located on the outskirts
of La Conner. Certain information regarding the La Conner, WA System as of
December 31, 1996 is as follows:
Basic Subscribers 2,185
Tier Subscribers 1,110
Premium Subscribers 484
Estimated Homes Passed 2,685
Aliceville, AL: The Aliceville system serves the communities in west
central Alabama. The communities, located south and west of Tuscaloosa, include
Aliceville, Carrollton, Pickensville, Reform, Gordo, Millport, Kennedy, Eutaw
and Marion. Certain information regarding the Aliceville, AL system as of
December 31, 1996 is as follows:
Basic Subscribers 6,880
Premium Subscribers 2,141
Estimated Homes Passed 8,260
Swainsboro, GA: The Swainsboro system serves the incorporated community of
Swainsboro and nearby unincorporated areas of Emanuel County, Georgia.
Swainsboro is predominantly an agricultural community located in central
Georgia, as well as the county seat for Emanuel County. Certain information
regarding the Swainsboro, GA system as of December 31, 1996 is as follows:
Basic Subscribers 3,185
Tier Subscribers 318
Premium Subscribers 2,094
Estimated Homes Passed 3,805
The Partnership had 18 employees as of December 31, 1996. Management of
these systems is handled through offices located in the towns of La Conner,
Washington, Aliceville, Alabama and Swainsboro, Georgia. Pursuant to the
Agreement of Limited Partnership, the Partnership reimburses the General Partner
for time spent by the General Partner's accounting staff on Partnership
accounting and bookkeeping matters. (See Item 13(a) below.)
The Partnership's cable television business is not considered seasonal.
The business of the Partnership is not dependent upon a single customer or a few
customers, the loss of any one or more of which would have a material adverse
effect on its business. No customer accounts for 10% or more of revenues. No
material portion of the Partnership's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of any
governmental unit, except that franchise agreements may be terminated or
modified by the franchising authorities as noted above. During the last year,
the Partnership did not engage in any research and development activities.
Partnership revenues are derived primarily from monthly payments received
from cable television subscribers. Subscribers are divided into three
categories: basic subscribers, tier subscribers and premium subscribers. "Basic
subscribers" are households that subscribe to the basic level of service, which
generally provides access to the three major television networks (ABC, NBC and
CBS), a few independent local stations, PBS (the Public Broadcasting System) and
certain satellite programming services, such as ESPN, CNN or The Discovery
Channel. "Tier subscribers" are households that subscribe to an additional level
of certain satellite programming services the content of which varies from
system to system. "Premium subscribers" are households that subscribe to one or
more "pay channels" in addition to the
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basic service. These pay channels include such services as "Showtime", "Home Box
Office", "Cinemax", "Disney" or "The Movie Channel".
COMPETITION
Due to factors such as the non-exclusivity of the Partnership's
franchises, recent regulatory changes and Congressional action, the rapid pace
of technological developments, and the adverse publicity received by the cable
industry over recent years regarding the lack of competition, there is a
substantial likelihood that the Partnership's systems will be subject to a
greater degree of competition in the future.
Other Entertainment Alternatives The Partnership's systems compete with
other communications and entertainment media, including conventional
over-the-air television broadcasting stations. Cable television service was
first offered as a means of improving television reception in markets where
terrain factors or remoteness from major cities limited the availability of
over-the-air television broadcasts. In some of the areas served by the
Partnership's systems, several of the broadcast television channels can be
adequately received off-air. The extent to which cable television service is
competitive with broadcast stations depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than is available off-air.
Cable television systems also are susceptible to competition from other
video programming delivery systems (discussed below), from other forms of home
entertainment such as video cassette recorders, and, in varying degrees, from
sources of entertainment in the communities served, including motion picture
theaters, live theater and sporting events.
Overbuilds Recent federal legislation and court decisions have increased
the likelihood that incumbent cable operators will face instances of
"overbuilding". Overbuilding occurs when a cable operator who is not affiliated
with the incumbent franchise holder applies for and receives a second franchise
from the local franchising authority and constructs a cable system in direct
competition with that of the incumbent. None of the Partnership's franchises
provide for exclusivity. Overbuilding typically occurs where the overbuilder
believes it can attract a profitable share of the incumbent operator's customer
base. Overbuilding also may occur if the local franchising authority authorizes
construction of a governmentally owned and operated cable system. However,
Management believes that given the current regulatory environment related to
cable rates, the attractiveness of overbuilding may have been diminished.
Wireless Services A variety of services, often generically referred to as
"wireless" cable, distribute video programming via omnidirectional low-power
microwave signals from a stationary transmitter to customers at fixed locations.
For many years such services faced governmental restrictions on the types of
programming they could distribute and were generally prevented, by regulatory
and technological reasons, from distributing the quantity of programming
distributed by cable operators. Wireless operators also faced difficulty in
obtaining access to certain programming produced by vendors affiliated with the
cable industry.
In recent years, the Federal Communications Commission (the "FCC") has
adopted policies for authorizing new technologies and providing a more favorable
regulatory environment for certain existing wireless technologies. Such policies
have the potential to create additional competition for cable television
systems. The FCC recently amended its regulations to enable multi-channel,
multi-point distribution services ("MMDS"), to compete more effectively with
cable television systems by making available additional channels to the MMDS
industry.
On December 10, 1992, the FCC commenced a rulemaking in which a new
wireless multichannel video service is proposed to be created. The proposed new
service is called the Local Multichannel Distribution Service ("LMDS") and will
operate in the 27.5 - 29.5 MHz frequency band. LMDS providers, as the FCC
currently proposes, would have no restrictions on the kinds of service that may
be offered. No major technological advances which would adversely affect the
Partnership's business have been made during 1996.
There can be no assurance, however, that future competition brought about
by MMDS, LMDS and other wireless technologies will not have a material adverse
effect on Partnership operations. As noted below, the recent Congressional
legislation, among other things, is designed to make programming that is
currently available to the cable television industry available to other
technologies to foster the growth of alternative video programming delivery
services.
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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 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.
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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 not subject to "effective
competition" as defined in the legislation. Effective competition is defined by
this law to exist only where (i) fewer than 30 percent of the households in the
franchise area subscribe to the cable service of a cable system; (ii) there are
at least two unaffiliated multichannel video programming distributors serving
the franchise area meeting certain penetration criteria; or (iii) a multichannel
video programming distributor is available to 50 percent of the homes in the
franchise area and is operated by the franchising authority. Virtually all cable
television systems in the United States, including all of the Partnership's
systems, are not subject to effective competition under this definition and
therefore are subject to rate regulation for basic service by local franchising
authority officials under the oversight of the FCC and subject to rate
regulation for their remaining programming services (other than those offered
for a per-channel or per-program charge) by the FCC.
