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FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-29354, eff. 7-1-91)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 2000
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 621-1351
Securities registered pursuant to Section 12(b) of the Act:
Title of each reviewed class Name of each exchange on which registered
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(NONE) (NONE)
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(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).
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(2) Form 10-K Annual Reports for fiscal years ended December 31, 1989, December
31, 1990, December 31, 1992 and December 31, 1994, respectively.
(3) Form 10-Q Quarterly Report for period ended June 30, 1989 and March 3, 1995.
(4) Form 8-K dated November 11, 1994.
(5) Form 8-K dated June 30, 1995.
(6) Form 8-K date January 5, 1996.
This filing contains _______ pages. Exhibits Index appears on page ______.
Financial Statements/Schedules Index appears on page ______.
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Cautionary statement for purposes of the "Safe Harbor" provisions of the Private
Litigation Reform Act of 1995. Statements contained or incorporated by reference
in this document that are not based on historical fact are "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
Forward-looking statements may be identified by use of forward-looking
terminology such as "believe", "intends", "may", "will", "expect", "estimate",
"anticipate", "continue", or similar terms, variations of those terms or the
negative of those terms.
PART I
ITEM 1. BUSINESS
Northland Cable Properties Eight Limited Partnership (the "Partnership")
is a Washington limited partnership consisting of one general partner and
approximately 971 limited partners as of December 31, 2000. Northland
Communications Corporation, a Washington corporation, is the General Partner of
the Partnership (referred to herein as "Northland" or the " 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
majority 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 for the Partnership and other Northland
affiliates.
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 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. As of December 31, 2000, the total number of basic subscribers served by
the Systems was 11,667, and the Partnership's penetration rate (basic
subscribers as a percentage of homes passed) was approximately 77%. The
Partnership's properties are located in rural areas which, to some extent, do
not offer consistently acceptable off-air network signals. This factor, combined
with the existence of fewer entertainment alternatives than in large markets
contributes to a larger proportion of the population subscribing to cable
television (higher penetration).
The Partnership has 17 non-exclusive franchises to operate the Systems.
These franchises, which will expire at various dates through the year 2019 (with
one franchise 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.
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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, 2000 is as follows:
Basic Subscribers 1,951
Tier Subscribers 1,119
Premium Subscribers 510
Estimated Homes Passed 2,785
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, 2000 is as follows:
Basic Subscribers 6,635
Premium Subscribers 2,253
Estimated Homes Passed 8,440
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, 2000 is as follows:
Basic Subscribers 3,081
Tier Subscribers 940
Premium Subscribers 1,718
Estimated Homes Passed 3,915
The Partnership had 11 employees as of December 31, 2000. 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 four
categories: basic subscribers, expanded basic subscribers, premium subscribers,
and digital subscribers. "Basic subscribers" are households that subscribe to
the basic level of service, which generally provides access to the three major
television networks (ABC, NBC and CBS), a few independent local stations, PBS
(the Public Broadcasting System) and certain satellite programming services,
such as ESPN, CNN or The Discovery Channel. "Expanded basic 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".
"Digital subscribers" are those who subscribe to digitally delivered video and
audio services where offered.
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COMPETITION
Cable television systems currently experience competition from several
sources, including broadcast television, cable overbuilds, direct broadcast
satellite services, private cable and multichannel multipoint distribution
service systems. 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. The following provides a summary description of these sources of
competition.
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 this competition is dependent in part upon the quality and
quantity of signals available by antenna reception as compared to the services
provided by the local cable system. Accordingly, cable operators find it less
difficult 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. The recent licensing of digital spectrum by the FCC will provide
incumbent broadcast licenses with the ability to deliver high definition
television pictures and multiple digital-quality program streams, as well as
advanced digital services such as subscription video.
OVERBUILDS
Cable television franchises are not exclusive, so that more than one
cable television system may be built in the same area. This is known as an
"overbuild." Overbuilds have the potential to result in 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 such
as 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. See "Regulation and Legislation"
below. It is therefore possible for companies with considerable resources to
overbuild existing cable operators and enter the business. 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.
DIRECT BROADCAST SATELLITE SERVICE
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. The two leading DBS providers have
experienced dramatic growth over the last several years and together now serve
over 10 million customers nationwide. Companies offering direct broadcast
satellite service use video compression technology to increase channel capacity
of their systems to more than 100 channels and to provide packages of movies,
satellite networks and other program services which are competitive to those of
cable television systems. DBS companies historically faced significant legal and
technological impediments to providing popular local broadcast programming to
their customers. Recent federal legislation reduced this competitive
disadvantage. Nevertheless, technological limitations still affect DBS
companies, and it is expected that DBS companies will offer local broadcast
programming only in the top 50 to 100 U.S. markets for the foreseeable future.
The same legislation reduced the compulsory copyright fees paid by DBS companies
and allowed them to continue offering distant network signals to rural
customers. The availability of low or no cost DBS equipment, delivery of local
signals in some markets and exclusivity with respect to certain sports
programming has increased DBS's market share over recent years. The impact of
DBS services on the Partnership's market share within its service areas cannot
be precisely determined but is estimated to have taken away between 2% and 6%
depending upon the specific area.
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PRIVATE CABLE
Additional competition is provided by private cable television systems,
known as satellite master antenna television, 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 these private complexes. Operators of private cable,
which do not cross public rights of way, are free from the federal, state and
local regulatory requirements imposed on franchised cable television operators.
MULTICHANNEL MULTIPOINT DISTRIBUTION SERVICE SYSTEMS
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service systems, commonly
called wireless cable, which are licensed to serve specific areas. Multichannel,
multipoint distribution service systems use low-power microwave frequencies to
transmit television programming over-the-air to paying subscribers. This
industry is less capital intensive than the cable television industry, and it is
therefore more practical to construct systems using this technology in areas of
lower subscriber penetration.
REGULATION AND LEGISLATION
SUMMARY
The following summary addresses the key regulatory developments and
legislation affecting 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 the Partnership's operations.
The operation of a cable system is extensively regulated at the federal,
local, and, in some instances, state levels. The Cable Communications Policy Act
of 1984, the Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), and the 1996 Telecommunications Act (the "1996 Telecom
Act", and, collectively, the "Cable Act") establish a national policy to guide
the development and regulation of cable television systems. The Federal
Communications Commission ("FCC") has principal responsibility for implementing
the policies of the Cable Act. Many aspects of such regulation are currently the
subject of judicial proceedings and administrative or legislative proposals.
