<PAGE> 1
FORM 10-K.--ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-29354 eff. 7-1-91.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] For the fiscal year ended DECEMBER 31, 1995
[ ] 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 0-16064
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 75-1998317
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 621-1351
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
(NONE) (NONE)
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
(Partially Incorporated into Part IV)
(1) Form 8-A Registration Statement filed July 24, 1987.
(2) Form 10-K Annual Reports for fiscal years ended December 31,
1986, December 31, 1987, December 31, 1988, December 31, 1990,
December 31, 1991 and December 31, 1992, respectively.
(3) Form 10-Q Quarterly Report for periods ended June 30, 1990,
September 30, 1992 and June 30, 1995, respectively.
(4) Form 8-K dated November 1, 1995 and September 15, 1995.
(5) Form 8-K dated September 15, 1995.
This filing contains ______pages. Exhibits Index appears on page ____. Financial
Statements/Schedules Index appears on page ____.
<PAGE> 2
PART I
ITEM 1. BUSINESS
Northland Cable Properties Four Limited Partnership (the "Partnership")
is a Washington limited partnership consisting of two general partners (the
"General Partners") and approximately 1,028 limited partners as of December 31,
1995. Northland Communications Corporation, a Washington corporation, is the
Managing General Partner of the Partnership (referred to herein as "Northland"
or the "Managing General Partner"). FN Equities Joint Venture, a California
general partnership, is the Administrative General Partner of the Partnership
(the "Administrative General Partner").
Northland was formed in March 1981 and is principally involved in the
ownership and management of cable television systems. Northland currently
manages the operations and is the General Partner for cable television systems
owned by 6 limited partnerships. Northland is also the parent company of
Northland Cable Properties, Inc. which was formed in February 1995 and is
principally involved in direct ownership of cable television systems. Northland
is a subsidiary of Northland Telecommunications Corporation ("NTC"). Other
subsidiaries of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and
principally involved in the direct ownership of cable television
systems. Owner of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and
principally involved in the production and development of
local programming.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 as the
holding company for the following entities:
CABLE TELEVISION BILLING, INC. - formed in June 1987 and
principally involved in the development and production of
computer software used in connection with the billing and
financial recordkeeping for cable systems owned or managed by
Northland or Northland Cable Television, Inc.
NORTHLAND INVESTMENT CORPORATION - formed in 1988 and
principally involved in the underwriting of Northland
sponsored limited partnership securities offerings.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and
principally involved in the production and development of
video commercial advertisements.
NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company for
the following entity:
STATESBORO MEDIA, INC. - formed in April 1995 and principally
involved in acquiring and operating an AM radio station
serving the community of Statesboro, GA and surrounding areas.
The Partnership was formed on January 2, 1985 and began operations in
1985 with the acquisition of several cable television systems in Texas and
California (the "Systems"). In September 1995, the Partnership acquired the
cable television systems in and around Kaufman, Oak Grove, Hillsboro, New
Waverly and Waterwood, TX (the "SLT System"). In October 1995, the Partnership
purchased the cable television systems in and around Huffman Prairie View,
Waller, Cut and Shoot, Brookshire, Tarkenton, Ace, Simonton and Fulshear, TX
(the "Brookridge System"). As of December 31, 1995, the total number of basic
subscribers served by the Systems was 23,138, and the partnership's penetration
rate (basic subscribers as a percentage of homes passed) was approximately 59%
as compared to an industry average of approximately 64%, as reported by PAUL
KAGAN ASSOCIATES, INC.
<PAGE> 3
The Partnership has 41 non-exclusive franchises to operate the Systems.
The franchises, which will expire at various dates through the year 2012, have
been granted by county, city and other local governmental authorities in the
areas in which the Systems operate. Annual franchise fees are paid to the
granting governmental authorities. These fees vary between 2% and 5% of the
respective gross revenues of the Systems in a particular community. The
franchises may be terminated for failure to comply with their respective
conditions.
