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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, 1997
[ ] 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
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(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1423516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
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(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
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(NONE) (NONE)
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
(Partially Incorporated into Part IV)
(1) Form S-1 Registration Statement declared effective on 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 973 limited partners as of December 31, 1997.
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, direct and indirect, of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and
principally involved in the direct ownership of cable television systems. Sole
shareholder of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally involved
in the production and development of local news, sports and informational
programming.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and
principally involved in the development and production of computer software used
in billing and financial record keeping for Northland-affiliated cable systems.
Sole shareholder of Cable Ad-Concepts, Inc.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally
involved in the sale, development and production of video commercial
advertisements that are cablecast on Northland-affiliated cable systems.
NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company for
Statesboro Media, Inc.:
STATESBORO MEDIA, INC. - formed in April 1995 and principally involved
in operating an AM radio station serving the community of Statesboro, Georgia
and surrounding areas.
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 (the "Swainsboro System"). As of December 31,
1997, the total number of basic subscribers served by the Systems was 12,198,
and the Partnership's penetration rate (basic subscribers as a percentage of
homes passed) was approximately 82% as compared to an industry average of
approximately 66%, as reported by the PAUL KAGAN AND ASSOCIATES, INC. The
Partnership's
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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 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, 1997 is as follows:
Basic Subscribers 2,184
Tier Subscribers 1,164
Premium Subscribers 561
Estimated Homes Passed 2,745
Aliceville, AL: The Aliceville system serves the communities in west
central Alabama. The communities, located south and west of Tuscaloosa, include
Aliceville, Carrollton, Pickensville, Reform, Gordo, Millport, Kennedy, Eutaw
and Marion. Certain information regarding the Aliceville, AL system as of
December 31, 1997 is as follows:
Basic Subscribers 6,830
Premium Subscribers 2,644
Estimated Homes Passed 8,420
Swainsboro, GA: The Swainsboro system serves the incorporated community
of Swainsboro and nearby unincorporated areas of Emanuel County, Georgia.
Swainsboro is predominantly an agricultural community located in central
Georgia, as well as the county seat for Emanuel County. Certain information
regarding the Swainsboro, GA system as of December 31, 1997 is as follows:
Basic Subscribers 3,184
Tier Subscribers 542
Premium Subscribers 2,022
Estimated Homes Passed 3,900
The Partnership had 18 employees as of December 31, 1997. 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
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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 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.
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
satellite master antenna television services, DBS services, wireless cable
services, newspapers, movie theaters, live sporting events, online computer
services and home video products, including videotape cassette recorders. The
extent to which a cable communications system is competitive depends, in part,
upon the cable system's ability to provide, at a reasonable price to customers,
a greater variety of programming and other communications services than those
which are available off-air or through other alternative delivery sources and
upon superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises
granted on a non-exclusive basis. The 1992 Cable Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to operate cable television systems without a
franchise. It is possible that a franchising authority might grant a second
franchise to another company containing terms and conditions more favorable than
those afforded the Partnership.
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Well-financed businesses from outside the cable industry (such as the
public utilities and other companies that own the poles to which cable is
attached) may become competitors for franchises or providers of competing
services. Congress has repealed the prohibition against national television
networks owning cable systems, and telephone companies may now enter the cable
industry, as described below. Such new entrants may become competitors for
franchises or providers of competitive services. In general, a cable system's
financial performance will be adversely affected when a competing cable service
exists (referred to in the cable industry as an "overbuild").
In recent years, the FCC and the Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable television systems. These technologies include, among
others, DBS, whereby signals are transmitted by satellite to small receiving
dishes located on subscribers' homes. Programming is currently available to DBS
subscribers through conventional, medium- and high-powered satellites. Existing
DBS systems offer in excess of 120 channels of programming and pay-per-view
services and are expected to increase channel capacity to 150 or more channels,
enabling them to provide program service comparable to and in some instances,
superior to those of cable television systems. At least four well-financed
companies currently offer DBS services and have undertaken extensive marketing
efforts to promote their products. The FCC has implemented regulations under the
1992 Cable Act to enhance the ability of DBS systems to make available to home
satellite dish owners certain satellite delivered cable programming at
competitive costs. Programming offered by DBS systems has certain advantages
over cable systems with respect to number of channels offered, programming
capacity and digital quality, as well as disadvantages that include high upfront
and monthly costs and a lack of local programming, service and equipment
distribution. DBS systems will provide increasing competition to cable systems
as the cost of DBS reception equipment continues to decline. At least one DBS
provider is undertaking the technical and legislative steps necessary to enhance
its service by adding local broadcast signals which could further increase
competitive pressures from DBS systems.
Cable television systems also compete with wireless program distribution
services such as MMDS which uses low power microwave to transmit video
programming over the air to customers. Additionally, the FCC recently adopted
new regulations allocating frequencies in the 28 GHz band for a new multichannel
wireless video service similar to MMDS, known as Local Multipoint Distribution
Service ("LMDS"). LMDS is also suited for providing wireless data services,
including the possibility of Internet access. Wireless distribution services
generally provide many of the programming services provided by cable systems,
although current technology limits the number of channels which may be offered.
Moreover, because MMDS service generally requires unobstructed "line of sight"
transmission paths, the ability of MMDS systems to compete may be hampered in
some areas by physical terrain and foliage.
The 1996 Telecommunications Act eliminated the previous prohibition on
the provision of video programming by local exchange telephone companies
("LECs") in their telephone service areas. Various LECs currently are providing
and seeking to provide video programming services within their telephone service
areas through a variety of distribution methods, primarily through the
deployment of broadband wire facilities, wireless transmission and installation
of traditional cable systems alongside existing telephone equipment. Cable
television systems could be placed at a competitive disadvantage if the delivery
of video programming services by LECs becomes widespread, since LECs may not be
required, under certain circumstances, to obtain local franchises to deliver
such video services or to comply with the variety of obligations imposed upon
cable television systems under such franchises. Issues of cross subsidization by
LECs of video and telephony services also pose strategic disadvantages for cable
operators seeking to compete with LECs that provide video services. The Company
believes, however, that the small to medium markets in which it provides or
expects to provide cable services are unlikely to support competition in the
provision of video and telecommunications broadband services given the lower
population densities and higher costs per subscriber of installing plant. The
1996 Telecommunications Act's provisions promoting facilities-based broadband
competition are primarily targeted at larger systems and markets. The 1996
Telecommunications Act includes certain limited exceptions to the general
prohibition on buy outs and joint ventures between incumbent cable operators and
LECs for smaller non-urban cable systems and carriers meeting certain criteria.