Legislation and regulations continue to change, and the Partnership cannot
predict the impact of future developments on the cable television industry.
Future regulatory and legislative changes could adversely affect the
Partnership's operations.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry, which limited the ability of cable companies to
increase subscriber fees. Under that regime, all cable systems were subject to
rate regulation, unless they face "effective competition" in their local
franchise area. Federal law now defines "effective competition" on a
community-specific basis as requiring satisfaction of conditions rarely
satisfied in the current marketplace.
Although the FCC established the underlying regulatory scheme, local
government units, commonly referred to as local franchising authorities, are
primarily responsible for administering the regulation of the lowest level of
cable service called the basic service tier. The basic service tier typically
contains local broadcast stations and public, educational, and government access
channels. Local franchising authorities 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. Before a
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local franchising authority begins basic service rate regulation, it must
certify to the FCC that it will follow applicable federal rules. Many local
franchising authorities have voluntarily declined to exercise their authority to
regulate basic service rates.
As of December 31, 2000, none of the Partnership's local franchising
authorities were certified to regulate basic tier rates. The 1992 Cable Act
permits communities to certify and regulate rates at any time, so that it is
possible that additional localities served by the systems may choose to certify
and regulate rates in the future.
The FCC itself historically administered rate regulation of cable
programming service tiers, which represent the expanded level of non-"basic" and
non-"premium", programming services. The 1996 Telecom Act, however, provided
special rate relief for small cable operators offering cable programming service
tiers. The elimination of cable programming service tier regulation afforded the
Partnership substantially greater pricing flexibility.
Under the rate regulations of the FCC, most cable systems were required
to reduce their basic service tier and cable programming service tier 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 to bypass this "benchmark" regulatory scheme
in favor of traditional "cost-of-service" regulation in cases where the latter
methodology appears favorable. Cost of service regulation is a traditional form
of rate regulation, under which a utility is allowed to recover its costs of
providing the regulated service, plus a reasonable profit.
In a particular effort to ease the regulatory burden on small cable
systems, the FCC created special rate rules applicable for systems with fewer
than 15,000 subscribers owned by an operator with fewer than 400,000
subscribers. The special rate rules allow for a simplified cost-of-service
showing. All of the Partnership's systems are eligible for these simplified
cost-of-service rules, and have calculated rates generally in accordance with
those rules.
Under the FCC's rate rules, 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. However,
federal law requires that the basic service tier be offered to all cable
subscribers and limits the ability of operators to require purchase of any cable
programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis, subject to a technology exception
which sunsets in 2002. 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.
Regulation by the FCC of cable programming service tier rates for all
systems, regardless of size, sunset pursuant to the 1996 Telecom Act on March
31, 1999. Certain legislators, however, have called for new rate regulations.
Should this occur, all rate deregulation, including that applicable to small
operators like the Partnership, could be jeopardized.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom Act creates a more favorable environment for the
Partnership to provide telecommunications services beyond traditional video
delivery. It 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. A cable operator is authorized under the
1996 Telecom Act to provide telecommunications services without obtaining a
separate local franchise. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way and
may require reasonable, competitively neutral compensation for management of the
public rights-of-way when cable operators provide telecommunications service.
The 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. The FCC recently clarified that a cable
operator's favorable pole rates are not endangered by the provision of Internet
services, but the U.S. Court of Appeals for the 11th Circuit recently ruled in
Gulf Power Co. v. FCC, 208F.3d 1263 (11th Cir. 2000) ("Gulf Power") that the FCC
has no authority to regulate pole rents for cable systems providing Internet
services (because, the court ruled, Internet services are not telecommunications
services or cable services). The court subsequently stayed the issuance of the
mandate in Gulf Power
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pending the filing of and final action on a petition for write of certiorari
seeking review of the Gulf Power decision in the U.S. Supreme Court. The stay
allows for the orderly review of the decision in the U.S. Supreme Court. In the
interim, the FCC may continue to process pending pole attachment complaints
under its existing rules and procedures. If the 11th Circuit decision goes into
effect, it could significantly increase pole attachment rates and adversely
impact cable operators.
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 Supreme Court
effectively upheld most of the FCC interconnection regulations, but recently the
8th Circuit Court of Appeals vacated other portions of the FCC's rules on
slightly different grounds. More recently, the 9th Circuit Court of Appeals
ruled in the FCC's favor on these same rules, creating a split in authority that
may be resolved by the Supreme Court. Although these regulations should enable
new telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including which specific network elements the
FCC can mandate that incumbent carriers make available to competitors, remain
unresolved.
Similarly, if another FCC decision requiring that incumbent telephone
companies permit co-location of competitors' equipment on terms more favorable
to competitors is sustained on administrative and judicial appeal, this
decision, too, would make it easier for new entrants, including the Partnership,
to provide telecommunications service.
INTERNET SERVICE
There is at present no significant federal regulation of cable system
delivery of Internet services. Furthermore, the FCC recently issued several
reports finding no immediate need to impose this type of regulation. However,
this situation may change as cable systems expand their broadband delivery of
Internet services. In particular, proposals have been advanced at the federal
level that would require cable operators to provide access to unaffiliated
Internet-service providers and online service providers. In one instance, the
Federal Trade Commission is considering whether and to what extent to impose, as
a condition of Time Warner's merger with America Online, certain "open access"
requirements on Time Warner's cable systems, thereby allowing unaffiliated
Internet-service providers access to Time Warner's broadband distribution
infrastructure.