The 1992 Cable Act requires each cable system to establish a basic service
tier consisting, at a minimum, of all local broadcast signals and all
non-satellite delivered distant broadcast signals which the system wishes to
carry, and all public, educational and governmental access programming. On April
1, 1993, the FCC adopted its initial regulations governing rates for the basic
service tier. Under the regulations adopted by the FCC on April 1, 1993, local
franchising authorities, after meeting certain requirements, were authorized to
require cable operators to reduce the rates for the basic service tier by up to
10 percent from the rates in effect on September 30, 1992, if those rates exceed
a per-channel benchmark established by the FCC. Local franchising authorities
also were empowered to regulate the rates charged for installation and lease of
the equipment used by subscribers to receive the basic service tier and the
installation and monthly use of connections for additional television sets.
A local franchising authority seeking to regulate basic service rates must
certify to the FCC that, among other things, it has adopted regulations
consistent with the FCC's rate regulation guidelines and criteria. If a local
franchising authority's certification is deficient or subsequently is revoked,
then the FCC is required to regulate the cable operator's basic service rates
until the local franchising authority is properly certified or until such time
as effective competition exists within the cable system's franchise area.
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
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for regulated services on cable systems not subject to effective competition.
In addition to adopting new, lower benchmark levels, the FCC's regulations (i)
allowed local franchising authorities to require cable operators to reduce the
rate for the basic service tier by up to 17 percent from the rates in effect on
September 30, 1992 if those rates exceed the new per-channel benchmarks by that
amount, and (ii) allowed the FCC, in response to a complaint, to require cable
operators to reduce the rates for CPST's by up to 17 percent from the rates in
effect on September 30, 1992 if those rates exceed the new per-channel
benchmarks by that amount.
Under the 1992 Cable Act, cable systems may not require subscribers to
purchase any service tier other than the basic tier as a condition of access to
video programming offered on a per-channel or per-program basis. Cable systems
are allowed a 10-year phase-in period to the extent necessary to implement the
required technology to facilitate such access. The FCC may grant extensions of
the 10-year time period, if deemed necessary.
The 1992 Cable Act also provides that the consent of most television
stations (except satellite-delivered television stations that were provided to
the cable television industry as of May 1, 1991, and noncommercial stations)
would be required before a cable system could retransmit their signals.
Alternatively, a television station could elect to exercise must-carry rights.
Must-carry rights entitle a local broadcast station to demand carriage on a
cable system, and a system generally is required to devote up to one-third of
its channel capacity for the carriage of local stations. Litigation challenging
the constitutionality of the mandatory broadcast signal carriage requirements of
the 1992 Cable Act is currently pending before the United States Supreme Court.
The must-carry rules will remain in effect during the pendency of the
proceedings before the United States Supreme Court. If must-carry requirements
withstand judicial review, the requirements may cause displacement of more
attractive programming. If retransmission consent requirements withstand
judicial review and broadcast stations require significant monetary payments for
cable system carriage of their signals, the cost of such signal carriage may
adversely affect the Partnership's operations.
In addition, the 1992 Cable Act (i) requires cable programmers under
certain circumstances to offer their programming to present and future
competitors of cable television such as multichannel multipoint distribution
services ("MMDS"), satellite master antenna systems ("SMATV") and direct
broadcast satellite system operators; (ii) prohibits new exclusive contracts
with program suppliers without FCC approval; (iii) bars municipalities from
granting exclusive franchises and from unreasonably refusing to grant additional
competitive franchises; (iv) permits municipal authorities to operate a cable
system without a franchise; (v) regulates the ownership by cable operators of
other media such as MMDS and SMATV; (vi) bars, subject to several stated
exceptions, cable operators from selling or transferring ownership in a cable
system for a three-year period following the acquisition or initial construction
of the system; and (vii) prohibits a cable operator from charging a customer for
any service or equipment that the subscriber has not affirmatively requested.
In response to the 1992 Cable Act, the FCC has imposed or will impose new
regulations in the areas of customer service, technical standards, compatibility
with other consumer electronic equipment such as "cable ready" television sets
and video cassette recorders, equal employment opportunity, privacy, rates for
leased access channels, obscene or indecent programming, limits on national
cable system ownership concentration, standards for 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
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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 local exchange
carrier, e.g. 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,
or a radio-based multichannel programming distributor not subject to any
provisions of the 1996 Act, or through non-franchised "open video systems"
offering non-discriminatory capacity to unaffiliated programmers, subject to
selected provisions of the 1996 Act. Although management's 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
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compulsory license to retransmit copyrighted materials from broadcast signals.
Existing Copyright Office regulations require that compulsory copyright payments
be calculated on the basis of revenue derived from any service tier containing
broadcast retransmission. Although the FCC has no formal jurisdiction over this
area, it has recommended to Congress to eliminate the compulsory copyright
scheme altogether. The Copyright Office has similarly recommended such a repeal.
Without the compulsory license, cable television operators would need to
negotiate rights from the copyright owners for each program carried on each
broadcast station in each cable system's channel lineup. Such negotiated
agreements could increase the cost to cable television operators of carrying
broadcast signals. Thus, given the uncertain but possible adoption of this type
of copyright legislation, the nature or amount of the Partnership's future
payments for broadcast signal carriage cannot be predicted at this time.
Local Regulation Cable television systems are generally operated pursuant
to franchises, permits or licenses issued by a municipality or other local
government entity. Each franchise generally contains provisions governing fees
to be paid to the franchising authority, sale or transfer of the franchise,
territory of the franchise, design and technical performance of the system, use
and occupancy of public streets and number and types of cable television
services provided. Franchises are usually issued for fixed terms and must
periodically be renewed. There can be no assurance that the franchises for the
Partnership's systems will be renewed as they expire, although the Partnership
believes that its cable systems generally have been operated in a manner that
satisfies the standards of the 1984 Cable Act, as amended by the 1992 Cable Act,
for franchise renewal. In the event the franchises are renewed, the Partnership
cannot predict the impact of any new 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
LaConner, Washington, Aliceville, Alabama and Swainsboro, Georgia. The principal
physical properties of the Systems consist of system components (including
antennas, coaxial cable, electronic amplification and distribution equipment),
motor vehicles, miscellaneous hardware, spare parts and real property including
office buildings and headend sites and buildings. The Partnership's cable plant
passed approximately 14,750 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.)