See "Proposed Transaction - Regulation Overview."
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information useful
both to consumers and businesses. The FCC also permits commercial and
noncommercial FM stations to use their subcarrier frequencies to provide non-
broadcast services including data transmissions. The FCC has established an
over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. The expansion of fiber optic systems by LECs and other common
carriers, and electric utilities is providing facilities for the transmission
and distribution to homes and businesses of video services, including
interactive computer-based services like the Internet, data and other nonvideo
services.
The business of delivering and producing televised news, information and
entertainment are characterized by new market entrants, increasingly rapid
technological change and evolving industry standards. There can be no assurance
that the Partnership will be able to fund the capital expenditures necessary to
keep pace with technological developments or that the Partnership will
successfully predict the technical demand of its subscribers. The Partnership's
inability to provide enhanced services in a timely manner or to predict the
demands of the marketplace could have a material adverse effect on the
Partnership, its financial condition, prospects and debt service ability.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environments are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry or on the operations of the
Partnership.
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REGULATION
The Partnership's business is subject to intensive regulation at the
federal and local levels, and to a lesser degree, at the state level. The FCC,
the principal federal regulatory agency with jurisdiction over cable television,
is responsible for implementing federal policies such as rate regulation, cable
system relations with other communications media, cross-ownership, signal
carriage, equal employment opportunity and technical performance. Provisions of
regulatory events that have impacted the Partnership's cable television system
operations, which are the principal business of the Partnership, are summarized
below.
INTRODUCTION
The operation of cable television systems is extensively regulated by
the FCC, some state governments and most local governments. The
Telecommunications Act of 1996 alters the regulatory structure governing the
nation's telecommunications providers. The Telecommunications Act of 1996 is
intended to remove barriers to competition in both the cable television market
and the local telephone market. It also reduces the scope of cable rate
regulation.
The 1996 Telecommunications Act requires the FCC to undertake a host of
implementing rulemakings, the final outcome of which cannot yet be determined.
Moreover, Congress and the FCC have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect the
Partnership's operations. This section briefly summarizes key laws and
regulations affecting the operation of the Partnership's systems and does not
purport to describe all present, proposed, or possible laws and regulations
affecting the Company or its systems.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry. Under that regime, all cable systems are subject to
rate regulation, unless they face "effective competition" in their local
franchise area. Federal law now defines "effective competition" on a
community-specific basis as requiring either low penetration (less than 30%) by
the incumbent cable
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operator, appreciable penetration (more than 15%) by competing multichannel
video providers ("MVPs"), or the presence of a competing MVP affiliated with a
local telephone company.
Although the FCC rules control, local government units (commonly
referred to as "local franchising authorities" or "LFAs") are primarily
responsible for administering the regulation of the lowest level of cable, the
basic service tier ("BST"), which typically contains local broadcast stations
and public, educational, and government access channels. Before an LFA begins
BST rate regulation, it must certify to the FCC that it will follow applicable
federal rules, and many LFAs have voluntarily declined to exercise this
authority. LFAs also have primary responsibility for regulating cable equipment
rates. Under federal law, charges for various types of cable equipment must be
unbundled from each other and from monthly charges for programming services. The
1996 Telecommunications Act allows operators to aggregate costs for broad
categories of equipment across geographic and functional lines.
The FCC itself directly administers rate regulation of an operator's
cable programming service tiers ("CPST"), which typically contain
satellite-delivered programming. Under the 1996 Telecommunications Act, the FCC
can regulate CPST rates only if an LFA first receives at least two rate
complaints from local subscribers and then files a formal complaint with the
FCC. When new CPST rate complaints are filed, the FCC now considers only whether
the incremental increase is justified and will not reduce the previously
established CPST rate.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carnage. The FCC has modified its rate
adjustment regulations to allow for annual rate increases and to minimize
previous problems associated with regulatory lag. Operators also have the
opportunity of bypassing this "benchmark" regulatory scheme in favor of
traditional "cost-of-service," regulation in cases where the latter methodology
appears favorable. Premium cable services offered on a per-channel or
per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. Federal law requires that the
BST be offered to all cable subscribers, but limits the ability of operators to
require purchase of any CPST before purchasing premium services offered on a
per-channel or per-program basis.
In an effort to ease the regulatory burden on small cable systems, the
FCC has created special rate rules applicable for systems with fewer than 15,000
subscribers owned by an operator with fewer than 400,000 subscribers. The
special rate rules allow for a simplified cost-of-service showing. All of the
Partnership's systems are eligible for these simplified cost-of-service rules,
and have calculated rates generally in accordance with those rules.
The 1996 Telecommunications Act provides additional relief for small
cable operators. For franchising units with less than 50,000 subscribers and
owned by an operator with less than one percent of the nation's cable
subscribers (i.e., approximately 600,000 subscribers) that is not affiliated
with any entities with aggregate annual gross revenue exceeding $250 million,
CPST rate regulation is automatically eliminated. The Partnership and all of its
systems qualify for this CPST deregulation.
The 1996 Cable Act sunsets FCC regulation of CPST rates for all systems
(regardless of size) on March 31, 1999. It also relaxes existing uniform rate
requirements by specifying that uniform rate requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing still may
be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Cable Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The extent to which state and local governments may
impose requirements in such situations recently has been, and will continue to
be, the subject of litigation. The outcome of that litigation, and its effect on
the Partnership, cannot be predicted. The favorable pole attachment rates
afforded cable operators under federal law can be gradually increased by utility
companies owning the poles (beginning on February 8, 2001) if the operator
provides telecommunications service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Cable Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. Certain aspects of the
FCC's initial interconnection order were rejected by the Eighth Circuit Court of
Appeals on July 18, 1997, on the ground that the states, not the FCC, have
statutory authority to set the prices that incumbent local exchange carriers may
charge for interconnection. The United States Supreme Court has granted
certiorari to hear an appeal of the Eighth Circuit Court of Appeals ruling.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Cable Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers ("LECs"), including the Bell
Operating Companies, can now compete with cable operators both inside and
outside their telephone service areas. Because of their resources, LECs could be
formidable competitors to traditional cable operators, and certain LECs have
begun offering cable service.