Some local franchising authorities unsuccessfully tried to impose
mandatory Internet access or "open access" requirements as part of cable
franchise renewals or transfers. In AT&T Corp v. City of Portland, No. 99-35609
(9th Cir., June 22, 2000), the federal Court of Appeals for the Ninth Circuit
overturned a federal district court in Portland, Oregon's ruling that local
franchising authorities have the lawful authority to impose these type of
conditions. The lower court had ruled that the City of Portland had inherent
authority to require, as a condition of the City's consent to the transfer of
TCI's cable franchise to AT&T, that AT&T provide "open access" to the "cable
modem platform" of the Excite@Home Internet service. On appeal, the Court of
Appeals rejected the City's attempt to impose "open access" conditions on AT&T
delivery of Internet service over the cable system because that service,
according to the Court, is not a cable service, but a "telecommunications
service." The potential regulatory state and federal implications of this
rationale are unclear, given the various regulatory requirements for the
provision of telecommunications services. There have been at least two
additional court rulings that have rejected local imposition of "open access"
conditions on cable-provided Internet access, but those ruling have employed
very different legal reasoning. A federal court in Virginia found that Internet
service was a cable service, but as such was exempt from local "open access"
regulation. Another federal court in Florida even more recently ruled that "open
access" could not be imposed on local operators because doing so would violate
the First Amendment. Other local authorities have imposed or may impose
mandatory Internet access requirements on cable operators. These developments
could, if they become widespread, burden the capacity of cable systems and
complicate any plans the Partnership may have to develop for providing Internet
service.
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, including the regional telephone
companies, can now compete with cable operators both inside and outside their
telephone service areas with certain regulatory safeguards. Because of their
resources, local exchange carriers could be formidable competitors to
traditional cable operators. Various local exchange carriers currently are
providing video programming services within their telephone service areas
through a variety of distribution methods, including both the deployment of
broadband wire facilities and the use of wireless transmission.
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Under the 1996 Telecom Act, local exchange carriers providing video
programming should be regulated as a traditional cable operator, subject to
local franchising and federal regulatory requirements, unless the local exchange
carrier elects to deploy its plant as an open video system. To qualify for
favorable open video system status, the competitor must reserve two-thirds of
the system's activated channels for unaffiliated entities. The Fifth Circuit
Court of Appeals reversed certain of the FCC's open video system rules,
including its preemption of local franchising. The FCC recently revised its OVS
rules to eliminate this general preemption, thereby leaving franchising
discretion to local and state authorities. It is unclear what effect this ruling
will have on the entities pursuing open video system operation.
Although local exchange carriers and cable operators can now expand
their offerings across traditional service boundaries, the general prohibition
remains on local exchange carrier buyouts of co-located cable systems. Cable
operator buyouts of co-located local exchange carrier systems, and joint
ventures between cable operators and local exchange carriers in the same market
also are prohibited. 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.
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 Utility Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several of these utilities have been granted broad authority by the FCC to
engage in activities which could include the provision of video programming.
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 Cable Act
leaves in place existing restrictions on cable cross-ownership with satellite
master antenna television and multichannel multipoint distribution service
facilities, but lifts those restrictions where the cable operator is subject to
effective competition. FCC regulations permit cable operators to own and operate
satellite master antenna television systems within their franchise area,
provided that their operation is consistent with local cable franchise
requirements.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements.
Broadcast signal carriage is the transmission of broadcast television signals
over a cable system to cable customers. These requirements, among other things,
allow local commercial television broadcast stations to elect once every three
years between a "must carry" status or a "retransmission consent" status. Less
popular stations typically elect must carry, which is the broadcast signal
carriage requirement that allows local commercial television broadcast stations
to require a cable system to carry the station. Must carry requests can dilute
the appeal of a cable system's programming offerings because a cable system with
limited channel capacity may be required to forego carriage of popular channels
in favor of less popular broadcast stations electing must carry. More popular
stations, such as those affiliated with a national network, typically elect
retransmission consent, which is the broadcast signal carriage rule that allows
local commercial television broadcast stations to negotiate terms (such as
mandating carriage of an affiliated cable network) for granting permission to
the cable operator to carry the stations. Retransmission consent demands may
require substantial payments or other concessions.
The Partnership has been able to reach agreements with all of the
broadcasters who elected retransmission consent. To date, compliance with the
"retransmission consent" and "must carry" provisions of the 1992 Cable Act has
not had a material effect on the Partnership, although these provisions may
affect the operations of the Partnership in the future, depending on factors as
market conditions, the introduction of digital broadcasts, channel capacity and
similar matters when these arrangements are negotiated or renegotiated.
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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 broadcasts in
their entirety. This burden would reduce capacity available for more popular
video programming and new Internet and telecommunication offerings. The
broadcast industry continues to press the FCC on the issue of digital must
carry. A rulemaking regarding must carry obligations during the transition from
analog to digital broadcasting remains pending at the FCC. It remains unclear
when a final decision will be released.
ACCESS CHANNELS
Local franchising authorities 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 commercial leased access use. In the Partnership's experience to
date, requests for commercial leased access carriages have been relatively
limited.
ACCESS TO PROGRAMMING
To spur the 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 their cable operators
over new competitors and requires these 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 also has been interest expressed in
further restricting the marketing practices of cable programmers, including
subjecting programmers who are not affiliated with cable operators or
programmers who deliver their service by terrestrial means (rather than by
satellite) to the program access requirements. These changes should not have a
dramatic impact on the Partnership, but would limit potential competitive
advantages the Partnership enjoys.
INSIDE WIRING; SUBSCRIBER ACCESS
In an order issued in 1997, the FCC established rules that require an
incumbent cable operator upon expiration of a multiple dwelling unit service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a multiple dwelling unit building. These inside wiring rules
are expected to assist building owners in their attempts to replace existing
cable operators with new programming providers who are willing to pay the
building owner a higher fee, where this fee is permissible. The FCC has also
proposed abrogating all exclusive multiple dwelling unit service agreements held
by incumbent operators.
With limited exceptions, existing FCC regulations prohibit any state or
local law or regulations, or private covenant, private contract, lease
provision, homeowners' association rule or similar restriction, impairing the
installation, maintenance or use of certain video reception antennas on property
within the exclusive control of a tenant or property owner.
OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION
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,
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- local sports blackouts,
- indecent programming,
- lottery programming,
- political programming,
- sponsorship identification,
- children's programming advertisements, and
- closed captioning,
- registration of cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical 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 ruled that cable customers must be allowed to purchase
cable converters from third parties and established a multi-year phase-in during
which security functions, which would remain in the operator's exclusive
control, would be unbundled from basic converter functions, which could then be
satisfied by third party vendors.
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, cable operators can obtain blanket permission to
retransmit copyrighted material included in broadcast signals. Effective July 1,
2000, the federal Copyright Office increased the cable compulsory license rates
used to calculate cable systems' copyright payments under the cable compulsory
license. 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. The
outcome of this legislative activity cannot be predicted. Copyright clearances
for nonbroadcast programming services are arranged through private negotiations.
