1 FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (As last amended in Rel. No. 34-29354, eff. 7-1-91) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended DECEMBER 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the transition period from _______ to ________ Commission file number 0-18307 NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP ------------------------------------------------------ (Exact name of registrant as specified in its charter) STATE OF WASHINGTON 91-1423516 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3600 WASHINGTON MUTUAL TOWER 1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101 ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 621-1351 Securities registered pursuant to Section 12(b) of the Act: Title of each reviewed class Name of each exchange on which registered ---------------------------- ----------------------------------------- (NONE) (NONE) Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST ------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] DOCUMENTS INCORPORATED BY REFERENCE ------------------------------------- (Partially Incorporated into Part IV) (1) Form S-1 Registration Statement declared effective on March 16, 1989 (No. 33-25892). 2 (2) Form 10-K Annual Reports for fiscal years ended December 31, 1989, December 31, 1990, December 31, 1992 and December 31, 1994, respectively. (3) Form 10-Q Quarterly Report for period ended June 30, 1989 and March 31, 1995. (4) Form 8-K dated November 11, 1994. (5) Form 8-K date January 5, 1996. This filing contains _______ pages. Exhibits Index appears on page ______. Financial Statements/Schedules Index appears on page ______. 2 3 Cautionary statement for purposes of the "Safe Harbor" provisions of the Private Litigation Reform Act of 1995. Statements contained or incorporated by reference in this document that are not based on historical fact are "forward-looking statements" within the meaning of the Private Securities Reform Act of 1995. Forward-looking statements may be identified by use of forward-looking terminology such as "believe", "intends", "may", "will", "expect", "estimate", "anticipate", "continue", or similar terms, variations of those terms or the negative of those terms. PART I ITEM 1. BUSINESS Northland Cable Properties Eight Limited Partnership (the "Partnership") is a Washington limited partnership consisting of one general partner and approximately 975 limited partners as of December 31, 1998. Northland Communications Corporation, a Washington corporation, is the Managing General Partner of the Partnership (referred to herein as "Northland" or the "Managing General Partner"). Northland was formed in March 1981 and is principally involved in the ownership and management of cable television systems. Northland currently manages the operations and is the general partner for cable television systems owned by 4 limited partnerships. Northland is also the parent company of Northland Cable Properties, Inc. which was formed in February 1995 and is principally involved in direct ownership of cable television systems and is the sole member and manager of Northland Cable Ventures, LLC. Northland is a subsidiary of Northland Telecommunications Corporation ("NTC"). Other subsidiaries, direct and indirect, of NTC include: NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and principally involved in the direct ownership of cable television systems. Sole shareholder of Northland Cable News, Inc. NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally involved in the production and development of local news, sports and informational programming. NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and principally involved in the development and production of computer software used in billing and financial recordkeeping for Northland-affiliated cable systems. Sole shareholder of Cable Ad-Concepts, Inc. CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally involved in the sale, development and production of video commercial advertisements that are cablecast on Northland-affiliated cable systems. NORTHLAND MEDIA, INC. - formed in April 1995 as a holding company. Sole shareholder of the following two entities: STATESBORO MEDIA, INC. - formed in April 1995 and principally involved in operating an AM radio station serving the community of Statesboro, Georgia and surrounding areas. CORSICANA MEDIA, INC. - purchased in September 1998 from an affiliate and principally involved in operating an AM radio station serving the community of Corsicana, Texas and surrounding areas. The Partnership was formed on September 21, 1988 and began operations in 1989 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, 1998, the total number of basic subscribers served by the Systems was 12,158, and the Partnership's penetration rate (basic subscribers as a percentage of homes passed) was approximately 81%. The Partnership's properties are located in rural areas which, to some extent, do 3 4 not offer consistently acceptable off-air network signals. This factor, combined with the existence of fewer entertainment alternatives than in large markets contributes to a larger proportion of the population subscribing to cable television (higher penetration). The Partnership has 17 non-exclusive franchises to operate the Systems. These franchises, which will expire at various dates through the year 2019 (with one franchise extending to 2044), have been granted by local and county authorities in the areas in which the Systems operate. Annual franchise fees are paid to the granting authorities. These fees vary between 2% and 5% and are generally based on the respective gross revenues of the Systems in a particular community. The franchises may be terminated for failure to comply with their respective conditions. The Partnership serves the communities and surrounding areas of LaConner, Washington, Aliceville, Alabama and Swainsboro, Georgia. The following is a description of these areas: LaConner, WA: The LaConner system serves communities within three counties in northwestern Washington along Puget Sound. LaConner was predominately a fishing and farming community when founded in the late 1800's and temporarily became a major trading port. Today, LaConner has become a popular tourist area, with surrounding landscapes of pastoral farms and tulip fields. Its main street, featuring wooden decks and courtyards, runs along the Swinomish slough. The Swinomish Indian Reservation is located on the outskirts of LaConner. Certain information regarding the LaConner, WA System as of December 31, 1998 is as follows: Basic Subscribers 2,135 Tier Subscribers 1,165 Premium Subscribers 511 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, 1998 is as follows: Basic Subscribers 6,877 Premium Subscribers 2,583 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, 1998 is as follows: Basic Subscribers 3,146 Tier Subscribers 749 Premium Subscribers 1,894 Estimated Homes Passed 3,900 The Partnership had 18 employees as of December 31, 1998. Management of these systems is handled through offices located in the towns of LaConner, Washington, Aliceville, Alabama and Swainsboro, Georgia. Pursuant to the Agreement of Limited Partnership, the Partnership reimburses the General Partner for time spent by the General Partner's accounting staff on Partnership accounting and bookkeeping matters. (See Item 13(a) below.) The Partnership's cable television business is not considered seasonal. The business of the Partnership is not dependent upon a single customer or a few customers, the loss of any one or more of which would have a material adverse effect on its business. No customer accounts for 10% or more of revenues. No material portion of the Partnership's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental unit, except that franchise agreements may be terminated or modified by the franchising authorities as noted above. During the last year, the Partnership did not engage in any research and development activities. Partnership revenues are derived primarily from monthly payments received from cable television subscribers. Subscribers are divided into three categories: basic subscribers, tier subscribers and premium subscribers. "Basic subscribers" are households that subscribe to the basic level of service, which generally provides access to the three major television networks (ABC, NBC and CBS), a few independent local stations, PBS (the Public Broadcasting System) and certain satellite programming services, such as ESPN, 4 5 CNN or The Discovery Channel. "Tier subscribers" are households that subscribe to an additional level of certain satellite programming services the content of which varies from system to system. "Premium subscribers" are households that subscribe to one or more "pay channels" in addition to the basic service. These pay channels include such services as "Showtime", "Home Box Office", "Cinemax", "Disney" or "The Movie Channel". COMPETITION Cable Television systems currently experience competition from several sources. BROADCAST TELEVISION Cable television systems have traditionally competed with broadcast television, which consists of television signals that the viewer is able to receive directly on his television without charge using an "off-air" antenna. The extent of such competition is dependent in part upon the quality and quantity of signals available by such antenna reception