Under the 1996 Cable Act, a LEC providing video programming to
subscribers generally will be regulated as a traditional cable operator (subject
to local franchising and federal regulatory requirements), unless the LEC elects
to provide its programming via an "open video system" ("OVS"). To qualify for
OVS status, the LEC must reserve two-thirds of the system's activated channels
for unaffiliated entities.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator
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buyouts of co-located LEC systems, and joint ventures between cable operators
and LECs in the same market. The 1996 Telecommunications Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption." The 1996 Telecommunications Act also provides
the FCC with the limited authority to grant waivers of the buyout prohibition
(subject to LFA approval).
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The 1996 Cable Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Because of their resources, electric utilities could be formidable competitors
to traditional cable systems, and a few electric utilities have announced plans
to offer video programming. Recent technological advances have increased the
likelihood that electric utilities may become competitive with the Partnership.
ADDITIONAL OWNERSHIP RESTRICTIONS
The 1996 Cable Act eliminates statutory restrictions on broadcast/cable
cross-ownership (including broadcast network/cable restrictions), but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Cable Act also
eliminates the three year holding period required under the 1992 Cable Act's
"anti-trafficking" provision. The 1996 Cable Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
("SMATV") and MMDS facilities, but lifts those restrictions where the cable
operator is subject to effective competition. FCC regulations permit cable
operators to own and operate SMATV systems within their franchise area, provided
that such operation is consistent with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national program services. A companion rule establishing
a nationwide ownership cap on any cable operator equal to 30% of all domestic
cable subscribers has been stayed pending further judicial review.
There are no federal restrictions on non-U.S. entities having an
ownership interest in cable television systems or the FCC licenses commonly
employed by such systems.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act conveyed to a commercial broadcaster the right
generally to elect every three years either to require: (i) that the local cable
operator carry its signals ("must carry"); or (ii) that such operator obtain the
broadcaster's retransmission consent before doing so. The Company has been able
to reach agreements with all of the broadcasters who elected retransmission
consent and has not been required by broadcasters to remove any broadcast
stations from the cable television channel line-ups. To date, compliance with
the "retransmission consent" and "must carry" provisions of the 1992 Cable Act
has not had a material effect on the Partnership, although this result may
change in the future depending on such factors as market conditions, the
introduction of digital broadcasts, channel capacity and similar matters when
such arrangements are renegotiated.
CHANNEL SET-ASIDES
LFAs can include franchise provisions, requiring cable operators to set
aside certain channels for public, educational and governmental access
programming. Federal law also requires cable systems to designate a portion of
their channel capacity (up to 15% in some cases) for commercial leased access by
unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but use of commercial leased access channels has
been relatively limited. The FCC recently modified its leased access rules,
making leased access somewhat more favorable to potential users. The changes,
however, were not as dramatic as leased access users had hoped, and should not
significantly infringe on the Partnership's control over the channel line-up of
its various cable television operating systems. The revised maximum rate formula
has been challenged by one leased access applicant in an appeal to the D.C.
Circuit Court.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition
to incumbent cable operators, the 1992 Cable Act imposed restrictions on
dealings between cable operators and cable programmers. The 1992 Cable Act
precludes video programmers affiliated with cable companies from favoring cable
operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors. This provision limits the
ability of vertically integrated cable programmers to offer exclusive
programming arrangements to cable companies.
OTHER FCC REGULATIONS
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as equal employment opportunity, subscriber
privacy, programming practices (including, among other things, syndicated
program exclusivity, network program non-duplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, and children's programming advertisements), registration of
cable systems and facilities licensing, maintenance of various records and
public inspection files, frequency usage, lockbox availability, antenna
structure notification, tower marking and lighting, consumer protection and
customer service standards, technical standards, and consumer electronics
equipment compatibility. The FCC recently adopted rules relating to the
ownership of cable wiring located inside multiple dwelling unit complexes. The
FCC has concluded that such wiring can, in certain cases, be unilaterally
acquired by the complex owner, making it easier for complex owners to terminate
service from the incumbent cable operator in favor of a new entrant. The FCC
recently imposed new Emergency Alert System requirements on cable operators
which will be phased in over several years. The FCC recently adopted "closed
captioning" rules that the Partnership does not expect to have an adverse effect
on its operations. The FCC has the authority to enforce its regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other
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administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities used in connection with cable
operations.
PENDING PROCEEDING
The FCC has initiated a rulemaking proceeding involving whether cable
customers must be allowed to purchase cable converters from third party vendors.
If the FCC concludes that such distribution is required, and does not make
appropriate allowances for signal piracy concerns, it may become more difficult
for cable operators to combat theft of service.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenue to a
federal copyright royalty pool (which varies depending on the size of the system
and the number of distant broadcast television signals carried), cable operators
can obtain blanket permission to retransmit copyrighted material on broadcast
signals. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect the Partnership's ability to obtain desired broadcast programming. In
addition, the cable industry pays music licensing fees to BMI and is negotiating
a similar arrangement with ASCAP. Copyright clearances for non-broadcast
programming services are arranged through private negotiations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in exchange for the use of public rights-of-way. Federal law now prohibits
franchise authorities from granting exclusive franchises or from unreasonably
refusing to award additional franchises. Cable franchises generally are granted
for fixed terms and in many cases include monetary penalties for non-compliance
and may be terminable if the franchisee fails to comply with material
provisions.
The terms and conditions of franchises vary materially from jurisdiction
to jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. Although LFAs have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, LFAs cannot require the payment of franchise
fees exceeding 5% of the system's gross revenue, cannot dictate the particular
technology used by the system, and cannot specify video programming, other than
identifying broad categories of programming, that must be carried on the
systems.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchise
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for consent. Historically,
franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of their franchises. However, there
can be no assurance that renewal will be granted or that renewals will be made
on similar terms and conditions.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of state governmental agencies.