The Partnership serves the communities and surrounding areas of
Flint/Tyler, New Caney, Whitewright, Kaufman, Hillsboro and Prairie View, Texas,
as well as Chowchilla, California. The following is a description of these
areas:
Flint/Tyler, TX: The S.W. Tyler and S.E. Tyler systems serve most of
the suburban areas to the southeast, south and southwest of Tyler, TX. This east
Texas area is known for its tree-lined lakes which offer year-round fishing,
swimming, skiing and other water-related sports during the summer months. The
area's largest lakes are Lake Palestine and Lake Tyler. The Tyler area enjoys a
mild subtropical climate. This allows farmers and gardeners to plant in both
spring and fall due to the area's long growing season of 259 days. Tyler also
features a 22-acre municipally-owned rose garden which is renowned for its
38,000 rose bushes and 450 rose varieties. Certain information regarding the
Tyler, TX system as of December 31, 1995 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 7,902
Tier Subscribers 1,884
Premium Subscribers 2,279
Estimated Homes Passed 9,870
</TABLE>
New Caney, TX: The New Caney system serves the communities and
surrounding areas of Patton Village, Splendora, Woodbranch Village, Roman
Forest, Waterwood, New Waverly, Huffman and New Caney, TX. This system is
approximately forty miles north of Houston, TX and has very easy access to
Houston Intercontinental Airport. Certain information regarding the New Caney,
TX system as of December 31, 1995 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 7,287
Tier Subscribers 2,328
Premium Subscribers 2,860
Estimated Homes Passed 12,870
</TABLE>
Whitewright, TX: The cities of Whitewright, Van Alstyne, Savoy, Bells,
Howe, Tom Bean and Trenton, as well as the city of Sherman, Texas, are located
in a region that is referred to as the "Texoma Region." The Texoma Region
includes Lake Texoma, a large 89,000-acre lake which has over 600 miles of sandy
beaches, an 11,000-acre wildlife refuge and 43 park areas. The wide variety of
recreational opportunities has created a popular resort area attracting more
than 11,000,000 visitors each year. Certain information regarding the
Whitewright, TX system as of December 31, 1995 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 2,266
Tier Subscribers 857
Premium Subscribers 634
Estimated Homes Passed 4,175
</TABLE>
Kaufman, TX: The Kaufman system includes the community of Oak Grove and
is located in north central Texas, approximately 32 miles southeast of Dallas,
Texas. Major industries in the area include manufacturing and health care.
Trinity Valley College is located in the area. Certain information regarding the
Kaufman, TX system as of December 31, 1995 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 1,452
Premium Subscribers 747
Estimated Homes Passed 2,080
</TABLE>
<PAGE> 4
Hillsboro, TX: The Hillsboro system is located in north central Texas,
approximately 65 miles south of Dallas, Texas. Major industries in the area
include retail, manufacturing and health care. In addition, Hill College is
located in the area. Certain information regarding the Hillsboro, TX system as
of December 31, 1995 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 1,554
Premium Subscribers 662
Estimated Homes Passed 3,050
</TABLE>
Prairie View, TX: The Prairie View system is located northwest of
Houston, Texas and includes the community of Waller, Texas. Prairie View is a
branch location of Texas A & M University, one of the largest universities in
southeast Texas. Certain information regarding the Prairie View, TX system as of
December 31, 1995 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 677
Premium Subscribers 385
Estimated Homes Passed 2,595
</TABLE>
Chowchilla, CA: The Chowchilla system serves the communities of and
contiguous areas surrounding Chowchilla, Planada, Riverdale and Caruthers, which
are all located in the San Joaquin Valley in west-central California. The San
Joaquin Valley is one of the nation's leading agricultural areas. The alluvial
deposits from the San Joaquin and Chowchilla rivers over the centuries have made
the valley ideally suited for fruits, nuts, vegetables, cotton and grain. The
climate is warm and dry with temperatures that approach 100 degrees in July and
August. The winters are mild with only occasional frosts. In recent years, the
valley has become increasingly popular because of its climate and access to
recreational areas, with many rivers, lakes and close proximity to the Sierra
National Forest and Yosemite National Park. Certain information regarding the
Chowchilla, CA system as of December 31, 1995 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 2,000
Premium Subscribers 966
Estimated Homes Passed 4,615
</TABLE>
The Partnership had 36 employees as of December 31, 1995. Management of
these systems is handled through offices located in the towns of Flint, New
Caney, Whitewright, Texas and Chowchilla, California. The Kaufman, Hillsboro and
Prairie View, Texas systems share the costs of offices maintained by affiliates
of the Partnership pursuant to the terms of operating management agreements.
Pursuant to the Agreement of Limited Partnership, the Partnership reimburses the
Managing General Partner for time spent by the Managing General Partner's
accounting staff on Partnership accounting and bookkeeping matters. (See Part
III Item 13(a) below.)
The Partnership's cable television business is not considered seasonal.
The business of the Partnership is not dependent upon a single customer or a few
customers, the loss of any one or more of which would have a material adverse
effect on its business. No customer accounts for 10% or more of revenues. No
material portion of the Partnership's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of any
governmental unit, except that franchise agreements may be terminated or
modified by the franchising authorities as noted above. During the last year,
the Partnership did not engage in any research and development activities.