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Cable operators distribute locally originated programming and
advertising that use music controlled by the two principal major music
performing rights organizations, the American Society of Composers, Authors and
Publishers (ASCAP) and BroadcastMusic, Inc. (BMI). The cable industry has had a
long series of negotiations and adjudications with both organizations. A prior
voluntarily negotiated settlement with BMI has now expired, and is subject to
further proceedings. The governing rate court recently set retroactive and
prospective cable industry rates for ASCAP music based on the previously
negotiated BMI rate. Although the Partnership cannot predict the ultimate
outcome of these industry proceedings or the amount of any license fees that
they may be required to pay for past and future use of association-controlled
music, the Partnership does not currently believe these license fees will be
significant to their business and operations.
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 local
franchising authorities from granting exclusive franchises or from unreasonably
refusing to award additional franchises.
Cable franchises generally are granted for fixed terms and in many cases
include monetary penalties for non-compliance and may be terminable if the
franchisee fails to comply with material provisions. The specific terms and
conditions of franchises vary materially between jurisdictions. Each franchise
generally contains provisions governing cable operations, service rates,
franchising 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 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 local
franchising authorities have considerable discretion in establishing franchise
terms, there are certain federal limitations. For example, local franchising
authorities cannot insist on franchise fees exceeding 5% of the system's gross
cable-related revenues, cannot dictate the particular technology used by the
system, and cannot specify video programming other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, the local franchising authority may attempt to impose more burdensome
or onerous franchise requirements in connection with a request for consent. The
Cable Act requires franchising authorities to act on any franchise transfer
request within 120 days after receipt by the franchising authority of all
information required by FCC regulations. Approval is deemed to be granted if the
franchising authority fails to act within such 120-day period. Historically,
most of the Partnership's franchises have been renewed and transfer consents
granted.
Under the 1996 Telecom Act, local franchising authorities are prohibited
from limiting, restricting, or conditioning the provision of competitive
telecommunications services except for certain "competitively neutral"
requirements necessary to manage public rights of way. In addition, local
franchising authorities may not require the Partnership to provide any
telecommunications service or facilities, other than institutional networks
under certain circumstances, as a condition of an initial cable franchise grant,
franchise renewal, or franchise transfer. The 1996 Telecom Act also provides
that franchising fees are limited to an operator's cable-related revenues and do
not apply to revenues that the Partnership derives from providing new
telecommunications services.
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 15,140 homes as of December 31, 2000. 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.)
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ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to ordinary and routine proceedings that are
incidental to the Partnership's business. Management believes that the outcome
of all pending legal proceedings will not, individually or in the aggregate,
have a material adverse effect on the Partnership, its financial condition,
prospects and debt service ability.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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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, 2000, is
as follows:
Limited Partners: 971
General Partners: 1
(c) During 2000, 1999, 1998, 1997 and 1996, the Partnership made no cash
distributions.
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS:
Revenue $ 5,148,191 $ 4,974,846 $ 4,876,464 $ 4,665,100 $ 4,499,588
Operating income 528,626 466,394 310,189 304,133 374,200
Net loss (160,886) (403,306) (634,150) (682,930) (705,502)
Net loss per
limited partner unit
(weighted average) (8) (21) (33) (35) (37)
Cumulative tax losses
per limited partner
unit (520) (520) (520) (520) (470)
DECEMBER 31,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -----------
BALANCE SHEET DATA:
Total assets $11,239,622 $12,044,826 $13,197,193 $13,826,582 $15,093,913
Notes payable 9,693,028 10,272,182 10,625,000 10,925,000 11,375,000
Total liabilities 10,365,992 11,010,310 11,759,371 11,754,610 12,339,011
General partner's
deficit (71,482) (69,873) (65,840) (59,498) (52,669)
Limited partner's
capital 945,112 1,104,389 1,503,662 2,131,470 2,807,571
Distribution per
limited partner unit 0 0 0 0 0
Cumulative distributions
per limited partner unit 0 0 0 0 0
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
2000 AND 1999
Total revenue reached $5,148,191 for the year ended December 31, 2000,
representing an increase of approximately 3% over 1999. This increase is
primarily attributable to rate increases during 2000. Of the 2000 revenue,
$3,902,648 (76%) is derived from subscriptions to basic services, $401,079 (8%)
from subscriptions to premium services, $212,485 (4%) from advertising, $206,644
(4%) from subscriptions to tier services, $59,565 (1%) from service maintenance
revenue, and $365,770 (7%) from other sources, including advertising and late
fee revenue.
The following table displays historical average rate information for
various services offered by the Partnership's systems (amounts per subscriber
per month):
2000 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- --------
Basic Rate $ 27.35 $ 25.95 $ 24.65 $ 23.65 $ 22.85 $ 20.75
Tier Rate 8.25 7.95 7.40 7.20 6.20 4.60
HBO Rate 10.70 10.50 10.50 11.00 9.70 11.25
Cinemax Rate 7.30 7.50 8.00 8.00 7.80 9.00
Showtime Rate 8.75 8.25 7.00 6.00 9.30 --
Disney Rate -- 8.60 8.60 8.50 8.20 9.00
Encore Rate 1.50 1.50 1.50 -- -- --
Starz 6.25 6.75 7.00 -- -- --
Service
Contract Rate 2.00 2.05 2.10 2.15 2.15 2.45
Operating expenses totaled $493,975 for the year ended December 31,
2000, representing a decrease of approximately 1% over 1999. The decrease is
attributable to a reduction of operating salaries and regional management
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 $1,248,737 for the year
ended December 31, 2000, representing an increase of approximately 5% from 1999.
This increase is due to increased salaries and benefits, copyright fees,
franchise fees and administrative overhead.
Programming expenses totaled $1,353,409 for the year ended December 31,
2000, representing an increase of approximately 9% over 1999. 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 decreased from $1,573,984 in 1999
to $1,523,444 in 2000 (approximately 3%). This is primarily due to assets
becoming fully depreciated offset by depreciation and amortization on plant,
equipment and intangible assets acquired during 2000.