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 15,065 homes as of December 31, 1997. 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
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
10
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, 1997, is
as follows:
Limited Partners: 973
General Partners: 1
(c) During 1997, 1996 and 1995, the Partnership made no cash
distributions.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS:
Revenue $ 4,665,100 $ 4,499,588 $ 3,529,252 $ 2,030,906 $ 1,649,839
Operating income (loss) 261,615 333,139 46,771 (307,224) (348,592)
Gain (loss) on sale of
assets 0 0 (11,627) (23,378) 0
Gain on sale of system 0 0 3,391,978 0 0
Net income (loss) (682,930) (705,502) 2,669,199 (705,411) (610,328)
Net income (loss) per
limited partner unit
(weighted average) (35) (37) 138 (36) (32)
Cumulative tax losses
per limited partner
unit (520) (470) (398) (520) (500)
December 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Total assets $ 13,826,582 $ 15,093,913 $ 9,682,978 $ 12,532,350 $ 5,991,946
Notes payable 10,925,000 11,375,000 5,618,000 11,209,977 4,224,000
Total liabilities 11,754,610 12,339,011 6,222,574 11,728,645 4,482,830
General partner's
deficit (59,498) (52,669) (45,614) (72,306) (65,252)
Limited partner's
capital 2,131,470 2,807,571 3,506,018 876,011 1,574,368
Distribution per
limited partner unit 0 0 0 0 0
Cumulative distributions
per limited partner unit 0 0 0 0 0
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 AND 1996
Total revenue reached $4,665,100 for the year ended December 31, 1997,
representing an increase of approximately 4% over 1996. This increase is
primarily attributable to rate increases during 1997. Of the 1997 revenue,
$3,528,474 (76%) is derived from subscriptions to basic services, $435,642 (9%)
from subscriptions to premium services, $139,221 (3%) from subscriptions to tier
services, $124,966 (3%) from installation charges, $36,843 (1%) from service
maintenance revenue, and $399,954 (8%) from other sources.
The following table displays historical average rate information for
various services offered by the Partnership's systems (amounts per subscriber
per month):
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Basic Rate $ 23.65 $ 22.85 $ 20.75 $ 19.80 $ 19.60
Tier Rate 7.20 6.20 4.60 3.50 3.25
HBO Rate 11.00 9.70 11.25 11.35 11.35
Cinemax Rate 8.00 7.80 9.00 9.10 9.10
Showtime Rate 6.00 9.30 -- 10.45 10.45
Disney Rate 8.50 8.20 9.00 9.40 9.40
Additional
Outlet Rate -- -- -- -- --
Service
Contract Rate 2.15 2.15 2.45 2.65 2.65
Operating expenses totaled $505,658 for the year ended December 31,
1997, representing an increase of approximately 3% over 1996. Increases in
salary and benefit costs contributed to the overall increase in operating
expenses. Salary and benefit costs are the major component of operating
expenses. Employee wages are reviewed annually and, in most cases, increased
based on cost of living adjustments and other factors. Therefore, Management
expects operating expenses to increase in the future.
General and administrative expenses totaled $1,143,911 for the year
ended December 31, 1997, representing an increase of approximately 5% over 1996.
This increase is due to increased copyright fees, insurance and utilities as
well as revenue related expenses, such as management fees.
Programming expenses totaled $1,133,964 for the year ended December 31,
1997, representing an increase of approximately 13% over 1996. This increase is
due to increased costs charged by various program suppliers and increased salary
and commission expense resulting from additional advertising employees in the
Swainsboro, GA system. As programming costs are based on the number of
subscribers served, future subscriber increases will cause the trend of
programming expense increases to continue. In addition, rate increases from
program suppliers, as well as new fees due to the launch of additional channels,
will contribute to the trend of increased programming costs.
Depreciation and amortization expense increased from $1,583,850 in 1996
to $1,619,952 in 1997 (approximately 2%). This is primarily due to depreciation
and amortization on plant, equipment and intangible assets acquired during 1997.
Interest expense decreased from $1,048,491 in 1996 to $965,873 in 1997
(approximately 8%). The Partnership's average bank debt balance decreased from
approximately $11,525,000 in 1996 to
12
$11,150,000 in 1997, due to principal payments made in 1997. In addition, the
Partnership's effective interest rate decreased from 8.87% in 1996 to 8.38% in
1997.
In 1997, the Partnership generated a net loss of $682,408. 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, 1997.
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.
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.
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 acquisition of the Swainsboro, GA system. In
addition, the Partnership's effective interest rate decreased from 9.55% in 1995
to 8.87% in 1996.
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
13
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 eliminates all rate regulation on CPST's of small
cable systems, defined by the 1996 Act as systems serving fewer than 50,000
subscribers owned by operators serving fewer than 1% of all subscribers in the
United States (approximately 600,000 subscribers). All of the Partnership's
cable systems qualify as small cable systems. Many of the changes called for by
the 1996 Act will not take effect until the FCC issues new regulations, a
process that could take from several months to a few years depending on the
complexity of the required changes and the statutory time limits. Because of
this, the full impact of the 1996 Act on the Partnership's operations cannot be
determined at this time.
As of the date of this filing, 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 1997, 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 1997, cash generated from monthly
billings was sufficient to meet the Partnership's needs for working capital,
capital expenditures (excluding acquisitions) and debt service. Management
estimates for 1998 that cash generated from monthly subscriber billings is
sufficient to meet the Partnership's working capital needs, as well as meeting
the debt service obligations of its bank loan as amended.
As of the date of this filing, the Partnership's term loan balance was
$10,925,000. Certain fixed rate agreements in effect as of September 30, 1997
expired during the fourth quarter of 1997, and the Partnership entered into new
fixed rate agreements. Currently, the interest rates on the credit facility are
as follows: $8,100,000 fixed at 8.74% under the terms of a swap agreement with
the Partnership's lender, expiring December 31, 2000; and $2,500,000 at LIBOR
based rate of 8.7188% expiring July 12, 1998 and $200,000 at LIBOR based rate of
8.9063% expiring March 31, 1998. The balance of $125,000 bears interest at the
prime rate plus 1.00% (currently 9.5%). The above rates include a margin paid to
the lender based on overall leverage and may increase or decrease as the
Partnership's overall leverage fluctuates.
Under the terms of the loan agreement, the Partnership has agreed to
restrictive covenants which require the maintenance of certain ratios, including
a Funded Debt to Cash Flow Ratio of 5.00 to 1 and a Cash flow to Debt Service
Ratio of 1.25 to 1, a limitation on the maximum amount of capital expenditures
of $726,000, among other restrictions. The General Partner submits quarterly
debt compliance reports to the Partnership's creditor under this agreement. At
December 31, 1997, the Partnership had exceeded its capital expenditure
limitation and was out of compliance on its Funded Debt to Cash Flow Ratio,
however an appropriate waiver has been obtained from the Partnership's creditor.