On June 30, 1995, the Partnership sold the operating assets and franchise
rights of its cable television systems serving eight communities in northwestern
Oregon. This sale represented all of the Partnership's operations in the State
of Oregon. The sales price was $5,800,000 which was received in cash by the
Partnership on June 30, 1995.
On January 5, 1996, the Partnership acquired substantially all operating
assets and franchise rights of the cable television system serving approximately
3,100 subscribers, in and around Swainsboro, Georgia. The purchase price was
$6,056,326 of which $5,751,326 was paid at the closing date. In April 1996, the
Partnership paid to the seller the remainder of $305,000, net of purchase price
adjustments.
ITEM 3. LEGAL PROCEEDINGS
10
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
11
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: 969
General Partners: 1
(c) During 1996 and 1995, the Partnership made no cash distributions.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS:
Revenue $ 4,499,588 $ 3,529,252 $ 2,030,906 $ 1,649,839 $ 1,650,731
Operating income (loss) 333,139 46,771 (307,224) (348,592) (465,168)
Gain (loss) on sale of assets 0 (11,627) (23,378) 0 0
Gain on sale of system 0 3,391,978 0 0 0
Net income (loss) (705,502) 2,669,199 (705,411) (610,328) (808,509)
Net income (loss) per
limited partner unit
(weighted average) (37) 138 (36) (32) (42)
Cumulative tax losses
per limited partner
unit (470) (398) (520) (500) (472)
December 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Total assets $ 15,093,913 $ 9,682,978 $ 12,532,350 $ 5,991,946 $ 6,878,696
Notes payable 11,375,000 5,618,000 11,209,977 4,224,000 4,550,000
Total liabilities 12,339,011 6,222,574 11,728,645 4,482,830 4,759,252
General partner's
deficit (52,669) (45,614) (72,306) (65,252) (59,149)
Limited partner's
capital 2,807,571 3,506,018 876,011 1,574,368 2,178,593
Distribution per
limited partner unit 0 0 0 0 0
Cumulative distributions
per limited partner unit 0 0 0 0 0
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1996 AND 1995
Total revenue reached $4,499,588 for the year ended December 31, 1996,
representing an increase of approximately 27% over 1995. This increase is
primarily attributable to the acquisition of the Swainsboro, GA system. Of the
1996 revenue, $3,396,628 (75%) is derived from subscriptions to basic services,
$446,789 (10%) from subscriptions to premium services, $92,296 (2%) from
subscriptions to tier services, $124,893 (3%) from installation charges, $30,360
(1%) from service maintenance revenue, and $408,622 (9%) 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 $22.85 $20.75 $19.80 $19.60 $19.20
Tier Rate 6.20 4.60 3.50 3.25 2.85
HBO Rate 9.70 11.25 11.35 11.35 11.35
Cinemax Rate 7.80 9.00 9.10 9.10 9.95
Showtime Rate 9.30 -- 10.45 10.45 10.45
Disney Rate 8.20 9.00 9.40 9.40 9.40
Additional
Outlet Rate -- -- -- -- 2.75
Service
Contract Rate 2.15 2.45 2.65 2.65 --
Operating expenses totaled $488,660 for the year ended December 31,
1996, representing an increase of approximately 15% over 1995. This increase is
due to the acquisition of the Swainsboro, GA system in January 1996 offset by
the disposition of the Santiam, OR system in June 1995. Increases in salary and
benefit costs also contributed to the overall increase in operating expenses.
Salary and benefit costs are the major component of operating expenses. Employee
wages are reviewed annually and, in most cases, increased based on cost of
living adjustments and other factors. Therefore, Management expects operating
expenses to increase in the future.
General and administrative expenses totaled $1,093,088 for the year
ended December 31, 1996, representing an increase of approximately 18% over
1995. This increase is due to the acquisition of the Swainsboro, GA system in
January 1996 offset by the disposition of the Santiam, OR system in June 1995.
Programming expenses totaled $1,000,851 for the year ended December 31,
1996, representing an increase of approximately 31% over 1995. This increase is
primarily due to the acquisition of the Swainsboro, GA system in January 1996
offset by the disposition of the Santiam, OR system in June 1995. The remaining
increase is due to increased costs charged by various program suppliers. As
these costs are based on the number of subscribers served, future subscriber
increases will cause the trend of programming expense increases to continue. In
addition, rate increases from program suppliers, as well as new fees due to the
launch of additional channels, will contribute to the trend of increased
programming costs.
Depreciation and amortization expense increased from $1,372,628 in 1995
to $1,583,850 in 1996 (approximately 15%). This is primarily due to a full year
of depreciation and amortization on plant, equipment and intangible assets of
the Swainsboro, GA system offset by the reduction of depreciation and
amortization expense on plant, equipment and intangible assets of the Santiam,
OR system.
Interest expense increased from $775,213 in 1995 to $1,048,491 in 1996
(approximately 35%). The Partnership's average bank debt balance increased from
approximately $8,109,000 in 1995 to $11,525,000 in 1996, mainly due to the
increased borrowings to finance the
13
acquisition of the Swainsboro, GA system. In addition, the Partnership's
effective interest rate decreased from 9.55% in 1995 to 9.10% in 1996.
In 1996, the Partnership generated a net loss of $705,502. The
operating losses incurred by the Partnership historically are a result of
significant non-cash charges to income for depreciation and amortization. Prior
to the deduction for these non-cash items, the Partnership has generated
positive operating income in each year in the three year period ending December
31, 1996. Management anticipates that this trend will continue, and that the
Partnership will continue to generate net operating losses after depreciation
and amortization until a majority of the Partnership's assets are fully
depreciated.
1995 AND 1994
Total revenue reached $3,529,252 for the year ended December 31, 1995,
representing an increase of approximately 74% over 1994. This increase is
primarily attributable to a full year of operations in the Aliceville, AL system
in 1995. This revenue increase is offset by the disposition of the Santiam, OR
system in June 1995. Of the 1995 revenue, $2,764,771 (78%) is derived from
subscriptions to basic services, $325,894 (9%) from subscriptions to premium
services, $60,241 (2%) from subscriptions to tier services, $98,881 (3%) from
installation charges, $43,332 (1%) from service maintenance revenue, and
$236,133 (7%) from other sources.