Interest expense increased from $819,119 in 1999 to $828,204 in 2000
(approximately 1%). The Partnership's average bank debt balance decreased from
approximately $10,448,591 in 1999 to $9,982,605 in 2000, due to principal
payments made in 2000, net of additional loan proceeds of $97,400. In addition,
the Partnership's effective interest rate increased from 7.86% in 1999 to 8.53%
in 2000.
In 2000, the Partnership generated a net loss of $160,886. 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, 2000.
Management
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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.
1999 AND 1998
Total revenue reached $4,974,846 for the year ended December 31, 1999,
representing an increase of approximately 2% over 1998. This increase was
primarily attributable to rate increases during 1999. Of the 1999 revenue,
$3,782,420 (76%) is derived from subscriptions to basic services, $432,515 (9%)
from subscriptions to premium services, $193,167 (4%) from subscriptions to tier
services, $142,053 (3%) from advertising, $50,344 (1%) from service maintenance
revenue, and $374,347 (7%) from other sources, including advertising and late
fee revenue.
Operating expenses totaled $500,673 for the year ended December 31,
1999, representing a decrease of approximately 2% over 1998. The reduction of
personnel in Aliceville, Alabama system resulted in reduced salary and benefit
costs. Salary and benefit costs are the major component of operating expenses.
Employee wages are reviewed annually and, in most cases, increased based on cost
of living adjustments and other factors. Therefore, management expects operating
expenses to increase in the future.
General and administrative expenses totaled $1,188,209 for the year
ended December 31, 1999, representing an increase of approximately 5% from 1998.
This increase is due to increased salaries and benefits, copyright fees,
franchise fees and administrative overhead.
Programming expenses totaled $1,245,586 for the year ended December 31,
1999, representing an increase of approximately 2% over 1998. 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 increase 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 decreased from $1,701,823 in 1998
to $1,573,984 in 1999 (approximately 8%). This is primarily due to organization
costs becoming fully amortized in 1998, offset by depreciation and amortization
on plant, equipment and intangible assets acquired during 1999.
Interest expense decreased from $908,651 in 1998 to $819,119 in 1999
(approximately 10%). The Partnership's average bank debt balance decreased from
approximately $10,775,000 in 1998 to $10,448,591 in 1999, due to principal
payments made in 1999, net of additional loan proceeds of $182,000. In addition,
the Partnership's effective interest rate decreased from 8.22% in 1998 to 7.86%
in 1999.
In 1999, the Partnership generated a net loss of $403,306. 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, 2000.
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.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, 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 2000, cash generated from monthly
billings was sufficient to meet the Partnership's needs for working capital,
capital expenditures and debt service. Management estimates for 2001 that cash
generated from monthly subscriber billings is sufficient to meet the
Partnership's working capital needs, as well as meeting the debt service
obligations of its bank loan.
As of the date of this filing, the Partnership's term loan balance was
$9,693,028. The Partnership has entered into certain fixed rate agreements.
Currently, the interest rates on the credit facility are as follows: $6,800,000
at a LIBOR based rate of 8.44301% expiring on March 29, 2001; $2,600,000
interest rate swap agreement fixed at a rate of 7.22% expiring on February 12,
2002 and $272,889 fixed at 8.25%. The balance of $20,139 bears interest at the
prime rate plus 0.25% (currently 8.75%). 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.
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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 periodically 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 had no interest rate swap agreements outstanding
at December 31, 2000.
Expected Maturity Date
2001 2002 2003 2004 2005 Total
---------- ---------- ---------- ---------- ---------- ----------
Liabilities
Debt Maturity $ 844,028 $8,605,476 $ 16,624 $ 226,900 $ 0 $9,693,028
Debt Interest Payments $ 790,817 $ 387,796 $ 20,064 $ 9,677 $ 0 $1,208,355
Average Interest Rate 8.53% 8.53% 8.53% 8.53% 8.53% 8.53%
Under the terms of the loan agreement, the Partnership has agreed to
restrictive covenants which require the maintenance of certain ratios, including
a Funded Debt to Cash Flow Ratio of 5.00 to 1 and a Cash flow to Debt Service
Ratio of 1.25 to 1, a limitation on the maximum amount of capital expenditures
of $700,000, amongst others. The General Partner submits quarterly debt
compliance reports to the Partnership's creditor under this agreement. At
December 31, 2000, 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 2000, the Partnership incurred approximately $585,000 in capital
expenditures. These expenditures included continued construction on a new office
building and the continued system upgrade to 400 MHz in the LaConner, WA system
and the continuation of a fiber backbone project and the initial phase of system
upgrade to 550 MHz in the Swainsboro, GA system. The LaConner office building is
being financed by a revolving note with maximum borrowings of up to $310,000
converting to a fixed rate note upon completion of construction. All other
capital expenditures for 2000 were financed through cash provided by operations.
Management estimates that the Partnership will spend approximately
$931,000 on capital expenditures in 2001. These expenditures include a
continuing system upgrade to a minimum of 400 MHz for the LaConner, WA system;
the start of a system upgrade, and continuing quality assurance projects in the
Aliceville, AL system; and the continuation of a system upgrade to 550 MHz, a
vehicle replacement and various line extensions in the Swainsboro, GA system.
YEAR 2000 READINESS DISCLOSURE
The efficient operation of the Partnership's business is dependent in
part on its computer software programs and operating 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.
Management experienced no material issues or problems arising out of the Year
2000 issues, either in connection with our internal operations, third-party
relationships or software products.
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Management will continue to monitor our software products to ensure no
problems arise either with regard to leap year or Year 2000 issues. Management
anticipates no material additional costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended
December 31, 2000, 1999 and 1998 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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The 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 59). 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 26 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 64). Mr. Iverson is the Secretary of Northland
Communications Corporation and has served on the Board of Directors since
December 1984. He also is the Secretary and 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. He is
a member of the Washington State Bar Association and American Bar Association
and has been practicing law for more than 38 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 43). Mr. Clark is an original incorporator of
Northland Communications Corporation and serves as Vice President, Assistant
Secretary and Assistant Treasurer of Northland Communications Corporation. He
also serves as Vice President, Assistant Secretary and Treasurer of Northland
Telecommunications Corporation. Mr. Clark has served on the Board of Directors
of both Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. In addition to his other responsibilities, Mr.
Clark 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 22 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.