Subsequent to December 31, 1997, the Partnership's lender approved an
amendment to the loan agreement. The amendment provides for a one year extension
of maturity to December 31, 2001, reduces the quarterly principal payments which
commence June 30, 1998, reduces the interest rates charged which vary based on
certain financial covenants, and increases the maximum allowable ratio of Funded
Debt to Cash Flow, among other things.
14
1996 Act, the Partnership does not expect the future rate of inflation to have a
material adverse impact on operations.
CAPITAL EXPENDITURES
During 1997, the Partnership incurred approximately $740,000 in capital
expenditures. These expenditures included computer upgrades, advertising
insertion equipment and line extensions in the LaConner, WA system. Capital
expenditures in the Aliceville, AL system included computer upgrades, a
continued fiber interconnect of two systems, new headend equipment, channel
additions and line extensions. The Swainsboro, GA system had capital
expenditures related to system mapping, test equipment upgrades, channel
additions and line extensions.
Management estimates that the Partnership will spend approximately
$540,000 on capital expenditures in 1998. These expenditures include a
continuing system upgrade to 400 MHz, and a tier channel move for the LaConner,
WA system. In the Aliceville, AL system, the capital expenditures include the
initial phases of a system upgrade to 450 MHz, a vehicle replacement and an
office remodel. In the Swainsboro, GA system, capital expenditures include the
construction of a fiber backbone project, a vehicle replacement, channel
additions and various line extensions.
YEAR 2000 ISSUES
The efficient operation of the Partnership's business is dependent in
part on its computer software programs and operating systems (collectively,
Programs and Systems). These Program and Systems are used in several key areas
of the Partnership's business, including subscriber billing and collections and
financial reporting. The Managing General Partner has evaluated the Programs and
Systems utilized in the conduct of the Partnership's business for the purpose of
identifying year 2000 compliance problems. Failure to remedy these issues could
impact the ability of the Partnership to timely bill its subscribers for service
provided and properly report its financial condition and results of operations
which could have a material impact on its liquidity and capital resources.
The Programs and Systems utilized in subscriber billing and collections
has been modified to address year 2000 compliance issues. These modifications
are currently in the process of being installed in the Partnership's various
billing sites. The Partnership expects this implementation to be completed by
the end of 1998. The Managing General Partner is currently in the process of
replacing Programs and Systems related to financial reporting which will resolve
year 2000 compliance issues and is expected to be completed by the end of 1998.
The aggregate cost to the Partnership to address year 2000 compliance issues is
not expected to be material to its results of operations, liquidity and capital
resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended
December 31, 1997, 1996 and 1995 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.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The Managing General
Partner of the Partnership is Northland Communications Corporation, a Washington
corporation.
Certain information regarding the officers and directors of Northland
and relating to the Partnership is set forth below.
JOHN S. WHETZELL (AGE 56). Mr. Whetzell is the founder of Northland
Communications Corporation and has been President since its inception and a
Director since March 1982. Mr. Whetzell became Chairman of the Board of
Directors in December 1984. He also serves as President and Chairman of the
Board of Northland Telecommunications Corporation and each of its subsidiaries.
He has been involved with the cable television industry for over 23 years and
currently serves as a director on the board of the Cable Telecommunications
Association, a national cable television association. Between March 1979 and
February 1982 he was in charge of the Ernst & Whinney national cable television
consulting services. Mr. Whetzell first became involved in the cable television
industry when he served as the Chief Economist of the Cable Television Bureau of
the Federal Communications Commission (FCC) from May 1974 to February 1979. He
provided economic studies to support the deregulation of cable television both
in federal and state arenas. He participated in the formulation of accounting
standards for the industry and assisted the FCC in negotiating and developing
the pole attachment rate formula for cable television. His undergraduate degree
is in economics from George Washington University, and he has an MBA degree from
New York University.
JOHN E. IVERSON (AGE 61). 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 35 years. Mr. Iverson is
the past president and a Trustee of the Pacific Northwest Ballet Association.
Mr. Iverson has a Juris Doctor degree from the University of Washington.
RICHARD I. CLARK (AGE 40). 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
16
July 1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the
area of providing cable television consultation services and has been involved
with the cable television industry for nearly 19 years. He has directed cable
television feasibility studies and on-site market surveys. Mr. Clark has
assisted in the design and maintenance of financial and budget computer
programs, and he has prepared documents for major cable television companies in
franchising and budgeting projects through the application of these programs. In
1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a
Bachelor of Arts degree in accounting.
JAMES E. HANLON (AGE 64). 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 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 43). 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 40). 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 52). Mr. Dyste has served as Vice President-
Technical Services of Northland Telecommunications Corporation and each of its
subsidiaries since April 1987. Mr. Dyste is responsible for planning and
advising all Northland cable systems with regard to technical performance as
well as system upgrades and rebuilds. He is a past president and current member
of the Mount Rainier Chapter of the Society of Cable Television Engineers, Inc.
Mr. Dyste joined Northland in 1986 as an engineer and served as Operations
Consultant to Northland
17
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 54). Mr. Johnson has served as Divisional Vice
President for Northland's Statesboro, Georgia regional office since March 1994.
He is responsible for the management of systems serving subscribers in Georgia,
Mississippi, North Carolina and South Carolina. Prior to his association with
Northland he served as Regional Manager for Warner Communications, managing four
cable systems in Georgia from 1968 to 1973. Mr. Johnson has also served as
President of Sunbelt Finance Corporation and was employed as a System Manager
for Statesboro CATV when Northland purchased the system in 1986. Mr. Johnson has
been involved in the cable television industry for over 29 years and is a
current member of the Society of Cable Television Engineers. He is a graduate of
Swainsboro Technical Institute and has attended numerous training seminars,
including courses sponsored by Jerrold Electronics, Scientific Atlanta, The
Society of Cable Television Engineers and CATA.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation
was paid to the General Partner and affiliates during 1997 as indicated in Note
3 to the Notes to Financial Statements--December 31, 1997 (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, 1997 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.
18
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.