Operating expenses totaled $425,346 for the year ended December 31,
1995, representing an increase of approximately 97% over 1994. This increase is
due to a full year of operations in the Aliceville, AL system offset by the
disposition of operations in the Santiam, OR system in June 1995. The
Aliceville, AL system represents approximately 74% of operations after giving
effect of the Santiam, OR system disposition. Increases in salary and benefit
costs also contributed to the overall increase in operating expenses.
General and administrative expenses totaled $923,079 for the year ended
December 31, 1995, representing an increase of approximately 63% over 1994. This
increase is due to a full year of operations in the Aliceville, AL system offset
by the disposition of operations in the Santiam, OR system in June 1995.
Programming expenses totaled $761,428 for the year ended December 31,
1995, representing an increase of approximately 88% over 1994. This increase is
due to a full year of operations in the Aliceville, AL system offset by the
disposition of operations in the Santiam, OR system in June 1995. The remaining
increase is due to higher agency sales commissions and increased costs charged
by various program suppliers.
Depreciation and amortization expense increased from $1,150,674 in 1994
to $1,372,628 in 1995 (approximately 19%). This is primarily due to a full year
of depreciation and amortization on plant, equipment and intangible assets of
the Aliceville, AL system offset by the reduction of depreciation and
amortization expense on plant, equipment and intangible assets of the Santiam,
OR system.
Interest expense increased from $377,385 in 1994 to $775,213 in 1995
(approximately 105%). The Partnership's average bank debt balance increased from
approximately $7,412,000 in 1994 to $8,109,000 in 1995, mainly due to increased
borrowings to finance the acquisition of the Aliceville, AL System. In addition,
the Partnership's effective interest rate increased from 5.09% in 1994 to 9.55%
in 1995.
EFFECTS OF REGULATION
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Act"). The 1992 Act and
subsequent revisions and rulemakings substantially re-regulated the cable
television industry. The regulatory aspects of the 1992 Act included giving the
local franchising authorities and the FCC the ability to regulate rates for
basic services, equipment charges and additional CPST's when certain conditions
were met. All of the Partnership's cable systems were potentially subject to
rate regulation. The most significant impact of rate regulation was the
inability to raise rates for regulated services as costs of operation rose
during an FCC imposed rate freeze from April 5, 1993 to May 15, 1994.
On February 8, 1996, the Communications Act of 1996 (the "1996 Act")
became law. The 1996 Act will eliminate all rate regulation on CPST's of small
cable systems, defined by the
14
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, no local franchising authorities have
elected to certify and no formal requests for rate justifications have been
received from franchise authorities. Based on Management's analysis, the basic
service tier rates charged by these systems are within the maximum rates allowed
under FCC rate regulations.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Partnership's primary source of liquidity was cash
flow from operations. 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.
On January 4, 1996, the Partnership refinanced its senior debt with its
current lender to finance the acquisition of the Swainsboro, GA system. The
amended credit facility increases the maximum available borrowings to
$11,925,000. Under the terms of the agreement, no principal payments are
required until March 31, 1998. Prior to this date, the outstanding balance
cannot exceed specified levels which reduce quarterly through December 31, 1997.
Quarterly principal payments will begin March 31, 1998, with a final payment due
December 31, 2001.
As of the date of this filing, the Partnership's term loan balance was
$11,375,000. Certain fixed rate agreements in effect as of September 30, 1996
expired during the fourth quarter of 1996, and the Partnership entered into new
fixed rate agreements. Currently, the interest rates on the credit facility are
as follows: $10,600,000 fixed at 8.86% under the terms of a swap agreement with
the Partnership's lender, expiring January 11, 1998; and $775,000 at LIBOR based
rate of 9.06% expiring March 27, 1997.
At December 31, 1996, the Partnership was required under the terms of
its credit agreement to maintain certain financial ratios, including a Funded
Debt to Annualized Cash Flow Ratio of 5.25 to 1 and Cash flow to Debt Service
Ratio of 1.25 to 1, among other restrictions. At December 31, 1996, the
Partnership was in compliance with all covenants of its loan agreement.
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 $464,000 in capital
expenditures. These expenditures included vehicle replacement, advertising
insertion equipment and line extensions in the LaConner, WA system. In the
Aliceville, AL system, the capital expenditures included system mapping,
continued fiber interconnect of two systems, vehicle replacement, purchase of
property for a headend site, channel additions and line extensions. The
Swainsboro, GA system had capital expenditures related to the launch of a new
tier, advertising equipment, channel additions and a billing system conversion.
Management estimates that the Partnership will spend approximately
$553,000 on capital expenditures in 1997. These expenditures include line
extensions, burying drops and office improvements for LaConner, WA. In the
Aliceville, AL system, the capital expenditures
15
include the continued fiber interconnect of two systems, channel additions, drop
grounding and an office remodel. In the Swainsboro, GA system the capital
expenditures include channel additions, pole line transfers and the purchase of
ad insertion equipment.
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.
16
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 and
relating to the Partnership 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. 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.
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
17
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.
GARY S. JONES (AGE 39). Mr. 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
18
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.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation
was paid to the General Partner and affiliates during 1996 as indicated in Note
3 to the Notes to Financial Statements--December 31, 1996 (see Items 14(a)(1)
and 13(a) below).
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
Note A: Northland has a 1% interest in the Partnership, which increases to
a 20% interest in the Partnership at such time as the limited partners have
received 100% of their aggregate cash contributions plus a preferred return. The
natural person who exercises voting and/or investment control over these
interests is John S. Whetzell.
(b) CHANGES IN CONTROL. Northland has pledged its ownership interest as
Managing General Partner of the Partnership to the Partnership's lender as
collateral pursuant to the terms of the revolving credit and term loan agreement
between the Partnership and its lender.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Managing General Partner
receives a management fee equal to 5% of the gross revenues of the Partnership,
not including revenues from any sale or refinancing of the Partnership's System.
The Managing General Partner also receives reimbursement of normal operating and
general and administrative expenses incurred on behalf of the Partnership.
The Partnership has an operating management agreement with Northland Cable
Properties Seven Limited Partnership ("NCP-Seven"), an affiliated partnership
organized and managed by Northland. Under the terms of this agreement, the
partnership serves as the exclusive managing agent for one of NCP-Seven's cable
systems and is reimbursed for certain operating and administrative costs.