GARY S. JONES (AGE 43). Mr. Jones is Vice President and Chief Financial
Officer 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
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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 55). 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 57). Mr. Johnson has served as Divisional Vice
President for Northland since March 1994. He is responsible for the management
of systems serving subscribers in Alabama, 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 32 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.
R. GREGORY FERRER (AGE 45). Mr. Ferrer joined Northland in March 1984 as
Assistant Controller and currently serves as Vice President and Treasurer of
Northland Communications Corporation. Mr. Ferrer also serves as Vice President
and Assistant Treasurer of Northland Telecommunications Corporation. Mr. Ferrer
is responsible for coordinating all of Northland's property tax filing,
insurance requirements and system programming contracts as well as interest rate
management and other treasury functions. Prior to joining Northland, he was a
Certified Public Accountant at Benson & McLaughlin, a local public accounting
firm, from 1981 to 1984. Mr. Ferrer received his Bachelor of Arts in Business
Administration from Washington State University with majors in marketing in 1978
and accounting and finance in 1981.
MATTHEW J. CRYAN (AGE 36). Mr. Cryan is Vice President - Budgets and
Planning and has been with Northland since September 1990. Mr. Cryan is
responsible for the development of current and long-term operating budgets for
all Northland entities. Additional responsibilities include the development of
financial models used in support of acquisition financing, analytical support
for system and regional managers, financial performance monitoring and reporting
and programming analysis. Prior to joining Northland, Mr. Cryan was employed as
an analyst with NKV Corp., a securities litigation support firm located in
Redmond, Washington. Mr. Cryan graduated from the University of Montana in 1988
with honors and holds a Bachelor of Arts in Business Administration with a major
in finance.
LAURA N. WILLIAMS (age 34). Ms Williams is Vice President and Senior
Counsel for Northland and has served in this role since August 2000. Prior to
this time, she served as Associate Counsel for each of the Northland entities
from August 1995. She is a member of the Washington State Bar Association,
American Bar Association and Women in Telecommunications. Ms. Williams received
her Bachelor of Science in Business Administration with a major in finance and
an MBA degree from California State University, Long Beach, and has a Juris
Doctor degree from Seattle University School of Law.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation
was paid to the General Partner and affiliates during 2000 as indicated in Note
3 to the Notes to Financial Statements--December 31, 2000 (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, 2000 is as follows:
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
-------------- ------------------- ----------------- ----------
General Northland (See Note A) (See Note A)
Partner's Communications
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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
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 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 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.
NCP-Seven began serves as the executive managing agent for one of the
Partnership's cable television systems and is reimbursed for certain operating
and administrative expenses.
Northland Cable Services Corporation ("NCSC"), an affiliate of
Northland, provides software installation and billing services to the
Partnership's Systems.
Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides the
production and development of video commercial advertisements and advertising
sales support.
Northland Cable News, Inc.("NCN"), an affiliate of Northland, provides
programming to certain of the Partnership's systems.
See Note 3 of the Notes to Financial Statements--December 31, 2000 for
disclosures regarding transactions with the General Partner and affiliates.
20
21
The following schedule summarizes these transactions:
FOR THE YEARS ENDED DECEMBER 31,
2000 1999 1998
--------- --------- ---------
Partnership management fees $ 257,410 $ 248,851 $ 243,823
Operating expense reimbursements 222,222 244,730 270,368
Software installation and
billing service fees to NCSC 45,992 40,276 41,275
Reimbursements (to)/from
Affiliates (243,509) (99,498) (39,028)
Local Advertising Services 28,966 23,233 18,218
Local Programming Services 8,196 33,615 49,365
Amounts due to (from) General Partner
and affiliates at year end 18,734 5,592 81,682
Management believes that all of the above transactions are on terms as
favorable to the Partnership as could be obtained from unaffiliated parties for
comparable goods or services.
As disclosed in the Partnership's Prospectus (which has been
incorporated by reference), certain conflicts of interest may arise between the
Partnership and the General Partner and its affiliates. Certain conflicts may
arise due to the allocation of management time, services and functions between
the Partnership and existing and future partnerships as well as other business
ventures. The General Partner has sought to minimize these conflicts by
allocating costs between systems on a reasonable basis. Each limited partner may
have access to the books and non-confidential records of the Partnership. A
review of the books will allow a limited partner to assess the reasonableness of
these allocations. The Agreement of Limited Partnership provides that any
limited partner owning 10% or more of the Partnership units may call a special
meeting of the Limited Partners, by giving written notice to the General Partner
specifying in general terms the subjects to be considered. In the event of a
dispute between the General Partner and Limited Partners which cannot be
otherwise resolved, the Agreement of Limited Partnership provides steps for the
removal of a General Partner by the Limited Partners.
(b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and
Secretary of the General Partner, is a partner of the law firm of Ryan, Swanson
& Cleveland, PLLC, which has rendered and is expected to continue to render
legal services to the General Partner and the Partnership.
(c)INDEBTEDNESS OF MANAGEMENT. None.
21
22
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, 2000 and 1999.............................................. ____
Statements of Operations for the years ended December 31, ____
2000, 1999 and 1998.....................................................................
Statements of Changes in Partners' Capital (Deficit) for
the years ended December 31, 2000, 1999 and 1998....................................... ____
Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998........................................................ ____
Notes to Financial Statements--December 31, 2000 ____
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)
22
23
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)
23
24
EXHIBITS:
---------
Franchise Agreement with Town of Millport, AL - Assignment and Assumption Agreement dated
10.39 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 dated March 30, 1998.(10)
- ------------
(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.
(10)Incorporated by reference from the Partnership's Form 10-K Annual Report for
the year ended December 31, 1998.
(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, 2000.