Northland Cable Services Corporation ("NCSC"), an affiliate of
Northland, provides software installation and billing services to the
Partnership's Systems.
Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides the
production and development of video commercial advertisements and advertising
sales support.
Northland Cable News, Inc.("NCN"), an affiliate of Northland, provides
programming to the Partnership's systems.
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, 1997 for
disclosures regarding transactions with the General Partner and affiliates.
The following schedule summarizes these transactions:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Partnership management fees $ 233,249 $ 224,979 $ 175,475
Operating expense reimbursements 275,758 257,499 225,798
Software installation and
billing service fees to NCSC 35,791 57,299 27,336
Reimbursements (to)/from
Affiliates (47,598) (45,881) (12,394)
Local Advertising Services 27,936 22,092 5,294
Local Programming Services 22,247 -- --
Amounts due to (from) General Partner
and affiliates at year end 34,201 265,478 69,933
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.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
SEQUENTIALLY
NUMBERED
PAGE
------------
(1) FINANCIAL STATEMENTS:
Report of Independent Public Accountants.......................................____
Balance Sheets--December 31, 1997 and 1996.....................................____
Statements of Operations for the years
ended December 31, 1997, 1996 and 1995.........................................____
Statements of Changes in Partners' Capital
(Deficit) for the years ended December 31,
1997, 1996 and 1995............................................................____
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.........................................____
Notes to Financial Statements--December 31,
1997...........................................................................____
(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)
20
10.9 Stayton Franchise(1)
10.10 Mill City Franchise(1)
10.11 Detroit Franchise(1)
10.12 Idanha Franchise(1)
10.13 Lyons Franchise(1)
10.14 Marion County Franchise(1)
10.15 Turner Franchise(1)
10.19 Amendment dated August 4, 1989 to Revolving Credit and Term Loan Agreement with
Security Pacific Bank of Washington, N.A.(3)
10.20 Revolving Credit and Term Loan Agreement with National Westminster
Bank USA dated as of December 20, 1990(4)
10.21 Note in the principal amount of up to $7,000,000 to the order of National Westminster
Bank USA(4)
10.22 Borrower Assignment with National Westminster Bank USA(4)
10.23 Borrower Security Agreement with National Westminster Bank USA(4)
10.24 Agreement of Purchase and Sale with TCI Cablevision of Nevada, Inc.(4)
10.25 First Amendment dated May 28, 1992 to Revolving Credit and Term Loan Agreement with
National Westminster Bank USA.(5)
10.26 Franchise Agreement with the City of Turner, OR effective March 21, 1991(5)
10.27 Franchise Agreement with the City of Lyons, OR effective April 8, 1991(5)
10.28 Franchise Agreement with the City of Idanha, OR effective November 3, 1992(5)
10.29 Agreement of Purchase with Alabama Television Cable Company(6)
10.30 Credit Agreement between Northland Cable Properties Eight Limited Partnership and U.S.
Bank of Washington, National Association and West One Bank, Washington dated November
10, 1994(6)
10.31 Franchise Agreement with City of Aliceville, AL - Assignment and Assumption Agreement
dated July 26, 1994.(7)
10.32 Franchise Agreement with City of Carrollton, AL - Assignment and Assumption Agreement
dated August 16, 1994.(7)
10.33 Franchise Agreement with City of Eutaw, AL - Assignment and Assumption Agreement dated
July 26, 1994.(7)
21
10.34 Franchise Agreement with City of Gordo, AL - Assignment and Assumption Agreement dated
August 1, 1994.(7)
10.35 Franchise Agreement with Greene County, AL - Assignment and Assumption Agreement dated
November 10, 1994.(7)
10.36 Franchise Agreement with Town of Kennedy, AL - Assignment and Assumption Agreement
dated August 15, 1994.(7)
10.37 Franchise Agreement with Lamar County, AL - Assignment and Assumption Agreement dated
August 8, 1994.(7)
10.38 Franchise Agreement with City of Marion, AL - Assignment and Assumption Agreement
dated August 1, 1994.(7)
10.39 Franchise Agreement with Town of Millport, AL - Assignment and Assumption Agreement
dated August 18, 1994.(7)
10.40 Franchise Agreement with Pickens County, AL - Assignment and Assumption Agreement
dated July 26, 1994.(7)
10.41 Franchise Agreement with Town of Pickensville, AL - Assignment and Assumption
Agreement dated August 2, 1994.(7)
10.42 Franchise Agreement with City of Reform, AL - Assignment and Assumption Agreement
dated August 1, 1994.(7)
10.43 Asset Purchase and Sale Agreement between SCS Communications and Security, Inc. and
Northland Cable Properties Eight Limited Partnership dated April 14, 1995.(8)
10.44 Asset Purchase Agreement between Northland Cable Properties Eight Limited Partnership
and TCI Cablevision of Georgia, Inc. dated November 17, 1995.(9)
- ----------
(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.
22
(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, 1997.