19
During 1994, NCP-Seven began serving as the executive managing agent for
one of the Partnership's cable television systems and is reimbursed for certain
operating and administrative expenses.
Cable Television Billing, Inc. ("CTB"), an affiliate of Northland,
provides software installation and billing services to the Partnership's
Systems.
Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides the
production and development of video commercial advertisements and advertising
sales support.
Northland Investment Corporation ("NIC"), also an affiliate of Northland,
acted as managing underwriter for the sale of the Partnership's limited
partnership units. The Partnership paid NIC commissions, due diligence fees and
other costs then distributed the remaining balance to selected broker-dealers
which it had retained to sell the limited partnership units. NIC was dissolved
as of December 31, 1996.
See Note 3 of the Notes to Financial Statements--December 31, 1996 for
disclosures regarding transactions with the General Partner and affiliates.
The following schedule summarizes these transactions:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
Partnership management fees $ 224,979 $ 175,475 $ 101,545
Operating expense reimbursements 257,499 225,798 144,956
Software installation and
billing service fees to CTB 57,299 27,336 30,025
Reimbursements (to)/from
Affiliates (45,881) (12,394) 68,615
Local Advertising Services 22,092 5,294 --
Amounts due to (from) General Partner
and affiliates at year end 265,478 69,933 53,536
Management believes that all of the above transactions are on terms as
favorable to the Partnership as could be obtained from unaffiliated parties for
comparable goods or services.
As disclosed in the Partnership's Prospectus (which has been incorporated
by reference), certain conflicts of interest may arise between the Partnership
and the General Partner and its affiliates. Certain conflicts may arise due to
the allocation of management time, services and functions between the
Partnership and existing and future partnerships as well as other business
ventures. The General Partner has sought to minimize these conflicts by
allocating costs between systems on a reasonable basis. Each limited partner may
have access to the books and non-confidential records of the Partnership. A
review of the books will allow a limited partner to assess the reasonableness of
these allocations. The Agreement of Limited Partnership provides that any
limited partner owning 10% or more of the Partnership units may call a special
meeting of the Limited Partners, by giving written notice to the General Partner
specifying in general terms the subjects to be considered. In the event of a
dispute between the General Partner and Limited Partners which cannot be
otherwise resolved, the Agreement of Limited Partnership provides steps for the
removal of a General Partner by the Limited Partners.
(b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and
Assistant Secretary of the Managing General Partner, is a 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.
20
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 Accountant............. ____
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 Agreement of Limited Partnership(1)
4.2 Amendment to Agreement of Limited Partnership dated
December 20, 1990(4)
10.1 Agreement of Purchase and Sale with Santiam Cable
Vision, Inc.(1)
10.2 Agreement for Sale of Assets between Valley Cable T.V.,
Inc. and Northland Telecommunications Corporation(1)
10.3 Form of Services and Licensing Agreement with Cable
Television Billing, Inc.(1)
10.4 Management Agreement with Northland Communications
Corporation(1)
10.5 First, Second and Third Amendment to Agreement of
Purchase and Sale with Santiam Cable Vision, Inc.(1)
10.6 Operating Management Agreement with Northland Cable
Properties Seven Limited Partnership(1)
10.7 Assignment and Transfer Agreement with Northland
Telecommunications Corporation for the purchase of the
La Conner System(2)
10.8 Gates Franchise(1)
10.9 Stayton Franchise(1)
10.10 Mill City Franchise(1)
10.11 Detroit Franchise(1)
21
10.12 Idanha Franchise(1)
10.13 Lyons Franchise(1)
10.14 Marion County Franchise(1)
10.15 Turner Franchise(1)
10.19 Amendment dated August 4, 1989 to Revolving Credit and
Term Loan Agreement with Security Pacific Bank of
Washington, N.A.(3)
10.20 Revolving Credit and Term Loan Agreement with National
Westminster Bank USA dated as of December 20, 1990(4)
10.21 Note in the principal amount of up to $7,000,000 to the
order of National Westminster Bank USA(4)
10.22 Borrower Assignment with National Westminster Bank
USA(4)
10.23 Borrower Security Agreement with National Westminster
Bank USA(4)
10.24 Agreement of Purchase and Sale with TCI Cablevision of
Nevada, Inc.(4)
10.25 First Amendment dated May 28, 1992 to Revolving Credit
and Term Loan Agreement with National Westminster Bank
USA.(5)
10.26 Franchise Agreement with the City of Turner, OR
effective March 21, 1991(5)
10.27 Franchise Agreement with the City of Lyons, OR effective
April 8, 1991(5)
10.28 Franchise Agreement with the City of Idanha, OR
effective November 3, 1992(5)
10.29 Agreement of Purchase with Alabama Television Cable
Company(6)
10.30 Credit Agreement between Northland Cable Properties
Eight Limited Partnership and U.S. Bank of Washington,
National Association and West One Bank, Washington dated
November 10, 1994(6)
10.31 Franchise Agreement with City of Aliceville, AL -
Assignment and Assumption Agreement dated July 26,
1994.(7)
10.32 Franchise Agreement with City of Carrollton, AL -
Assignment and Assumption Agreement dated August 16,
1994.(7)
10.33 Franchise Agreement with City of Eutaw, AL - Assignment
and Assumption Agreement dated July 26, 1994.(7)
10.34 Franchise Agreement with City of Gordo, AL - Assignment
and Assumption Agreement dated August 1, 1994.(7)
10.35 Franchise Agreement with Greene County, AL - Assignment
and Assumption Agreement dated November 10, 1994.(7)
10.36 Franchise Agreement with Town of Kennedy, AL -
Assignment and Assumption Agreement dated August 15,
1994.(7)
22
10.37 Franchise Agreement with Lamar County, AL - Assignment
and Assumption Agreement dated August 8, 1994.(7)
10.38 Franchise Agreement with City of Marion, AL - Assignment
and Assumption Agreement dated August 1, 1994.(7)
10.39 Franchise Agreement with Town of Millport, AL -
Assignment and Assumption Agreement dated August 18,
1994.(7)
10.40 Franchise Agreement with Pickens County, AL - Assignment
and Assumption Agreement dated July 26, 1994.(7)
10.41 Franchise Agreement with Town of Pickensville, AL -
Assignment and Assumption Agreement dated August 2,
1994.(7)
10.42 Franchise Agreement with City of Reform, AL - Assignment
and Assumption Agreement dated August 1, 1994.(7)
10.43 Asset Purchase and Sale Agreement between SCS
Communications and Security, Inc. and Northland Cable
Properties Eight Limited Partnership dated April 14,
1995.(8)
10.44 Asset Purchase Agreement between Northland Cable
Properties Eight Limited Partnership and TCI Cablevision
of Georgia, Inc. dated November 17, 1995.(9)
------------
(1) Incorporated by reference from the Partnership's Form S-1
Registration Statement declared effective on March 16, 1989
(No. 33-25892).