as compared to the services provided by the local cable system. Accordingly, it has generally been less difficult for cable operators to obtain higher penetration rates in rural areas where signals available off-air are limited, than in metropolitan areas where numerous, high quality off-air signals are often available without the aid of cable television systems. OVERBUILDS Cable television franchises are not exclusive, so that more than one cable television system may be built in the same area (known as an "overbuild"), with potential loss of revenues to the operator of the original cable television system. Constructing and developing a cable television system is a capital intensive process, and it is often difficult for a new cable system operator to create a marketing edge over the existing system. Generally, an overbuilder would be required to obtain franchises from the local governmental authorities, although in some instances, the overbuilder could be the local government itself. In any case, an overbuilder would be required to obtain programming contracts from entertainment programmers and, in most cases, would have to build a complete cable system, including headends, trunk lines and drops to individual subscribers homes, throughout the franchise areas. Federal cross-ownership restrictions historically limited entry by local telephone companies into the cable television business. The 1996 Telecom Act eliminated this cross-ownership restriction, making it possible for companies with considerable resources to overbuild existing cable operators and enter the business (for a more extensive discussion of The Act, see Regulation and Legislation). Several telephone companies have begun seeking cable television franchises from local governmental authorities and constructing cable television systems. The Partnership cannot predict at this time the extent of telephone company competition that will emerge in areas served by the Partnership's cable television systems. The entry of telephone companies as direct competitors, however, is likely to continue over the next several years and could adversely affect the profitability and market value of the Partnership's systems. The entry of electric utility companies into the cable television business, as now authorized by the 1996 Telecom Act, could have a similar adverse effect. DBS High powered direct-to-home satellites have made possible the wide-scale delivery of programming to individuals throughout the United States using small roof-top or wall-mounted antennas. Several companies began offering direct broadcast satellite ("DBS") service over the last few years and recently announced mergers should strengthen the surviving companies. Companies offering DBS service use video compression technology to increase channel capacity of their systems to 100 or more channels and to provide packages of movies, satellite networks and other program services which are competitive to those of cable television systems. DBS faces technical and legal obstacles to offering its customers popular local broadcast programming. At least one DBS provider, however, is now attempting to do so, and the FCC and Congress are considering proposals that would enhance the ability of DBS companies to provide popular broadcast programming, including broadcast network programming. In addition to emerging high-powered DBS competition, cable television systems face competition from several low-powered providers, whose service requires use of much larger home satellite dishes. The ability of DBS service providers to compete successfully with the cable television industry will depend on, among other factors, the availability of equipment at reasonable prices and the relative attractiveness of the programming options offered by the cable television industry and DBS competitors. PRIVATE CABLE 5 6 Additional competition is provided by private cable television systems, known as Satellite Master Antenna Television ("SMATV"), serving multi-unit dwellings such as condominiums, apartment complexes, and private residential communities. These private cable systems may enter into exclusive agreements with apartment owners and homeowners associations, which may preclude operators of franchised systems from serving residents of such private complexes. Private cable requirements, that do not cross public rights of way are free from the federal, state and local regulatory requirements imposed on franchised cable television operators. MMDS Cable television systems also compete with wireless program distribution services such as multichannel, multipoint distribution service ("MMDS") systems, commonly called wireless cable, which are licensed to serve specific areas. MMDS uses low-power microwave frequencies to transmit television programming over-the-air to paying subscribers. The MMDS industry is less capital intensive than the cable television industry, and it is therefore more practical to construct MMDS systems in areas of lower subscriber penetration. Cable television systems are also in competition in various degrees with other communications and entertainment media, including motion pictures, home video cassette recorders, internet data delivery and internet video delivery. REGULATION AND LEGISLATION The operation of cable television systems is extensively regulated by the FCC, some state governments and most local governments. The Telecommunications Act of 1996 ("1996 Telecom Act") alters the regulatory structure governing the nation's telecommunications providers. It removes barriers to competition in both the cable television market and the local telephone market. Among other things, it also reduces the scope of cable rate regulation. The 1996 Telecom 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, and there have been recent calls to maintain or even tighten cable regulation in the absence of widespread effective competition. This section briefly summarizes key laws and regulations affecting the operation of the Partnership's cable systems and does not purport to describe all present, proposed, or possible laws and regulations affecting the Partnership. 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 essentially requiring either low penetration (less than 30%) by the incumbent cable 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 ("PEG") 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 FCC itself directly administers rate regulation of any cable programming service tiers ("CPST"), which typically contain satellite-delivered programming. Under the 1996 Telecom 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. 6 7 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 carriage. The FCC has modified its rate adjustment regulations to allow for annual rate increases and to minimize previous problems associated with regulatory lag. Operators also have the opportunity 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. SMALL OPERATORS The FCC and Congress have provided various forms of rate relief for smaller cable systems owned by smaller operators. If requisite eligibility criteria are satisfied, a cable operator may be allowed to rely on a vastly simplified cost-of-service rate justification and/or may be allowed to avoid regulation of CPST rates entirely. Under FCC regulations, cable systems serving 15,000 or fewer subscribers, which are owned by or affiliated with a cable company serving in the aggregate no more than 400,000 subscribers, can submit a simplified cost-of-service filing under which the regulated rate (including equipment charges) will be presumed reasonable if it equates to no more than $1.24 per channel. Eligibility for this relief continues if the small cable system is subsequently acquired by a larger cable operator, but is lost when and if the individual system serves in excess of 15,000 subscribers. The 1996 Telecom Act immediately deregulated the CPST rates of cable systems serving communities with fewer than 50,000 subscribers, which are owned by or affiliated with entities serving, in the aggregate, no more than one percent of the nation's cable customers (approximately 617,000) and having no more than $250 million in annual revenues. The Partnership's systems currently qualify for such regulatory relief. The 1996 Telecom Act sunsets FCC regulation of CPST rates for all systems (regardless of size) on March 31, 1999. Certain critics of the cable television industry, however, have called for a delay in the regulatory sunset and some have even urged more rigorous rate regulation, including limits on operators passing through to their customers increased programming costs and bundling together multiple programming services. The 1996 Telecom Act also relaxes existing uniform rate requirements by specifying that uniform rate requirements do not apply where the operator faces "effective competition", and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing still may be made to the FCC. CABLE ENTRY INTO TELECOMMUNICATIONS The 1996 Telecom Act 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 public rights-of-way when cable operators provide telecommunications service. The favorable pole attachment rates afforded cable operators under federal law can be gradually increased by utility companies owning the poles (beginning in 2001) if the operator provides telecommunications service, as well as cable service, over its plant. 