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, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
26
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,
1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN, LLP
Seattle, Washington,
February 13, 1998
27
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
------------ ------------
CASH $ 463,021 $ 844,700
ACCOUNTS RECEIVABLE 101,772 105,377
PREPAID EXPENSES 62,453 62,591
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 10,825,112 10,087,069
Less- Accumulated depreciation (3,552,644) (2,544,227)
------------ ------------
7,272,468 7,542,842
Franchise agreements (net of accumulated amortization
of $1,730,425 in 1997 and $1,282,646 in 1996) 5,474,557 5,922,337
Organization costs (net of accumulated amortization
of $63,826 in 1997 and $40,686 in 1996) 51,877 75,018
Loan fees and other intangibles (net of accumulated
amortization of $353,783 in 1997 and $270,754 in 1996) 276,016 412,670
Goodwill (net of accumulated amortization of $33,991
in 1997 and $30,031 in 1996) 124,418 128,378
------------ ------------
Total investment in cable television
properties 13,199,336 14,081,245
------------ ------------
Total assets $ 13,826,582 $ 15,093,913
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES:
Accounts payable and accrued expenses $ 625,573 $ 579,822
Due to General Partner and affiliates 34,201 265,478
Deposits 12,200 17,800
Subscriber prepayments 157,636 100,911
Term loan 10,925,000 11,375,000
------------ ------------
Total liabilities 11,754,610 12,339,011
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' CAPITAL (DEFICIT):
General Partner-
Contributed capital 1,000 1,000
Accumulated deficit (60,498) (53,669)
------------ ------------
(59,498) (52,669)
------------ ------------
Limited partners-
Contributed capital, net -
19,087 units 8,120,820 8,120,820
Accumulated deficit (5,989,350) (5,313,249)
------------ ------------
2,131,470 2,807,571
------------ ------------
Total liabilities and partners' capital
(deficit) $ 13,826,582 $ 15,093,913
============ ============
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, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
REVENUE $ 4,665,100 $ 4,499,588 $ 3,529,252
------------ ------------ ------------
EXPENSES:
Operating (including $52,697, $49,082 and $30,458 paid to
affiliates in 1997, 1996 and 1995, respectively) 505,658 488,660 425,346
General and administrative (including $489,975, $479,614
and $369,851 paid to affiliates in 1997, 1996
and 1995, respectively) 1,143,911 1,093,088 923,079
Programming (including $40,219 and $32,622, net, paid to
affiliates in 1997 and 1996, respectively) 1,133,964 1,000,851 761,428
Depreciation and amortization 1,619,952 1,583,850 1,372,628
------------ ------------ ------------
4,403,485 4,166,449 3,482,481
------------ ------------ ------------
Operating income 261,615 333,139 46,771
OTHER INCOME (EXPENSE):
Interest income and other 21,328 9,850 17,290
Interest expense (965,873) (1,048,491) (775,213)
Gain on sale of system -- -- 3,391,978
Loss on disposal of assets -- -- (11,627)
------------ ------------ ------------
Net (loss) income $ (682,930) $ (705,502) $ 2,669,199
============ ============ ============
ALLOCATION OF NET (LOSS) INCOME:
General Partner $ (6,829) $ (7,055) $ 26,692
============ ============ ============
Limited partners $ (676,101) $ (698,447) $ 2,642,507
============ ============ ============
NET (LOSS) INCOME PER LIMITED PARTNERSHIP UNIT $ (35) $ (37) $ 138
============ ============ ============
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, 1997, 1996 AND 1995
General Limited
Partner Partners Total
------------ ------------ ------------
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
Net loss (6,829) (676,101) (682,930)
------------ ------------ ------------
BALANCE, December 31, 1997 $ (59,498) $ 2,131,470 $ 2,071,972
============ ============ ============
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, 1997, 1996 AND 1995
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (682,930) $ (705,502) $ 2,669,199
Adjustments to reconcile net (loss) income to net
cash provided by operating activities-
Depreciation and amortization expense 1,619,952 1,583,850 1,372,628
Gain on sale of system -- -- (3,391,978)
Loss on disposal of assets -- -- 11,627
(Increase) decrease in operating assets:
Accounts receivable 3,605 (14,576) (7,526)
Prepaid expenses 138 (13,615) (19,197)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 45,751 171,732 (130,118)
Due to General Partner and affiliates (231,277) 195,545 16,397
Deposits (5,600) (3,950) (5,982)
Subscriber prepayments 56,725 (3,890) (2,579)
------------ ------------ ------------
Net cash provided by operating activities 806,364 1,209,594 512,471
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of cable system -- -- 5,765,769
Acquisition of cable system -- (6,083,676) (606,383)
Purchase of property and equipment, net (738,043) (319,942) (563,377)
Increase in accrued property and equipment -- -- 208,188
------------ ------------ ------------
Net cash (used in) provided by investing activities (738,043) (6,403,618) 4,804,197
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable -- 6,057,000 --
Principal payments on note payable (450,000) (300,000) (4,982,000)
Loan fees -- (98,993) (277,002)
Repurchase of limited partnership units -- -- (12,500)
------------ ------------ ------------
Net cash (used in) provided by financing activities (450,000) 5,658,007 (5,271,502)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH (381,679) 463,983 45,166
CASH, beginning of year 844,700 380,717 335,551
------------ ------------ ------------
CASH, end of year $ 463,021 $ 844,700 $ 380,717
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 986,979 $ 857,217 $ 811,274
============ ============ ============
The accompanying notes are an integral part of these statements.
31
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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
Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred.
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold improvements 5-20 years
The Partnership periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized.
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocated the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to noncompetition agreements 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
Cable television service revenue is recognized in the month service is provided
to customers. Advance payments on cable services to be rendered are recorded as
subscriber prepayments. Revenues resulting from the sale of local spot
advertising are recognized when the related advertisements or commercials appear
before the public. Local spot advertising revenues earned were $154,578,
$163,656, and $69,869 in 1997, 1996 and 1995, respectively.
Derivatives
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. As discussed in Note 6, the Partnership enters
into interest rate swap agreements with major banks or financial institutions
(typically its bank) in which the Partnership pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
Gains or losses associated
33
-3-
with changes in fair values of these swaps and the underlying notional principal
amounts are deferred and recognized against interest expense over the term of
the agreements in the Partnership's Statements of Operations.
The Partnership is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. The Partnership deals only
with highly rated counterparties, and usually only its bank. The notional
amounts of these interest rate swaps is $10,600,000 at December 31, 1997. These
notional amounts do not represent amounts exchanged by the parties and, thus,
are not a measure of exposure to the Partnership through its use of derivatives.
The exposure in a derivative contract is the net difference between what each
party is required to pay based on the contractual terms against the notional
amount of the contract, which in the Partnership's case are interest rates. The
use of derivatives does not have a significant effect on the Partnership's
result of operations or its financial position.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. TRANSACTIONS WITH 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 $233,249, $224,979 and $175,475 for 1997, 1996 and 1995,
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, 1997, the Partnership
has repurchased $12,500 of limited partnership units (50 units at $250 per
unit).
34
-4-
Reimbursements
The General Partner provides or causes to be provided certain centralized
services to the Partnership and other affiliated entities. The General Partner
is entitled to reimbursement from the Partnership for various expenses incurred
by it or its affiliates on behalf of the Partnership allocable to its management
of the Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and
licenses, headquarters supplies and expenses, pay television expenses, equipment
and vehicle charges, operating salaries and expenses, administrative salaries
and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by affiliates
in rendering the services. The costs of certain services are charged directly to
the Partnership, based upon the personnel time spent by the employees rendering
the service. The cost of other services is allocated to the Partnership and
affiliates based upon relative size and revenue. Management believes that the
methods used to allocate services to the Partnership are reasonable. Amounts
charged to the Partnership by the General Partner for these services were
$275,758, $257,499 and $225,798 for the years ended December 31, 1997, 1996 and
1995, respectively.