(2) Incorporated by reference from the Partnership's Form 10-Q
Quarterly Report for the period ended June 30, 1989.
(3) Incorporated by reference from the Partnership's Form 10-K
Annual Report for the year ended December 31, 1989.
(4) Incorporated by reference from the Partnership's Form 10-K
Annual Report for the year ended December 31, 1990
(5) Incorporated by reference from the Partnership's Form 10-K
Annual Report for the year ended December 31, 1992.
(6) Incorporated by reference from the Partnership's Form 8-K
dated November 11, 1994.
(7) Incorporated by reference from the Partnership's Form 10-K
Annual Report for the year ended December 31, 1994.
(8) Incorporated by reference from the Partnership's Form 10-Q
Quarterly Report for the period ended March 31, 1995.
(9) Incorporated by reference from the Partnership's Form 8-K
dated January 5, 1996.
(b) REPORTS ON FORM 8-K. No Partnership reports on Form 8-K have been
filed during the fourth quarter of the fiscal year ended December 31, 1996.
23
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION
(Managing General Partner)
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
24
EXHIBITS INDEX
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------------------------------------- ------------
27.0 Financial Data Schedule.
25
NORTHLAND CABLE PROPERTIES EIGHT
LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
26
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Eight Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Eight Limited Partnership (a Washington limited partnership) as of December 31,
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
Eight 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
27
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
------------ ------------
CASH $ 844,700 $ 380,717
ACCOUNTS RECEIVABLE 105,377 65,537
PREPAID EXPENSES 62,591 48,976
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 10,087,069 8,224,815
Less- Accumulated depreciation (2,544,227) (1,571,951)
------------ ------------
7,542,842 6,652,864
Franchise agreements (net of
accumulated amortization of
$1,282,646 in 1996 and $834,865 in
1995) 5,922,337 2,006,779
Organization costs (net of accumulated
amortization of $40,686 in 1996 and
$7,013 in 1995) 75,018 82,269
Loan fees and other intangibles (net of
accumulated amortization of $270,754
in 1996 and $144,594 in 1995) 412,670 313,498
Goodwill (net of accumulated
amortization of $30,031 in 1996 and
$26,071 in 1995) 128,378 132,338
------------ ------------
Total investment in cable
television properties 14,081,245 9,187,748
------------ ------------
Total assets $ 15,093,913 $ 9,682,978
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
1996 1995
------------ ------------
LIABILITIES:
Accounts payable and accrued expenses $ 579,822 $ 408,090
Due to General Partner and affiliates 265,478 69,933
Deposits 17,800 21,750
Subscriber prepayments 100,911 104,801
Term loan 11,375,000 5,618,000
------------ ------------
Total liabilities 12,339,011 6,222,574
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' CAPITAL (DEFICIT):
General Partner-
Contributed capital 1,000 1,000
Accumulated deficit (53,669) (46,614)
------------ ------------
(52,669) (45,614)
------------ ------------
Limited partners-
Contributed capital, net -
19,087 units in 1996 and 1995 8,120,820 8,120,820
Accumulated deficit (5,313,249) (4,614,802)
------------ ------------
2,807,571 3,506,018
------------ ------------
Total liabilities and partners'
capital (deficit) $ 15,093,913 $ 9,682,978
============ ============
The accompanying notes are an integral part of these balance sheets.
28
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
REVENUE $ 4,499,588 $ 3,529,252 $ 2,030,906
----------- ----------- -----------
EXPENSES:
Operating (including $49,082, $30,458 and
$(34,250), net, paid to (received from)
affiliates in 1996, 1995 and 1994,
respectively) 488,660 425,346 215,405
General and administrative (including
$479,614, $369,851 and $211,673, net,
paid to affiliates in 1996, 1995 and
1994, respectively) 1,093,088 923,079 566,674
Programming (including $32,622 paid to
affiliates in 1996) 1,000,851 761,428 405,377
Depreciation and amortization 1,583,850 1,372,628 1,150,674
----------- ----------- -----------
4,166,449 3,482,481 2,338,130
----------- ----------- -----------
Operating income (loss) 333,139 46,771 (307,224)
OTHER INCOME (EXPENSE):
Interest income and other 9,850 17,290 2,576
Interest expense (1,048,491) (775,213) (377,385)
Gain on sale of system -- 3,391,978 --
Loss on disposal of assets -- (11,627) (23,378)
----------- ----------- -----------
Net (loss) income $ (705,502) $ 2,669,199 $ (705,411)
=========== =========== ===========
ALLOCATION OF NET (LOSS) INCOME:
General Partner $ (7,055) $ 26,692 $ (7,054)
=========== =========== ===========
Limited partners $ (698,447) $ 2,642,507 $ (698,357)
=========== =========== ===========
NET (LOSS) INCOME PER LIMITED PARTNERSHIP
UNIT $ (37) $ 138 $ (36)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
29
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Limited
Partner Partners Total
----------- ----------- -----------
BALANCE, December 31, 1993 $ (65,252) $ 1,574,368 $ 1,509,116
Net loss (7,054) (698,357) (705,411)
----------- ----------- -----------
BALANCE, December 31, 1994 (72,306) 876,011 803,705
Repurchase of limited partnership units -- (12,500) (12,500)
Net income 26,692 2,642,507 2,669,199
----------- ----------- -----------
BALANCE, December 31, 1995 (45,614) 3,506,018 3,460,404
Net loss (7,055) (698,447) (705,502)
----------- ----------- -----------
BALANCE, December 31, 1996 $ (52,669) $ 2,807,571 $ 2,754,902
=========== =========== ===========
The accompanying notes are an integral part of these statements.