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 Telecom Act to facilitate the entry of new telecommunications providers (including cable operators) is the interconnection obligation imposed on all telecommunications carriers. The Eighth Circuit Court of Appeals vacated certain aspects of the FCC's initial interconnection order, but that decision was reversed by the U.S. Supreme court in January 1999. TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION The 1996 Telecom Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable cross-ownership ban. Local exchange carriers ("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. 7 8 Under the 1996 Telecom Act, an LEC (electric utility or other entity) providing video programming to subscribers through wired facilities 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. The Fifth Circuit Court of Appeals recently reversed certain of the FCC's OVS rules, including the FCC's preemption of local franchising. 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 buyouts of co-located LEC systems, and joint ventures between cable operators and LECs in the same market. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition, including a carefully circumscribed "rural exemption". The 1996 Telecom Act also provides the FCC with the limited authority to grant waivers of the buyout prohibition (subject to LFA approval). ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services (including cable television) notwithstanding the Public Utilities Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the FCC for operating authority. Again, because of their resources, electric utilities could be formidable competitors to traditional cable systems. ADDITIONAL OWNERSHIP RESTRICTIONS The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable cross-ownership (including broadcast network/cable restrictions), but leaves in place existing FCC regulations prohibiting local cross-ownership between co-located television stations and cable systems. The 1996 Telecom Act leaves in place existing restrictions on cable cross-ownership with SMATV and MMDS facilities, but lifts those restrictions where the cable operator is subject to effective competition. The FCC permits 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, although the FCC recently expressed an interest in reviewing and reimposing this limit. MUST CARRY/RETRANSMISSION CONSENT The 1992 Cable Act contains broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years between (a)requiring a cable system to carry the station ("must carry") or (b)negotiating for payments of granting permission to the cable operator to carry the station ("retransmission consent"). Less popular stations typically elect "must carry", and more popular stations typically elect "retransmission consent". Must carry requests can dilute the appeal of a cable system's programming offerings and retransmission consent demands may require substantial payments or other concessions. Either option has a potentially adverse affect on the Partnership's business. The burden associated with "must carry" may increase substantially if broadcasters proceed with planned conversion to digital transmission and the FCC determines that cable systems must carry all analog and digital broadcasters in their entirety. A rulemaking is now pending at the FCC regarding the imposition of dual digital and analog must carry. ACCESS CHANNELS 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 the designated channel capacity, but use of commercial leased access channels has been relatively limited to date. ACCESS TO PROGRAMMING 8 9 To spur development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes video programmers affiliated with cable companies from favoring 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. There recently has been increased interest in further restricting the marketing practices of cable programmers, including subjecting programmers who are not affiliated with cable operators to all of the existing program access requirements. In addition, some cable critics have argued that vertically integrated, non-satellite programming (such as certain regional sports networks) which is now exempt from the ban on exclusive programming, should be subjected to this prohibition. INSIDE WIRING The FCC determined that an incumbent cable operator can be required by the owner of a multiple dwelling unit ("MDU") complex to remove, abandon or sell the "home run" wiring it initially provided. In addition, the FCC is reviewing the enforceability of contracts to provide exclusive video service within a MDU complex. The FCC has proposed abrogating all such contracts held by incumbent cable operators, but allowing such contracts when held by new entrants. These changes, and others now being considered by the FCC, would, if implemented, make it easier for an MDU complex owner to terminate service from an incumbent cable operator in favor of a new entrant and leave the already competitive MDU sector even more challenging for incumbent operators. In a separate proceeding, the FCC has preempted restrictions on the deployment of private antennas, including satellite dishes, on rental property within the exclusive use of a tenant (such as balconies and patios). 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 nonduplication, local sports blackouts, indecent programming, lottery programming, political programming, sponsorship identification, children's programming advertisements and closed captioning), registration of frequency usage, lockbox availability, antenna structure notification, tower marking and lighting, consumer protection and customer service standards, technical standards, consumer electronics equipment compatibility and Emergency Alert Systems. The FCC recently stated that cable customers must be allowed to purchase cable converters from third party vendors, and established a multi-year phase-in during which signal security functions (which remain in the operator's exclusive control) would be unbundled from basic converter functions (which could then be satisfied by third party vendors). Details regarding this phase-in are still under FCC review. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations. COPYRIGHT Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenues to a federal copyright royalty pool (that 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 contained in television 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 nonbroadcast 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 order to cross 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. 9 10 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. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although LFAs have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross revenues, cannot dictate the particular technology used by the system, and cannot specify video programming that must be carried on the system other than identifying broad categories of programming. Federal law contains renewal procedures designed to protect incumbent franchises 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. INTERNET SERVICE Although there is no significant federal regulation of cable system delivery of Internet services at the current time and the FCC recently issued a report to Congress finding no immediate need to impose such regulation, this situation may change as cable systems expand their broadband delivery of Internet services. In particular, proposals have been advanced at the FCC that would require cable operators to provide access to unaffiliated Internet service providers and online service providers. Certain Internet service providers also are attempting to use existing commercial leased access provisions to gain the imposition of mandatory Internet access requirements as part of cable franchise renewals or transfer approvals. 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 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 15,000 homes as of December 31, 1998. 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.) 10 11 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. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) There is no established public trading market for the Partnership's units of limited partnership interest. (b) The approximate number of equity holders as of December 31, 1998, is as follows: Limited 975 Partners: General 1 Partners: (c) During 1998, 1997, 1996 and 1995, the Partnership made no cash distributions. ITEM 6. SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- SUMMARY OF OPERATIONS: Revenue ............... $ 4,876,464 $ 4,665,100 $ 4,499,588 $ 3,529,252 $ 2,030,906 Operating income (loss) 310,189 304,133 374,200 46,771 (307,224) Gain (loss) on sale of assets .............. 0 0 0 (11,627) (23,378) Gain on sale of system 0 0 0 3,391,978 0 Net income (loss) ..... (634,150) (682,930) (705,502) 2,669,199 (705,411) Net income (loss) per limited partner unit (weighted average) .. (33) (35) (37) 138 (36) Cumulative tax losses per limited partner unit ................ (520) (520) (470) (398) (520) DECEMBER 31, ----------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ----------- ----------- ---------- ----------- BALANCE SHEET DATA: Total assets ........... $13,197,193 $13,826,582 $15,093,913 $9,682,978 $12,532,350 Notes payable .......... 10,625,000 10,925,000 11,375,000 5,618,000 11,209,977 Total liabilities ...... 