24
25
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CABLE PROPERTIES EIGHT LIMITED
PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION
(Managing General Partner)
Date: 3/30/01 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 3/30/01
- -------------------------------- executive officer and chairman of the board -------
John S. Whetzell of directors of Northland Communications
Corporation
/s/ Richard I. Clark Director of Northland Communications 3/30/01
- -------------------------------- Corporation -------
Richard I. Clark
/s/ John E. Iverson Secretary and Director of Northland Communications 3/30/01
- -------------------------------- Corporation -------
John E. Iverson
/s/ Gary S. Jones Vice President and principal accounting 3/30/01
- -------------------------------- officer of Northland Communications -------
Gary S. Jones Corporation
EXHIBITS INDEX
26
NORTHLAND CABLE PROPERTIES EIGHT
LIMITED PARTNERSHIP
Financial Statements
As of December 31, 2000 and 1999
Together With Report of Independent Public Accountants
27
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,
2000 and 1999, 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, 2000. 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 auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
----------------------------------
Seattle, Washington
January 26, 2001
28
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
CASH $ 602,716 $ 316,123
ACCOUNTS RECEIVABLE 151,961 111,341
DUE FROM AFFILIATES 8,842 2,445
PREPAID EXPENSES 71,289 71,698
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment 12,581,448 12,366,457
Less- Accumulated depreciation (6,600,455) (5,682,821)
------------ ------------
5,980,993 6,683,636
Franchise agreements (net of accumulated
amortization of $2,330,905 and $2,539,971
in 2000 and 1999, respectively) 4,278,722 4,665,011
Loan fees and other intangibles (net of
accumulated amortization of $127,156
and $594,610 in 2000 and 1999, respectively) 32,562 78,075
Goodwill (net of accumulated amortization of
$45,872 and $41,912 in 2000 and 1999,
respectively) 112,537 116,497
------------ ------------
Total investment in cable television
properties 10,404,814 11,543,219
------------ ------------
Total assets $ 11,239,622 $ 12,044,826
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES:
Accounts payable and accrued expenses $ 436,245 $ 514,549
Due to General Partner and affiliates 27,576 8,037
Deposits 4,322 7,952
Subscriber prepayments 204,821 207,590
Term loan 9,693,028 10,272,182
------------ ------------
Total liabilities 10,365,992 11,010,310
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' CAPITAL (DEFICIT):
General Partner-
Contributed capital 1,000 1,000
Accumulated deficit (72,482) (70,873)
------------ ------------
(71,482) (69,873)
------------ ------------
Limited partners
Contributed capital, net:
19,087 units 8,120,820 8,120,820
Accumulated deficit (7,175,708) (7,016,431)
------------ ------------
945,112 1,104,389
------------ ------------
Total liabilities and partners'
capital (deficit) $ 11,239,622 $ 12,044,826
============ ============
The accompanying notes are an integral part of these balance sheets.
29
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
REVENUE $ 5,148,191 $ 4,974,846 $ 4,876,464
----------- ----------- -----------
EXPENSES:
Operating (including $71,438, $60,576, and $30,156,
net, paid to affiliates in 2000, 1999 and 1998,
respectively) 493,975 500,673 513,323
General and administrative (including $644,859,
$500,749, and $496,332, net, paid to affiliates in
2000, 1999 and 1998, respectively) 1,248,737 1,188,209 1,130,734
Programming (including $89,998, $71,510, and $2,066,
net, paid to affiliates in 2000, 1999 and 1998,
respectively) 1,353,409 1,245,586 1,220,395
Depreciation and amortization 1,523,444 1,573,984 1,701,823
----------- ----------- -----------
4,619,565 4,508,452 4,566,275
----------- ----------- -----------
Operating income 528,626 466,394 310,189
OTHER INCOME (EXPENSE):
Interest income 11,247 14,875 15,817
Interest expense (828,204) (819,119) (908,651)
Amortization of loan fees and other, net 127,445 (65,456) (51,505)
----------- ----------- -----------
Net loss $ (160,886) $ (403,306) $ (634,150)
=========== =========== ===========
ALLOCATION OF NET LOSS:
General Partner $ (1,609) $ (4,033) $ (6,342)
=========== =========== ===========
Limited partners $ (159,277) $ (399,273) $ (627,808)
=========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (8) $ (21) $ (33)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
30
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
General Limited
Partner Partners Total
----------- ----------- -----------
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
Net loss (4,033) (399,273) (403,306)
----------- ----------- -----------
BALANCE, December 31, 1999 (69,873) 1,104,389 1,034,516
Net loss (1,609) (159,277) (160,886)
----------- ----------- -----------
BALANCE, December 31, 2000 $ (71,482) $ 945,112 $ 873,630
=========== =========== ===========
The accompanying notes are an integral part of these statements.
31
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (160,886) $ (403,306) $ (634,150)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization expense 1,523,444 1,573,984 1,701,823
Amortization of loan fees 29,660 53,506 51,505
(Gain) loss on sale of property (156,205) 11,950 --
Changes in certain assets and liabilities:
Accounts receivable (40,620) (3,330) (6,239)
Due from affiliates (6,397) 23,850 (26,295)
Prepaid expenses 409 (10,727) 1,482
Accounts payable and accrued expenses (78,304) (264,369) 153,344
Due to General Partner and affiliates 19,539 (99,940) 73,776
Deposits (3,630) (2,050) (2,198)
Subscriber prepayments (2,769) (29,885) 79,839
----------- ----------- -----------
Net cash provided by operating activities 1,124,241 849,683 1,392,887
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (585,285) (979,928) (672,390)
Increase in intangibles (16,063) -- (27,153)
Proceeds from sale of property 342,854 2,175 --
----------- ----------- -----------
Net cash used in investing activities (258,494) (977,753) (699,543)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 97,400 182,000 --
Principal payments on note payable (676,554) (534,818) (300,000)
Loan fees -- (3,099) (56,255)
----------- ----------- -----------
Net cash used in financing activities (579,154) (355,917) (356,255)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH 286,593 (483,987) 337,089
CASH, beginning of year 316,123 800,110 463,021
----------- ----------- -----------
CASH, end of year $ 602,716 $ 316,123 $ 800,110
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 808,176 $ 854,903 $ 1,066,353
=========== =========== ===========
The accompanying notes are an integral part of these statements.
32
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
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.
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
33
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.
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, including service maintenance, 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 $212,485, $142,053, and $153,797 in 2000, 1999
and 1998, 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. The Partnership periodically 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 agreement in the Partnership's statements
of operations.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133 - In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133) and in June 2000
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," an amendment of SFAS 133. These statements establish
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. These statements require 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
34
operations, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that are subject to hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB No. 133 -- an Amendment to
FASB Statement No. 133," the effective date of SFAS 133 has been deferred until
fiscal years beginning after January 15, 2000. SFAS 133 cannot be applied
retroactively. SFAS 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, 1998 (and, at the
company's election, before January 1, 1999).