30
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (705,502) $ 2,669,199 $ (705,411)
Adjustments to reconcile net (loss) income to
net cash provided by operating activities-
Depreciation and amortization expense 1,583,850 1,372,628 1,150,674
Gain on sale of system -- (3,391,978) --
Loss on disposal of assets -- 11,627 23,378
(Increase) decrease in operating assets:
Accounts receivable (14,576) (7,526) (26,670)
Due from General Partner and affiliates -- -- 27,168
Prepaid expenses (13,615) (19,197) 4,014
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 171,732 (130,118) 139,802
Due to General Partner and affiliates 195,545 16,397 53,536
Deposits (3,950) (5,982) 22,393
Subscriber prepayments (3,890) (2,579) 44,107
------------ ------------ ------------
Net cash provided by operating activities 1,209,594 512,471 732,991
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of cable system -- 5,765,769 --
Acquisition of cable system (6,083,676) (606,383) (6,559,016)
Purchase of property and equipment, net (319,942) (563,377) (348,499)
Increase in accrued property and equipment -- 208,188 --
------------ ------------ ------------
Net cash (used in) provided by investing activities (6,403,618) 4,804,197 (6,907,515)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 6,057,000 -- 10,600,000
Principal payments on note payable (300,000) (4,982,000) (4,224,000)
Loan fees (98,993) (277,002) (121,611)
Repurchase of limited partnership units -- (12,500) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 5,658,007 (5,271,502) 6,254,389
------------ ------------ ------------
INCREASE IN CASH 463,983 45,166 79,865
CASH, beginning of year 380,717 335,551 255,686
------------ ------------ ------------
CASH, end of year $ 844,700 $ 380,717 $ 335,551
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 857,217 $ 811,274 $ 327,051
============ ============ ============
The accompanying notes are an integral part of these statements.
31
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Eight Limited Partnership (the Partnership), a
Washington limited partnership, was formed on September 21, 1988, and began
operations on March 8, 1989. The Partnership was formed to acquire, develop and
operate cable television systems. Currently, the Partnership owns systems
serving the city of La Conner, Washington and certain surrounding areas;
Aliceville, Alabama and certain surrounding areas; and Swainsboro, Georgia and
certain surrounding areas. The Partnership has 17 nonexclusive franchises to
operate these cable systems for periods which will expire at various dates
through 2019, with one franchise extending to 2044.
Northland Communications Corporation (the General Partner or Northland) is the
General Partner of the Partnership. Certain affiliates of the Partnership also
own and operate other cable television systems. In addition, Northland manages
cable television systems for other limited partnerships for which it is General
Partner.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' capital (deficit). No limited partner is
obligated to make any additional contribution to partnership capital.
Northland contributed $1,000 to acquire its 1% interest in the Partnership.
Pursuant to the Partnership Agreement, brokerage fees of $1,004,693 paid to an
affiliate of the General Partner and other offering costs of $156,451 paid to
the General Partner were recorded as a reduction of limited partners' capital.
Organization Costs
Organization costs originally included reimbursements of $113,913 to the General
Partner for costs incurred on the Partnership's behalf and a fee of $621,952 as
compensation for selecting and arranging for the purchase of the cable
television systems.
32
-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 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 noncompetition agreements and other intangibles and
franchise costs; then the excess was allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, organization costs, loan fees and other
intangibles, and goodwill are being amortized using the straight-line method
over the following estimated useful lives:
Franchise agreements 8-40 years
Organization costs 5 years
Loan fees and other intangibles 1-5 years
Goodwill 40 years
Revenues
The Partnership recognizes revenue in the month service is provided to customers
and accounts for advance payments on services to be rendered as subscriber
prepayments.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
33
-3-
3. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner receives a fee for managing the Partnership equal to 5% of
the gross revenues of the Partnership, excluding revenues from the sale of cable
television systems or franchises. The amount of management fees charged by the
General Partner was $224,979, $175,475 and $101,545 for 1996, 1995 and 1994,
respectively.
Income Allocation
As defined in the limited partnership agreement, the General Partner is
allocated 1% and the limited partners are allocated 99% of partnership net
income, net losses, deductions and credits from operations until such time as
the limited partners receive aggregate cash distributions equal to their
aggregate capital contributions, plus the limited partners' preferred return.
Thereafter, the General Partner will be allocated 20% and the limited partners
will be allocated 80% of partnership net income, net losses, deductions and
credits from operations. Cash distributions from operations will be allocated in
accordance with the net income and net loss percentages then in effect. Prior to
the General Partner receiving cash distributions from operations for any year,
the limited partners must receive cash distributions in an amount equal to the
lesser of i) 50% of the limited partners' allocable share of net income for such
year or ii) the federal income tax payable on the limited partners' allocable
share of net income on the then highest marginal federal income tax rate
applicable to such net income.
The limited partners' total initial contributions to capital were $9,568,500
($500 per limited partnership unit). As of December 31, 1996, the Partnership
has repurchased $12,500 of limited partnership units (50 units at $250 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
$257,499, $225,798 and $144,956 for 1996, 1995 and 1994, respectively.
In 1996, 1995 and 1994, the Partnership paid software installation charges and
billing service fees to an affiliate, amounting to $57,299, $27,336 and $30,025,
respectively.
34
-4-
For approximately three months in 1994, the Partnership had an operating
management agreement with an affiliate managed by the General Partner. Under the
terms of the agreement, the Partnership served as the executive managing agent
for the affiliate's cable television systems and was reimbursed for certain
operating and administrative expenses. The Partnership received $81,750 under
the terms of this agreement during 1994.
The Partnership has entered into operating management agreements with certain
affiliates managed by the General Partner. Under the terms of these agreements,
the affiliates serve as the executive managing agents for certain of the
Partnership's cable television systems and are reimbursed for certain operating
and administrative expenses. The Partnership paid $45,881 and $12,394 under the
terms of these agreements during 1996 and 1995, respectively.
Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner was formed to
assist in the development of local advertising markets and the management and
training of local sales staff. CAC billed the Partnership $22,092 and $5,294 in
1996 and 1995, 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 $224,979 $ 13,651
Reimbursable operating costs 24,009 20,571
Due to affiliates, net 16,490 35,711
-------- --------
$265,478 $ 69,933
======== ========
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
December 31,
--------------------------
1996 1995
----------- -----------
Land and buildings $ 205,171 $ 180,219
Distribution plant 9,353,279 7,568,564
Other equipment 496,022 349,845
Construction in progress 32,597 126,187
----------- -----------
10,087,069 8,224,815
Less- Accumulated depreciation 2,544,227 1,571,951
----------- -----------
$ 7,542,842 $ 6,652,864
=========== ===========
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
35
-5-
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following:
December 31,
-----------------------
1996 1995
-------- --------
Interest payable $224,641 $ 33,367
Programmer license fees 158,591 45,840
Other 196,590 328,883
-------- --------
$579,822 $408,090
======== ========
6. TERM LOAN:
December 31,
-------------------------
1996 1995
----------- ----------
Term loan, amended and restated on January 4, 1996,
collateralized by a first lien position on all present
and future assets of the Partnership. Interest rates
vary based on certain financial covenants, at
December 31, 1996, 8.87% (weighted average). Graduated
principal payments plus interest are due quarterly until
maturity on December 31, 2001. $11,375,000 $5,618,000
=========== ==========
On January 4, 1996, the Partnership entered into an amended and restated credit
agreement to increase its available existing debt with U.S. Bank of Washington
National Association to $11,925,000. The Partnership used the additional
proceeds to finance the acquisition of a cable system in Swainsboro, Georgia
(the Swainsboro System), and provide working capital (see Note 9).