11,759,371 11,754,610 12,339,011 6,222,574 11,728,645 General partner's deficit .............. (65,840) (59,498) (52,669) (45,614) (72,306) Limited partner's capital .............. 1,503,662 2,131,470 2,807,571 3,506,018 876,011 Distribution per limited partner unit . 0 0 0 0 0 Cumulative distributions per limited partner unit ............... 0 0 0 0 0 12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 1998 AND 1997 Total revenue reached $4,876,464 for the year ended December 31, 1998, representing an increase of approximately 5% over 1997. This increase is primarily attributable to rate increases during 1998. Of the 1998 revenue, $3,687,185 (76%) is derived from subscriptions to basic services, $442,162 (9%) from subscriptions to premium services, $168,569 (3%) from subscriptions to tier services, $113,380 (2%) from installation charges, $47,444 (1%) from service maintenance revenue, and $417,724 (9%) from other sources. The following table displays historical average rate information for various services offered by the Partnership's systems (amounts per subscriber per month): 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Basic Rate .. $ 24.65 $ 23.65 $ 22.85 $ 20.75 $ 19.80 Tier Rate ... 7.40 7.20 6.20 4.60 3.50 HBO Rate .... 10.50 11.00 9.70 11.25 11.35 Cinemax Rate 8.00 8.00 7.80 9.00 9.10 Showtime Rate 7.00 6.00 9.30 -- 10.45 Disney Rate . 8.60 8.50 8.20 9.00 9.40 Encore Rate . 1.50 -- -- -- -- Starz ....... 7.00 -- -- -- -- Service Contract Rate .... 2.10 2.15 2.15 2.45 2.65 Operating expenses totaled $513,323 for the year ended December 31, 1998, representing an increase of approximately 2% over 1997. Increases in salary and benefit costs contributed to the overall increase in operating expenses. Salary and benefit costs are the major component of operating expenses. Employee wages are reviewed annually and, in most cases, increased based on cost of living adjustments and other factors. Therefore, Management expects operating expenses to increase in the future. General and administrative expenses totaled $1,130,734 for the year ended December 31, 1998, representing a decrease of approximately 1% from 1997. This decrease is due to reduced copyright fees, insurance, audit fees and utilities. Programming expenses totaled $1,220,395 for the year ended December 31, 1998, representing an increase of approximately 8% over 1997. This increase is due to increased costs charged by various program suppliers. As programming costs are based on the number of subscribers served, future subscriber increases will cause the trend of programming expense increases to continue. In addition, rate increases from program suppliers, as well as new fees due to the launch of additional channels, will contribute to the trend of increased programming costs. Depreciation and amortization expense increased from $1,577,434 in 1997 to $1,701,823 in 1998 (approximately 8%). This is primarily due to depreciation and amortization on plant, equipment and intangible assets placed into service during 1998. Interest expense decreased from $965,873 in 1997 to $908,651 in 1998 (approximately 6%). The Partnership's average bank debt balance decreased from approximately $11,150,000 in 1997 to $10,775,000 in 1998, due to principal payments made in 1998. In addition, the Partnership's effective interest rate decreased from 8.38% in 1997 to 8.22% in 1998. In 1998, the Partnership generated a net loss of $634,150. The operating losses incurred by the Partnership historically are a result of significant non-cash charges to income for depreciation and amortization. Prior to the deduction for these non-cash items, the Partnership has generated positive operating income in each year in the three year period ending December 31, 1998. Management anticipates that this trend will continue, and that the Partnership will continue to generate net operating losses after depreciation and amortization until a majority of the Partnership's assets are fully depreciated. 1997 AND 1996 13 14 Total revenue reached $4,665,100 for the year ended December 31, 1997, representing an increase of approximately 4% over 1996. This increase was 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. 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 $1,542,789 in 1996 to $1,577,434 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 $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 $682,930. 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. EFFECTS OF REGULATION On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Act"). The 1992 Act and subsequent revisions and rulemakings substantially re-regulated the cable television industry. The regulatory aspects of the 1992 Act included giving the local franchising authorities and the FCC the ability to regulate rates for basic services, equipment charges and additional CPST's when certain conditions were met. All of the Partnership's cable systems were potentially subject to rate regulation. The most significant impact of rate regulation was the inability to raise rates for regulated services as costs of operation rose during an FCC imposed rate freeze from April 5, 1993 to May 15, 1994. On February 8, 1996, the Telecommunications 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. 14 15 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 1998, 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 1998, cash generated from monthly billings was sufficient to meet the Partnership's needs for working capital, capital expenditures and debt service. Management estimates for 1999 that cash generated from monthly subscriber billings is expected to be 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 $10,565,182. Certain fixed rate agreements in effect as of September 30, 1998 expired during the fourth quarter of 1998, and the Partnership entered into new fixed rate agreements. Currently, the interest rates on the credit facility are as follows: $7,700,000 fixed at 8.24% under the terms of a swap agreement with the Partnership's lender, expiring December 31, 2000; and $2,475,000 at LIBOR based rate of 7.57781% expiring July 13, 1999 and $390,182 at LIBOR based rate of 7.56% expiring June 30, 1999. 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. The Partnership has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate risks. The Partnership enters into interest rate swap agreements with major banks or financial institutions (typically its bank) in which the Partnership pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. Gains or losses associated with changes in fair values of these swaps and the underlying notional principal amounts are deferred and recognized against interest expense over the term of the agreements in the Partnership's statements of operations. The Partnership is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but does not expect any counterparties to fail to meet their obligations, as the Partnership currently deals only with its bank. The notional amounts of these interest rate swaps is $7,700,000 at December 31, 1998. 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. EXPECTED MATURITY DATE 1999 2000 2001 2002 TOTAL ------- ------- ------- --------- ---------- Liabilities Debt Maturity 475,000 650,000 850,000 8,650,000 10,625,000 Debt Interest Payments 839,137 793,603 735,169 664,545 3,032,454 Average Interest Rate 8.06% 8.06% 8.06% 8.06% 8.06% Interest Rate Swaps Variable to Fixed Notional Amount 400,000 7,300,000 7,700,000 Average Pay Rate* 5.74% 5.74% 5.74% Average Receive Rate* 5.28% 5.28% 5.28% *plus an applicable margin, currently 2.5% It is the Partnership's policy to renegotiate swap agreements on or near expiration. Under the terms of the loan agreement, the Partnership has agreed to restrictive covenants which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of 6.00 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 $700,000, among other covenants. The General Partner submits quarterly debt compliance reports to the Partnership's creditor under this agreement. At December 31, 1998, the Partnership was in compliance with the terms of the loan agreement. ECONOMIC CONDITIONS Historically, the effects of inflation have been considered in determining to what extent rates will be increased for various services provided. It is expected that the future rate of inflation will continue to be a significant variable in determining rates charged for services provided, subject to the provisions of the 1996 Act. Because of the deregulatory nature of the 1996 Act, the Partnership does not expect the future rate of inflation to have a material adverse impact on operations. CAPITAL EXPENDITURES During 1998, the Partnership incurred approximately $670,000 in capital expenditures. These expenditures included the continued system upgrade to 400 MHz in the LaConner, WA system; a vehicle replacement, the continued fiber interconnect of two systems, new headend equipment, channel additions and line extensions in the Aliceville, AL system; and a vehicle replacement, system mapping, channel additions and line extensions in the Swainsboro, GA system. Management estimates that the Partnership will spend approximately $600,000 on capital expenditures in 1999. These expenditures include a continuing system upgrade to 400 MHz for the LaConner, WA system; a vehicle replacement, the extension of the fiber backbone to eliminate a headend and quality assurance projects in the Aliceville, AL system; and the construction of a fiber backbone which will lead to a future system upgrade to 450 MHz, an advertising equipment upgrade and various line extensions in the Swainsboro, GA system. 