In 1997, 1996 and 1995, the Partnership was charged a maintenance fee for
billing system support provided by an affiliate, amounting to $35,791, $57,299
and $27,336, respectively.
The Partnership has entered into operating management agreements with certain
affiliates managed by the General Partner. Under the terms of these agreements,
the Partnership or an affiliate serves as the executive managing agent for
certain cable television systems and is reimbursed for certain operating and
administrative expenses. The Partnership paid $47,598, $45,881 and $12,394 under
the terms of these agreements during 1997, 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 $27,936, $22,092 and
$5,294 in 1997, 1996 and 1995, respectively, for these services.
In 1997, the Partnership began paying monthly program license fees to Northland
Cable News, Inc. (NCN), an affiliate of the General Partner, for the rights to
distribute programming developed and produced by NCN. Total license fees charged
by NCN during 1997 were $22,247.
Due to General Partner and Affiliates
December 31,
----------------------
1997 1996
-------- --------
Management fees $ -- $224,979
Reimbursable operating costs 31,532 24,009
Other amounts due to affiliates, net 2,669 16,490
-------- --------
$ 34,201 $265,478
======== ========
35
-5-
4. PROPERTY AND EQUIPMENT:
December 31,
------------------------------
1997 1996
------------ ------------
Land and buildings $ 205,171 $ 205,171
Distribution plant 9,593,328 9,353,279
Other equipment 517,130 496,022
Construction in progress 509,483 32,597
------------ ------------
10,825,112 10,087,069
============ ============
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
December 31,
----------------------
1997 1996
-------- --------
Interest payable $203,535 $224,641
Programmer license fees 111,345 158,591
Other 310,693 196,590
-------- --------
$625,573 $579,822
======== ========
6. TERM LOAN:
December 31,
--------------------------
1997 1996
----------- -----------
Termloan, 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; currently 8.38% (weighted
average). Graduated principal payments plus interest are due quarterly until
maturity on December 31, 2001 $10,925,000 $11,375,000
=========== ===========
Beginning March 31, 1998, scheduled principal payments are required. Prior to
this date, the outstanding balance cannot exceed specified levels (currently
$10,925,000).
Annual maturities of notes payable after December 31, 1997 are as follows:
1998 $ 1,000,000
1999 1,200,000
2000 1,400,000
2001 7,325,000
-----------
$10,925,000
===========
36
-6-
Under the terms of the loan agreement, the Partnership has agreed to restrictive
covenants which require the maintenance of certain ratios, including a Funded
Debt to Cash Flow Ratio of 5.00 to 1 and a Cash Flow to Debt Service Ratio of
1.25 to 1, a limitation on the maximum amount of capital expenditures of
$726,000, among other restrictions. The General Partner submits quarterly debt
compliance reports to the Partnership's creditor under this agreement. At
December 31, 1997, the Partnership had exceeded its capital expenditure
limitation and was out of compliance on its Funded Debt to Cash Flow Ratio,
however an appropriate waiver has been obtained from the Partnership's creditor.
The Partnership has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates. At December 31, 1997, 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, 1997 was 3.00%). The maturity date of the swap is January 11, 1998.
At December 31, 1997, the counterparty would have been required to pay the
Partnership approximately $1,245 to settle this agreement based on fair value
estimates received from financial institutions.
On January 12, 1998 the Partnership entered into an interest rate swap
agreement, notional amount of $8,100,000, to reduce the impact of changes in
interest rates. This agreement effectively changes the Partnership's interest
rate exposure to a fixed rate of 5.74% plus an applicable margin based on
certain financial covenants (the margin at February 13, 1998, was 3.0%). The
maturity date of the swap is December 31, 2000.
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 $(959,672),
$(1,370,756) and $2,335,000 in 1997, 1996 and 1995, respectively, and is
different from that reported in the statements of operations due to the
difference in depreciation expense allowed for tax purposes and the 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 $118,129, $117,515 and $80,138 in 1997, 1996
and 1995, respectively. Minimum lease payments through the end of the lease
terms are as follows:
1998 $ 3,300
1999 3,300
2000 3,300
2001 3,300
2002 3,300
Thereafter 42,800
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$59,300
=======
Self-Insurance
The Partnership began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, the Partnership began making quarterly contributions into an
insurance fund maintained by an affiliate which covers all Northland entities
and would defray a portion of any loss should the Partnership's losses exceed
the fund's balance, the Partnership would absorb any such loss. If the
Partnership were to sustain a material uninsured loss, such reserves could be
insufficient to fully fund such a loss. The resulting reduction in cash flow
caused by interrupted service, together with the capital cost of replacing such
equipment and physical plant, could have a material adverse effect on the
Partnership, its financial condition, prospects and debt service ability.
Amounts paid to the affiliate, which maintains the fund for the Partnership and
its affiliates, are expensed as incurred and are included in the Statements of
Operations. To the extent a loss has been incurred related to risks that are
self-insured, the Partnership records an expense and an associated liability for
the amount of the loss, net of any amounts to be drawn from the fund. For 1997,
the Partnership made payments of $7,346 to the fund. As of December 31, 1997,
the fund had a balance of $129,700.
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Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted. This act dramatically changed federal telecommunications laws and the
future competitiveness of the industry. Many of the changes called for by the
1996 Act will not take effect until the Federal Communications Commission (FCC)
issues new regulations which, in some cases, may not be completed for a few
years. Because of this, the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Partnership's operations, follows.
Cable Programming Service Tier Regulation. FCC regulation of rates for cable
programming service tiers has been eliminated for small cable systems owned by
small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000). The Partnership qualifies as a small cable
company and all of the Partnership's cable systems qualify as small cable
systems. Basic tier rates remain subject to regulations by the local franchising
authority under most circumstances until effective competition exists. The 1996
Act expands the definition of effective competition to include the offering of
video programming services directly to subscribers in a franchised area served
by a local telephone exchange carrier, its affiliates or any multichannel video
programming distributor which uses the facilities of the local exchange carrier.
The FCC has not yet determined the penetration criteria that will trigger the
presence of effective competition under these circumstances.
Telephone Companies. The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act; 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:
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.
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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.