Beginning March 31, 1998, scheduled principal payments are required. Prior to
this date, the outstanding balance cannot exceed specified levels (currently
$11,700,000), which reduce quarterly through December 31, 1997 to $10,925,000.
Based on the current outstanding balance of $11,375,000, the Partnership would
be required to pay $450,000 by December 31, 1997.
36
-6-
Annual maturities of notes payable after December 31, 1996 are as follows:
1997 $ 450,000
1998 1,000,000
1999 1,200,000
2000 1,400,000
2001 7,325,000
-----------
$11,375,000
===========
Under the terms of the amended and restated credit agreement, the Partnership
has agreed to restrictive covenants which require the maintenance of certain
ratios, including a Funded Debt to Cash Flow Ratio of 5.25 to 1 and a Cash Flow
to Debt Service Ratio of 1.25 to 1, among other restrictions. The General
Partner submits quarterly debt compliance reports to the Partnership's creditor
under this agreement.
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 $10,600,000. This agreement effectively changes the
Partnership's interest rate exposure to a fixed rate of 5.36%, plus an
applicable margin based on certain financial covenants (the margin at December
31, 1996 was 3.50%). The maturity date of the swap is January 11, 1998.
At December 31, 1996, the counterparty would have been required to pay the
Partnership approximately $36,435 to settle this agreement based on fair value
estimates received from financial institutions.
7. INCOME TAXES:
Income taxes have not been recorded in the accompanying financial statements
because they are obligations of the partners. The federal and state income tax
returns of the Partnership are prepared and filed by the General Partner.
The tax returns, the qualification of the Partnership as such for tax purposes
and the amount of distributable partnership income or loss are subject to
examination by federal and state taxing authorities. If such examinations result
in changes with respect to the Partnership's qualification or in changes with
respect to the income or loss, the tax liability of the partners would likely be
changed accordingly.
Taxable (loss) income to the limited partners was approximately $(1,370,756),
$2,335,000 and $(382,000) in 1996, 1995 and 1994, respectively, 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 loss and the net (loss) income 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. No losses will be allocated to
limited partners with negative basis.
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In addition, current tax law does not allow a taxpayer to use losses from a
business activity in which he does not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset other
income such as salary, active business income, dividends, interest, royalties
and capital gains. However, such losses can be used to offset income from other
passive activities. In addition, disallowed losses can be carried forward
indefinitely to offset future income from passive activities. Disallowed losses
can be used in full when the taxpayer recognizes gain or loss upon the
disposition of his entire interest in the passive activity.
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $117,515, $80,138 and $41,308 in 1996, 1995
and 1994, respectively. Minimum lease payments through the end of the lease
terms are as follows:
1997 $ 3,300
1998 3,300
1999 3,300
2000 3,300
2001 3,300
Thereafter 46,100
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$62,600
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Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted. The 1996 Act dramatically changed federal telecommunications laws and
the future competitiveness of the industry. Many of the changes called for by
the 1996 Act will not take effect until the Federal Communications Commission
(FCC) issues new regulations which, in some cases, may not be completed for a
few years. Because of this, the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Partnership's operations, follows.
Cable Programming Service Tier Regulation. FCC regulation of rates for cable
programming service tiers has been eliminated for small cable systems owned by
small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000). 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.
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Telephone Companies. The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act; as a radio-based multichannel
programming distributor not subject to any provisions of the 1996 Act; or
through nonfranchised "open video systems" offering nondiscriminatory capacity
to unaffiliated programmers, subject to select provisions of the 1996 Act.
Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross-ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public, Educational and Governmental and leased
access channels.
9. CABLE TELEVISION SYSTEM ACQUISITIONS AND DISPOSITION:
In November 1994, the Partnership completed its purchase of certain operating
assets and franchises of cable television systems owned by Alabama Television
Cable Company (ATCC). These systems currently serve the communities of Millport,
Kennedy, Aliceville, Pickinsville, Carrollton, Reform, Gordo, Eutaw, Marion and
other nearby areas in Lamar, Pickens, Perry and Greene counties. The purchase
price was $7,175,000. At the time of closing, the Partnership paid $6,375,000 to
ATCC. The remaining purchase price was in the form of an unsecured,
subordinated, noninterest-bearing, hold-back note payable. In June 1995, the
Partnership paid approximately $606,000, net of purchase price adjustments, to
settle the note payable.
On June 30, 1995, the Partnership sold the operating assets and franchise rights
of its cable television system serving eight communities in northwestern Oregon.
This sale represented all of the Partnership's operations in the state of
Oregon. The sales price was $5,800,000 and the proceeds were used to reduce the
outstanding credit facility; repay the unsecured, subordinated,
noninterest-bearing, hold-back seller note and noncompete agreement related to
the acquisition of the Aliceville, Alabama system; and reimburse the General
Partner for deferred management fees and operating costs.
On November 17, 1995, the Partnership entered into an agreement to acquire
certain operating assets and franchise rights of the cable television systems in
or around the community of Swainsboro, Georgia. The Swainsboro System was owned
by TCI Cablevision of Georgia, Inc. The assets were acquired on January 5, 1996,
for $6,056,326. Of the total purchase price, $5,751,326 was paid at the closing
date. In April 1996, the Partnership paid to the seller the remainder of
$305,000, net of purchase price adjustments.
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Pro forma operating results of the Partnership for 1995, assuming the 1994 and
1995 transactions described above had been made at the beginning of 1995,
follow:
For the year
ended
December 31,
1995
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(unaudited)
Revenue $ 4,095,244
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Net loss $ (715,071)
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Net loss per limited partnership unit $ (37)
===========