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 Programs and Systems are used in several key areas of the Partnership's business, including subscriber billing and collections and financial reporting. Management 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. 15 16 The Programs and Systems utilized in subscriber billing and collections has been modified to address year 2000 compliance issues. These modifications were substantially complete at the end of 1998. Management has completed the process of replacing Programs and Systems related to financial reporting which resolve year 2000 compliance issues. 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. Management is currently focusing its efforts on the impact of the year 2000 compliance issue on service delivery and has established an internal team to address this issue. The internal team is identifying and testing all date sensitive equipment involved in delivering service to its customers. In addition, management will assess its options regarding repair or replacement of affected equipment during this testing. 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. The provision of cable television services is significantly dependent on the Partnership's ability to adequately receive programming signals via satellite distribution or off air reception from various programmers and broadcasters. The Partnership has inquired of certain significant programming vendors with respect to their year 2000 issues and how they might impact the operations of the Partnership. As of the date of this filing no significant programming vendor has communicated a year 2000 issue that would affect materially the operations of the Partnership. However, if significant programming vendors identify year 2000 issues in the future and are unable to resolve such issues in a timely manner, it could result in a material financial risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The audited financial statements of the Partnership for the years ended December 31, 1998, 1997 and 1996 are included as a part of this filing (see Item 14(a)(1) below). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors or officers. The Managing General Partner of the Partnership is Northland Communications Corporation, a Washington corporation. Certain information regarding the officers and directors of Northland and relating to the Partnership is set forth below. JOHN S. WHETZELL (AGE 57). 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. 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 62). Mr. Iverson is the Assistant Secretary of Northland Communications Corporation and has served on the Board of Directors since December 1984. He also serves on the Board of Directors of Northland Telecommunications Corporation and each of its subsidiaries. He is currently a member in the law firm of Ryan, Swanson & Cleveland P.L.L.C., 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 41). Mr. Clark has served as Vice President of Northland since March 1982. He has served on the Board of Directors of both Northland Communications Corporation and Northland Telecommunications Corporation since July 1985. He also serves as Vice President and Director of all subsidiaries of Northland Telecommunications Corporation. Mr. Clark was elected Treasurer in April 1987, prior to which he served as Secretary from March 1982. Mr. Clark was an original incorporator of Northland and is responsible for the administration and investor relations activities of Northland, including financial planning and corporate development. From July 1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the area of providing cable television consultation services and has been involved with the cable television industry for nearly 19 years. He has directed cable television feasibility studies and on-site market surveys. Mr. Clark has assisted in the design and maintenance of financial and budget computer programs, and he has prepared documents for major cable television companies in franchising and budgeting projects through the application of these programs. In 1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a Bachelor of Arts degree in accounting. JAMES E. HANLON (AGE 65). Since June 1985, Mr. Hanlon has been a Divisional Vice President for Northland and is currently responsible for the management of systems serving subscribers in Texas, Alabama and parts of Mississippi. Prior to his association with Northland, he served as Chief Executive of M.C.T. Communications, a cable television company, from 1981 to June 1985. His responsibilities included supervision of the franchise, construction and operation of a cable television system located near Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of the CATV Division of Buford Television, Inc., and from 1973 to 1979, he served as President and General Manager of Suffolk Cablevision in Suffolk County, New York. Mr. Hanlon has also served as Vice President and Corporate Controller of Viacom International, Inc. and Division Controller of New York Yankees, Inc. Mr. Hanlon has a Bachelor of Science degree in Business Administration from St. Johns University. JAMES A. PENNEY (AGE 44). 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 & 17 18 Cleveland P.L.L.C., 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 41). 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 53). Mr. Dyste has served as Vice President- Technical Services of Northland Telecommunications Corporation and each of its subsidiaries since April 1987. Mr. Dyste is responsible for planning and advising all Northland cable systems with regard to technical performance as well as system upgrades and rebuilds. He is a past president and current member of the Mount Rainier Chapter of the Society of Cable Television Engineers, Inc. Mr. Dyste joined Northland in 1986 as an engineer and served as Operations Consultant to Northland Communications Corporation from August 1986 until April 1987. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is a graduate of Washington Technology Institute. H. LEE JOHNSON (AGE 55). 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 1998 as indicated in Note 3 to the Notes to Financial Statements--December 31, 1998 (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, 1998 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 18 19 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. 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 for which it is compensated. Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides the production and development of video commercial advertisements and advertising sales support for which it is compensated. Northland Cable News, Inc.("NCN"), an affiliate of Northland, provides programming to certain of 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, 1998 for disclosures regarding transactions with the General Partner and affiliates. The following schedule summarizes these transactions: FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 --------- --------- --------- Partnership management fees .. $ 243,823 $ 233,249 $ 224,979 Operating expense reimbursements ............. 270,368 275,758 257,499 Software installation and billing service fees to NCSC 41,275 35,791 57,299 Reimbursements (to)/from Affiliates ................. (39,028) (47,598) (45,881) Local Advertising Services ... 18,218 27,936 22,092 Local Programming Services ... 49,365 22,247 -- Amounts due to (from) General Partner and affiliates at year end .. 81,682 34,201 265,478 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. 19 20 (b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and Assistant Secretary of the Managing General Partner, is a member of the law firm of Ryan, Swanson & Cleveland P.L.L.C., which has rendered and is expected to continue to render legal services to the Managing General Partner and the Partnership. (c)INDEBTEDNESS OF MANAGEMENT. None. 20 21 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, 1998 and 1997............................ ____ Statements of Operations for the years ended December 31, ____ 1998, 1997 and 1996................................................... Statements of Changes in Partners' Capital (Deficit) for the years ended December 31, 1998, 1997 and 1996..................... ____ Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996...................................... ____ Notes to Financial Statements--December 31, 1998...................... ____ EXHIBITS: --------- 4.1 Amended and Restated Agreement of Limited Partnership(1) 4.2 Amendment to Agreement of Limited Partnership dated December 20, 1990(4) 10.1 Agreement of Purchase and Sale with Santiam Cable Vision, Inc.(1) 10.2 Agreement for Sale of Assets between Valley Cable T.V., Inc. and Northland Telecommunications Corporation(1) 10.3 Form of Services and Licensing Agreement with Cable Television Billing, Inc.(1) 10.4 Management Agreement with Northland Communications Corporation(1) 10.5 First, Second and Third Amendment to Agreement of Purchase and Sale with Santiam Cable Vision, Inc.