The Partnership had no interest rate swaps or other derivative financial
instruments outstanding at December 31, 2000.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 $257,410, $248,851, and $243,823 for 2000, 1999 and 1998,
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, 2000, the Partnership
has repurchased $12,500 of limited partnership units (50 units at $250 per
unit).
35
Reimbursements
The General Partner provides or causes to be provided certain centralized
services to the Partnership and other affiliated entities. The General Partner
is entitled to reimbursement from the Partnership for various expenses incurred
by it or its affiliates on behalf of the Partnership allocable to its management
of the Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and
licenses, headquarters' supplies and expenses, pay television expenses,
equipment and vehicle charges, operating salaries and expenses, administrative
salaries and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by affiliates
in rendering the services. The costs of certain services are charged directly to
the Partnership, based upon the personnel time spent by the employees rendering
the service. The cost of other services is allocated to the Partnership and
affiliates based upon relative size and revenue. Management believes that the
methods used to allocate services to the Partnership are reasonable. Amounts
charged to the Partnership by the General Partner for these services were
$222,222, $244,730, and $270,368 for the years ended December 31, 2000, 1999 and
1998, respectively.
In 2000, 1999 and 1998, the Partnership was charged software installation
charges and maintenance fees for billing system support provided by an
affiliate, amounting to $45,992, $40,276, and $41,275, 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 $243,509, $99,498, and $39,028
under the terms of these agreements during 2000, 1999 and 1998, 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 $28,966, $23,233 and
$18,218 in 2000, 1999 and 1998, 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 $8,196, $33,615 and $49,365 during 2000, 1999 and 1998,
respectively.
Due to General Partner and Affiliates
2000 1999
------- -------
Reimbursable operating costs $11,595 $ --
Other amounts due to affiliates, net 15,981 8,037
------- -------
$27,576 $ 8,037
======= =======
36
4. PROPERTY AND EQUIPMENT:
December 31,
----------------------------
2000 1999
----------- -----------
Land and buildings $ 511,397 $ 203,718
Distribution plant 11,386,043 11,284,388
Other equipment 524,420 615,561
Construction in progress 159,588 262,790
----------- -----------
$12,581,448 $12,366,457
=========== ===========
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
December 31,
----------------------
2000 1999
-------- --------
Accounts payable $ 74,069 $111,446
Interest 30,076 10,049
Program license fees 146,142 141,993
Franchise fees 16,782 55,609
Pole rental 79,282 71,654
Other 89,894 123,798
-------- --------
$436,245 $514,549
======== ========
6. TERM LOAN:
December 31,
----------------------------
2000 1999
----------- -----------
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 8.53% (weighted average). Graduated principal
payments plus interest are due quarterly until
maturity on December 31, 2002 $ 9,420,139 $10,090,182
Additional drawdown of the term loan issued under the
Company's March 30, 1998 term loan, for a new office in
LaConner, Washington, collateralized by a first lien
position on all present and future assets of the Partnership
Interest is fixed at 8.25%. Fixed payments of principal plus
interest are due monthly until maturity on December 31, 2004 272,889 182,000
----------- -----------
$ 9,693,028 $10,272,182
=========== ===========
37
Annual maturities of term loan after December 31, 2000 are as follows:
2001 $ 844,028
2002 8,605,476
2003 16,624
2004 226,900
-----------
9,693,028
===========
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 no more than 5.00 to 1 and a Cash Flow to Debt
Service Ratio of greater than 1.25 to 1, and a limitation on the maximum amount
of capital expenditures of $700,000, excluding costs for the office site in
LaConner, Washington, among other restrictions. The General Partner submits
quarterly debt compliance reports to the Partnership's creditor under this
agreement. At December 31, 2000, the Partnership was in compliance with the
terms of the loan agreement.
7. INCOME TAXES:
Income taxes payable have not been recorded in the accompanying financial
statements because they are obligations of the partners. The federal and state
income tax returns of the Partnership are prepared and filed by the General
Partner.
The tax returns, the qualification of the Partnership as such for tax purposes,
and the amount of distributable partnership income or loss are subject to
examination by federal and state taxing authorities. If such examinations result
in changes with respect to the Partnership's qualification or in changes with
respect to the income or loss, the tax liability of the partners would likely be
changed accordingly.
There was no taxable income to the limited partners in any of the three years in
the periods ended December 31, 2000. Generally, subject to the allocation
procedures discussed in the following paragraph, taxable income to the limited
partners is different from that reported in the statements of operations
principally due to differences in depreciation and amortization expense allowed
for tax purposes and the amount recognizable under generally accepted accounting
principles. Traditionally, there are no other significant differences between
taxable income and net income reported in the statements of operations.
The Partnership agreement provides that tax losses may not be allocated to the
Limited Partners if such loss allocation would create a deficit in the Limited
Partners' Capital Account. Such excess losses are reallocated to the General
Partner ("Reallocated Limited Partner Losses"). In general, in subsequent years,
100% of the Partnership's net income is allocated to the General Partner until
the General Partner has been allocated net income in amounts equal to the
Reallocated Limited Partner Losses.
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 their individual
income tax return only to the extent of the partner's adjusted basis in their
partnership interest at the end of the tax year. No losses will be allocated to
limited partners with negative basis.
38
In addition, current tax law does not allow a taxpayer to use losses from a
business activity in which they do 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 their entire interest in the passive activity.
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $133,043, $122,851 and $111,412 in 2000, 1999
and 1998, respectively. Minimum lease payments through the end of the lease
terms are as follows:
2001 $ 3,300
2002 3,300
2003 3,100
2004 3,100
2005 3,300
Thereafter 33,300
-------
$49,400
=======
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.
39
Telephone Companies. The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act; as a radio-based multichannel
programming distributor not subject to any provisions of the 1996 Act; or
through nonfranchised "open video systems" offering nondiscriminatory capacity
to unaffiliated programmers, subject to select provisions of the 1996 Act.
Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross-ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public, Educational and Governmental and leased
access channels.
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 2000,
1999 and 1998, respectively, the Partnership was charged $7,185, $7,304 and
$7,370 by the fund. As of December 31, 2000, the fund had a balance of $509,135.