(1) 10.6 Operating Management Agreement with Northland Cable Properties Seven Limited Partnership(1) 10.7 Assignment and Transfer Agreement with Northland Telecommunications Corporation for the purchase of the LaConner System(2) 10.8 Gates Franchise(1) 10.9 Stayton Franchise(1) 10.10 Mill City Franchise(1) 10.11 Detroit Franchise(1) 21 22 EXHIBITS: --------- 10.12 Idanha Franchise(1) 10.13 Lyons Franchise(1) 10.14 Marion County Franchise(1) 10.15 Turner Franchise(1) 10.19 Amendment dated August 4, 1989 to Revolving Credit and Term Loan Agreement with Security Pacific Bank of Washington, N.A.(3) 10.20 Revolving Credit and Term Loan Agreement with National Westminster Bank USA dated as of December 20, 1990(4) 10.21 Note in the principal amount of up to $7,000,000 to the order of National Westminster Bank USA(4) 10.22 Borrower Assignment with National Westminster Bank USA(4) 10.23 Borrower Security Agreement with National Westminster Bank USA(4) 10.24 Agreement of Purchase and Sale with TCI Cablevision of Nevada, Inc.(4) 10.25 First Amendment dated May 28, 1992 to Revolving Credit and Term Loan Agreement with National Westminster Bank USA.(5) 10.26 Franchise Agreement with the City of Turner, OR effective March 21, 1991(5) 10.27 Franchise Agreement with the City of Lyons, OR effective April 8, 1991(5) 10.28 Franchise Agreement with the City of Idanha, OR effective November 3, 1992(5) 10.29 Agreement of Purchase with Alabama Television Cable Company(6) 10.30 Credit Agreement between Northland Cable Properties Eight Limited Partnership and U.S. Bank of Washington, National Association and West One Bank, Washington dated November 10, 1994(6) 10.31 Franchise Agreement with City of Aliceville, AL - Assignment and Assumption Agreement dated July 26, 1994.(7) 10.32 Franchise Agreement with City of Carrollton, AL - Assignment and Assumption Agreement dated August 16, 1994.(7) 10.33 Franchise Agreement with City of Eutaw, AL - Assignment and Assumption Agreement dated July 26, 1994.(7) 10.34 Franchise Agreement with City of Gordo, AL - Assignment and Assumption Agreement dated August 1, 1994.(7) 10.35 Franchise Agreement with Greene County, AL - Assignment and Assumption Agreement dated November 10, 1994.(7) 10.36 Franchise Agreement with Town of Kennedy, AL - Assignment and Assumption Agreement dated August 15, 1994.(7) 10.37 Franchise Agreement with Lamar County, AL - Assignment and Assumption Agreement dated August 8, 1994.(7) 10.38 Franchise Agreement with City of Marion, AL - Assignment and Assumption Agreement dated August 1, 1994.(7) 22 23 EXHIBITS: --------- 10.39 Franchise Agreement with Town of Millport, AL - Assignment and Assumption Agreement dated August 18, 1994.(7) 10.40 Franchise Agreement with Pickens County, AL - Assignment and Assumption Agreement dated July 26, 1994.(7) 10.41 Franchise Agreement with Town of Pickensville, AL - Assignment and Assumption Agreement dated August 2, 1994.(7) 10.42 Franchise Agreement with City of Reform, AL - Assignment and Assumption Agreement dated August 1, 1994.(7) 10.43 Asset Purchase and Sale Agreement between SCS Communications and Security, Inc. and Northland Cable Properties Eight Limited Partnership dated April 14, 1995.(8) 10.44 Asset Purchase Agreement between Northland Cable Properties Eight Limited Partnership and TCI Cablevision of Georgia, Inc. dated November 17, 1995.(9) 10.45 First Amendment to Amended and Restated Credit Agreement between Northland Cable Properties Eight Limited Partnership and U.S. Bank National Association - ------------ (1) Incorporated by reference from the Partnership's Form S-1 Registration Statement declared effective on March 16, 1989 (No. 33-25892). (2) Incorporated by reference from the Partnership's Form 10-Q Quarterly Report for the period ended June 30, 1989. (3) Incorporated by reference from the Partnership's Form 10-K Annual Report for the year ended December 31, 1989. (4) Incorporated by reference from the Partnership's Form 10-K Annual Report for the year ended December 31, 1990 (5) Incorporated by reference from the Partnership's Form 10-K Annual Report for the year ended December 31, 1992. (6) Incorporated by reference from the Partnership's Form 8-K dated November 11, 1994. (7) Incorporated by reference from the Partnership's Form 10-K Annual Report for the year ended December 31, 1994. (8) Incorporated by reference from the Partnership's Form 10-Q Quarterly Report for the period ended March 31, 1995. (9) Incorporated by reference from the Partnership's Form 8-K dated January 5, 1996. (b) REPORTS ON FORM 8-K. No Partnership reports on Form 8-K have been filed during the fourth quarter of the fiscal year ended December 31, 1998. 23 24 SIGNATURES Purchase to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP By: NORTHLAND COMMUNICATIONS CORPORATION (Managing General Partner) Date: March 30, 1999 By: /s/ JOHN S. WHETZELL -------------- ------------------------------------ John S. Whetzell, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES CAPACITIES DATE ---------- ---------- ---- /s/ JOHN S. WHETZELL Chief executive officer of registrant; chief executive officer March 30, 1999 - ----------------------------- and chairman of the board of directors of Northland John S. Whetzell Communications Corporation /s/ RICHARD I. CLARK Director of Northland Communications March 30, 1999 - ----------------------------- Corporation Richard I. Clark /s/ JOHN E. IVERSON Director of Northland Communications March 30, 1999 - ----------------------------- Corporation John E. Iverson /s/ GARY S. JONES Principal financial officer and principal accounting March 30, 1999 - ----------------------------- officer of registrant; vice president, principal financial Gary S. Jones officer and principal accounting officer of Northland Communications Corporation 24 25 NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Seattle, Washington, February 15, 1999 27 NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 1998 AND 1997 ASSETS 1998 1997 ------------ ------------ CASH ........................................................ $ 800,110 $ 463,021 ACCOUNTS RECEIVABLE ......................................... 108,011 101,772 DUE FROM AFFILIATES ......................................... 26,295 -- PREPAID EXPENSES ............................................ 60,971 62,453 INVESTMENT IN CABLE TELEVISION PROPERTIES: Property and equipment, at cost ....................... 11,454,452 10,825,112 Less- Accumulated depreciation ........................ (4,641,375) (3,552,644) ------------ ------------ 6,813,077 7,272,468 Franchise agreements (net of accumulated amortization of $2,145,760 in 1998 and $1,730,425 in 1997) ................................... 5,059,222 5,474,557 Loan fees and other intangibles (net of accumulated amortization of $504,157 in 1998 and $417,609 in 1997) ............................ 209,050 327,893 Goodwill (net of accumulated amortization of $37,952 in 1998 and $33,991 in 1997) .................. 120,457 124,418 ------------ ------------ Total investment in cable television properties ................................... 12,201,806 13,199,336 ------------ ------------ Total assets .................................... $ 13,197,193 $ 13,826,582 ============ ============ LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) 1998 1997 ------------ ------------ LIABILITIES: Accounts payable and accrued expenses .................... $ 778,917 $ 625,573 Due to General Partner and affiliates .................... 107,977 34,201 Deposits ................................................. 10,002 12,200 Subscriber prepayments ................................... 237,475 157,636 Term loan ................................................ 10,625,000 10,925,000 ------------ ------------ Total liabilities ............................... 11,759,371 11,754,610 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 8) PARTNERS' CAPITAL (DEFICIT): General Partner- Contributed capital ................................... 1,000 1,000 Accumulated deficit ................................... (66,840) (60,498) ------------ ------------ (65,840) (59,498) ------------ ------------ Limited partners- Contributed capital, net - 19,087 units ....................................... 8,120,820 8,120,820 Accumulated deficit ................................... (6,617,158) (5,989,350) ------------ ------------ 1,503,662 2,131,470 ------------ ------------ Total liabilities and partners' capital (deficit) ............................ $ 13,197,193 $ 13,826,582 ============ ============ 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, 1998, 1997 AND 1996 1998 1997 1996 ----------- ----------- ----------- REVENUE ............................................ $ 4,876,464 $ 4,665,100 $ 4,499,588 ----------- ----------- ----------- EXPENSES: Operating (including $30,156, $52,697 and $49,082 paid to affiliates in 1998, 1997 and 1996, respectively) ................................ 513,323 505,658 488,660 General and administrative (including $496,332, $489,975 and $479,614 paid to affiliates in 1998, 1997 and 1996, respectively) ........... 1,130,734 1,143,911 1,093,088 Programming (including $2,066, $40,219 and $32,622, net, paid to affiliates in 1998, 1997 and 1996, respectively) ...................... 1,220,395 1,133,964 1,000,851 Depreciation and Amortization ................... (1,701,823) (1,577,434) (1,542,789) ----------- ----------- ----------- 4,566,275 4,360,967 4,125,338 ----------- ----------- ----------- Operating income ....................... 310,189 304,133 374,200 OTHER INCOME (EXPENSE): Interest income and other ....................... 15,817 21,328 9,850 Interest expense ................................ (908,651) (965,873) (1,048,491) Other expense ................................... (51,505) (42,518) (41,061) ----------- ----------- ----------- Net loss ............................... $ (634,150) $ (682,930) $ (705,502) =========== =========== =========== ALLOCATION OF NET LOSS: General Partner ................................. $ (6,342) $ (6,829) $ (7,055) =========== =========== =========== Limited partners ................................ $ (627,808) $ (676,101) $ (698,447) =========== =========== =========== NET LOSS PER LIMITED PARTNERSHIP UNIT .............. $ (33) $ (35) $ (37) =========== =========== =========== 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, 1998, 1997 AND 1996 General Limited Partner Partners Total ----------- ----------- ----------- 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 Net loss .............. (6,342) (627,808) (634,150) ----------- ----------- ----------- BALANCE, December 31, 1998 $ (65,840) $ 1,503,662 $ 1,437,822 =========== =========== =========== 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, 1998, 1997 AND 1996 1998 1997 1996 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ...................................................................... $ (634,150) $ (682,930) $ (705,502) Adjustments to reconcile net loss to net cash provided by operating activities- Depreciation and amortization expense ...................................... 1,701,823 1,577,434 1,542,789 Amortization of loan fees .................................................. 51,505 42,518 41,061 (Increase) decrease in operating assets: Accounts receivable ..................................................... (6,239) 3,605 (14,576) Due from affiliates ..................................................... (26,295) -- -- Prepaid expenses ........................................................ 1,482 138 (13,615) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses ................................... 153,344 45,751 171,732 Due to General Partner and affiliates ................................... 73,776 (231,277) 195,545 Deposits ................................................................ (2,198) (5,600) (3,950) Subscriber prepayments .................................................. 79,839 56,725 (3,890) ----------- ----------- ----------- Net cash provided by operating activities ............................ 1,392,887 806,364 1,209,594 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of cable system ................................................... -- -- (6,083,676) Purchase of property and equipment, net ....................................... (672,390) (738,043) (319,942) Increase in intangibles ....................................................... (27,153) -- -- ----------- ----------- ----------- Net cash used in investing activities ................................ (699,543) (738,043) (6,403,618) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable .................................................... -- -- 6,057,000 Principal payments on note payable ............................................ (300,000) (450,000) (300,000) Loan fees ..................................................................... (56,255) -- (98,993) ----------- ----------- ----------- Net cash (used in) provided by financing activities .................. (356,255) (450,000) 5,658,007 ----------- ----------- ----------- INCREASE (DECREASE) IN CASH ...................................................... 337,089 (381,679) 463,983 CASH, beginning of year .......................................................... 463,021 844,700 380,717 ----------- ----------- ----------- CASH, end of year ................................................................ $ 800,110 $ 463,021 $ 844,700 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest ........................................ $ 1,066,353 $ 986,979 $ 857,217 =========== =========== =========== The accompanying notes are an integral part of these statements. 31 NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1. ORGANIZATION AND PARTNERS' INTERESTS: Formation and Business Northland Cable Properties Eight Limited Partnership (the Partnership), a Washington limited partnership, was formed on September 21, 1988, and began operations on March 8, 1989. The Partnership was formed to acquire, develop and operate cable television systems. Currently, the Partnership owns systems serving the city of La Conner, Washington and certain surrounding areas; Aliceville, Alabama and certain surrounding areas; and Swainsboro, Georgia and certain surrounding areas. The Partnership has 17 nonexclusive franchises to operate these cable systems for periods which will expire at various dates through 2019, with one franchise extending to 2044. Northland Communications Corporation (the General Partner or Northland) is the General Partner of the Partnership. Certain affiliates of the Partnership also own and operate other cable television systems. In addition, Northland manages cable television systems for other limited partnerships for which it is General Partner. Contributed Capital, Commissions and Offering Costs The capitalization of the Partnership is set forth in the accompanying statements of changes in partners' capital (deficit). No limited partner is obligated to make any additional contribution to partnership capital. Northland contributed $1,000 to acquire its 1% interest in the Partnership. Pursuant to the Partnership Agreement, brokerage fees of $1,004,693 paid to an affiliate of the General Partner and other offering costs of $156,451 paid to the General Partner were recorded as a reduction of limited partners' capital. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Property and Equipment Property and equipment are stated at cost. Replacements, renewals and improvements are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation of property and equipment is provided using the straight-line method over the following estimated service lives: Buildings 20 years Distribution plant 10 years Other equipment and leasehold improvements 5-20 years 32 -2- The Partnership periodically reviews the carrying value of its long-lived assets, including property, equipment and intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated 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, franchise agreements and other intangibles; then the excess is allocated to goodwill. Intangible Assets Costs assigned to franchise agreements, loan fees and other intangibles, and goodwill are being amortized using the straight-line method over the following estimated useful lives: Franchise agreements 8-40 years Loan fees and other intangibles 1-5 years Goodwill 40 years Revenue Recognition Cable television service revenue 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 $153,797, $154,578, and $163,656 in 1998, 1997 and 1996, respectively. Derivatives The Partnership has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate risks. As discussed in Note 6, the Partnership enters into interest rate swap agreements with major banks or financial institutions (typically its bank) in which the Partnership pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. Gains or losses associated with changes in fair values of these swaps and the underlying notional principal amounts are deferred and recognized against interest expense over the term of the agreements in the Partnership's statements of operations. The Partnership is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but does not expect any counterparties to fail to meet their obligations, as the Partnership currently deals only with its bank. The notional amounts of these interest rate swaps is $7,700,000 at December 31, 1998. 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. 33 -3- Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year's presentation. Recently Issued Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 130 - In 1998, the Partnership adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income (loss) consists of net income (loss), foreign currency translation adjustments and unrealized gains on investment securities available-for-sale. As of December 31, 1998, the Partnership had no comprehensive income to report, therefore the adoption of SFAS No. 130 had no impact on equity. Statement of Position 98-5 - In April 1998, the AICPA released Statement of Position 98-5, "Reporting on Start-Up Activities" (SOP 98-5). The new standard requires that all entities expense costs of start-up activities as those costs are incurred. SOP 98-5 defines "start-up costs" as those costs directly related to pre-operating, pre-opening, and organization activities. This standard must be adopted in fiscal years beginning after December 15, 1998. The Partnership previously capitalized pre-opening costs and amortized such costs over a five-year period. As of December 31, 1998, all pre-opening costs have been amortized. As a result, the adoption of SOP 98-5 will not have an effect on the Partnership's financial position or results of operations. Statement of Financial Accounting Standards No. 133 - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). The Partnership has not yet quantified the impacts of adopting SFAS No. 133 on the financial statements and has not determined the timing of or method of adoption of SFAS No. 133. However, the statement could increase volatility in earnings and other comprehensive income. 34 -4- 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 $243,823, $233,249 and $224,979 for 1998, 1997 and 1996, 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, 1998, the Partnership has repurchased $12,500 of limited partnership units (50 units at $250 per unit). Reimbursements The General Partner provides or causes to be provided certain centralized services to the Partnership and other affiliated entities. The General Partner is entitled to reimbursement from the Partnership for various expenses incurred by it or its affiliates on behalf of the Partnership allocable to its management of the Partnership, including travel expenses, pole and site rental, lease payments, legal expenses, billing expenses, insurance, governmental fees and licenses, headquarters supplies and expenses, pay television expenses, equipment and vehicle charges, operating salaries and expenses, administrative salaries and expenses, postage and office maintenance. The amounts billed to the Partnership are based on costs incurred by affiliates in rendering the services. The costs of certain services are charged directly to the Partnership, based upon the personnel time spent by the employees rendering the service. The cost of other services is allocated to the Partnership and affiliates 35 -5- 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 $270,368, $275,758 and $257,499 for the years ended December 31, 1998, 1997 and 1996, respectively. In 1998, 1997 and 1996, the Partnership was charged software installation charges and maintenance fees for billing system support provided by an affiliate, amounting to $41,275, $35,791 and $57,299, 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 $39,028, $47,598 and $45,881 under the terms of these agreements during 1998, 1997 and 1996, 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 $18,218, $27,936 and $22,092 in 1998, 1997 and 1996, respectively, for these services. In 1997, the Partnership began paying monthly program license fees to Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the rights to distribute programming developed and produced by NCN. Total license fees charged by NCN were $49,365 and $22,247 during 1998 and 1997, respectively. Due to General Partner and Affiliates 1998 1997 -------- -------- Management fees .................... $ 41,962 $ -- Reimbursable operating costs ....... 54,323 31,532 Other amounts due to affiliates, net 11,692 2,669 -------- -------- $107,977 $ 34,201 ======== ======== 4. PROPERTY AND EQUIPMENT: December 31, ---------------------------- 1998 1997 ----------- ----------- Land and buildings ..... $ 205,171 $ 205,171 Distribution plant ..... 10,585,052 9,593,328 Other equipment ........ 573,132 517,130 Construction in progress 91,097 509,483 ----------- ----------- $11,454,452 $10,825,112 =========== =========== 36 -6- 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: December 31, ---------------------- 1998 1997 -------- --------- Accounts payable ...... $338,505 $ 79,291 Interest .............. 45,833 203,535 Programmer license fees 130,695 111,345 Franchise fees ........ 48,351 46,939 Pole rental ........... 50,985 48,941 Other ................. 164,548 135,522 -------- -------- $778,917 $625,573 ======== ======== 6. TERM LOAN: December 31, ------------------------- 1998 1997 --------- --------- Term loan, amended and restated on March 30, 1998, collateralized by a first lien position on all present and future assets of the Partnership. Interest rates vary based on certain financial covenants; currently 8.22% (weighted average). Graduated principal payments plus interest are due quarterly until maturity on December 31, 2002. $10,625,000 $10,925,000 =========== =========== Annual maturities of notes payable after December 31, 1998 are as follows: 1999 $ 475,000 2000 650,000 2001 850,000 2002 8,650,000 ----------- $10,625,000 =========== 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 6.00 to 1 and a Cash Flow to Debt Service Ratio of 1.25 to 1, and a limitation on the maximum amount of capital expenditures of $700,000, among other restrictions. The General Partner submits quarterly debt compliance reports to the Partnership's creditor under this agreement. As of December 31, 1998, the Partnership was in compliance with the terms of the loan agreement. The Partnership has entered into an interest rate swap agreement to reduce the impact of changes in interest rates. At December 31, 1998, the Partnership had outstanding an interest rate swap agreement with its bank, having a notional principal amount of $7,700,000. This agreement effectively changes the Partnership's interest rate exposure to a fixed rate of 5.74%, plus an applicable margin based on certain financial covenants (the margin at December 31, 1998 was 2.50%). The maturity date of the swap is December 31, 2000. 37 -7- At December 31, 1998, the Partnership would have been required to pay the counterparty approximately $95,613 to settle this agreement based on fair value estimates received from the financial institution. 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 to the limited partners was approximately $0, $(959,672) and $(1,370,756) in 1998, 1997 and 1996, 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 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. 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. 38 -8- 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 $111,412, $118,129 and $117,515 in 1998, 1997 and 1996, respectively. Minimum lease payments through the end of the lease terms are as follows: 1999 $ 3,300 2000 3,300 2001 3,300 2002 3,300 2003 3,100 Thereafter 39,700 ------- $56,000 ======= Effects of Regulation On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was enacted. This act dramatically changed federal telecommunications laws and the future competitiveness of the industry. Many of the changes called for by the 1996 Act will not take effect until the Federal Communications Commission (FCC) issues new regulations which, in some cases, may not be completed for a few years. Because of this, the full impact of the 1996 Act on the Partnership's operations cannot be determined at this time. A summary of the provisions affecting the cable television industry, more specifically those affecting the Partnership's operations, follows. Cable Programming Service Tier Regulation. FCC regulation of rates for cable programming service tiers has been eliminated for small cable systems owned by small companies. Small cable systems are those having 50,000 or fewer subscribers which are owned by companies with fewer than 1% of national cable subscribers (approximately 600,000) or more than $250 million in annual revenue. The Partnership qualifies as a small cable company and all of the Partnership's cable systems qualify as small cable systems. Basic tier rates remain subject to regulations by the local franchising authority under most circumstances until effective competition exists. The 1996 Act expands the definition of effective competition to include the offering of video programming services directly to subscribers in a franchised area served by a local telephone exchange carrier, its affiliates or any multichannel video programming distributor which uses the facilities of the local exchange carrier. The FCC has not yet determined the penetration criteria that will trigger the presence of effective competition under these circumstances. 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. 39 -9- The 1996 Act encompasses many other aspects of providing cable television service including prices for equipment, discounting rates to multiple dwelling units, lifting of anti-trafficking restrictions, cable-telephone cross-ownership provisions, pole attachment rate formulas, rate uniformity, program access, scrambling and censoring of Public, Educational and Governmental and leased access channels. Self-Insurance The Partnership began self-insuring for aerial and underground plant in 1996. Beginning in 1997, the Partnership began making quarterly contributions into an insurance fund maintained by an affiliate which covers all Northland entities and would defray a portion of any loss should the Partnership be faced with a significant uninsured loss. To the extent the Partnership's losses exceed the fund's balance, the Partnership would absorb any such loss. If the Partnership were to sustain a material uninsured loss, such reserves could be insufficient to fully fund such a loss. The capital cost of replacing such equipment and physical plant, could have a material adverse effect on the Partnership, its financial condition, prospects and debt service ability. Amounts paid to the affiliate, which maintains the fund for the Partnership and its affiliates, are expensed as incurred and are included in the statements of operations. To the extent a loss has been incurred related to risks that are self-insured, the Partnership records an expense and an associated liability for the amount of the loss, net of any amounts to be drawn from the fund. For 1998 and 1997, respectively, the Partnership was charged $7,370 and $7,346 by the fund. As of December 31, 1998, the fund had a balance of $249,617.