Partnership revenues are derived primarily from monthly payments
received from cable television subscribers. Subscribers are divided into three
categories: basic subscribers, tier subscribers and premium subscribers. "Basic
subscribers" are households that subscribe to the basic level of service, which
generally provides access to the three major television networks (ABC, NBC and
CBS), a few independent local stations, PBS (the Public Broadcasting System) and
certain satellite programming services, such as ESPN, CNN or The Discovery
Channel. "Tier subscribers" are households that subscribe to an additional level
of certain satellite programming services, such as Cartoon Network, CNBC
<PAGE> 5
or American Movie Classics. "Premium subscribers" are households that subscribe
to one or more "pay channels" in addition to the basic service. These pay
channels include such services as Showtime, Home Box Office, Cinemax, Disney or
The Movie Channel.
COMPETITION
Due to factors such as the non-exclusivity of the Partnership's
franchises, recent regulatory changes and Congressional action, the rapid pace
of technological developments, and the adverse publicity received by the cable
industry regarding the lack of competition, there is a substantial likelihood
that the Partnership's systems will be subject to a greater degree of
competition in the future.
Other Entertainment Alternatives The Partnership's systems compete with
other communications and entertainment media, including conventional
over-the-air television broadcasting stations. Cable television service was
first offered as a means of improving television reception in markets where
terrain factors or remoteness from major cities limited the availability of
over-the-air television broadcasts. In some of the areas served by the
Partnership's systems, several of the broadcast television channels can be
adequately received off-air. The extent to which cable television service is
competitive with broadcast stations depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than available off-air.
Cable television systems also are susceptible to competition from other
video programming delivery systems (discussed below), from other forms of home
entertainment such as video cassette recorders, and, in varying degrees, from
sources of entertainment in the communities served, including motion picture
theaters, live theater and sporting events.
Overbuilds Recent federal legislation and court decisions have
increased the likelihood that incumbent cable operators will face instances of
"overbuilding". Overbuilding occurs when a cable operator who is not affiliated
with the incumbent franchise holder applies for and receives a second franchise
from the local franchising authority and constructs a cable system in direct
competition with that of the incumbent. None of the Partnership's franchises
provide for exclusivity. Overbuilding typically occurs where the overbuilder
believes it can attract a profitable share of the incumbent operator's customer
base. Overbuilding also may occur if the local franchising authority authorizes
construction of a governmentally owned and operated cable system. At present
none of the Partnership's cable systems are overbuilt. Given the regulatory
developments making it easier for overbuilders, both private and governmental
entities, to enter the marketplace, there can be no assurances that overbuilder
competition will not occur in the future. However, Management believes that
given the current regulatory environment related to cable rates, the
attractiveness of overbuilding may have been diminished.
Wireless Services A variety of services, often generically referred to
as "wireless" cable, distribute video programming via omnidirectional low-power
microwave signals from a stationary transmitter to customers at fixed locations.
For many years such services faced governmental restrictions on the types of
programming they could distribute and were generally prevented, by regulatory
and technological reasons, from distributing the quantity of programming
distributed by cable operators. Wireless operators also faced difficulty in
obtaining access to certain programming produced by vendors affiliated with the
cable industry.
In recent years, the Federal Communications Commission (the "FCC") has
adopted policies for authorizing new technologies and providing a more favorable
regulatory environment for certain existing wireless technologies. Such policies
have the potential to create additional competition for cable television
systems. The FCC recently amended its regulations to enable multi-channel,
multi-point distribution services ("MMDS"), to compete more effectively with
cable television systems by making available additional channels to the MMDS
industry.
<PAGE> 6
On December 10, 1992, the FCC commenced a rulemaking in which a new
wireless multichannel video service is proposed to be created. The proposed new
service is called the Local Multichannel Distribution Service ("LMDS") and will
operate in the 27.5 - 29.5 MHz frequency band. LMDS providers, as the FCC
currently proposes, would have no restrictions on the kinds of service that may
be offered. No major technological advances which would adversely affect the
Partnership's business have been made during 1995.
There can be no assurance, however, that future competition brought
about by MMDS, LMDS and other wireless technologies will not have a material
adverse effect on Partnership operations. As noted below, the recent
Congressional legislation, among other things, is designed to make programming
that is currently available to the cable television industry available to other
technologies to foster the growth of alternative video programming delivery
services.
Satellite Delivered Services Additional competition exists from private
cable television systems serving condominiums, apartment complexes and other
private residential developments. The operators of these private systems,
generally referred to as Satellite Master Antenna Television ("SMATV")
providers, often enter into exclusive agreements with apartment building owners
or homeowner's associations that preclude operators of franchised cable
television systems from serving residents of such private complexes. Due to the
widespread availability of reasonably priced satellite signal reception dishes
or earth stations, SMATV systems now can offer both improved reception of local
televisions station and many of the same satellite-delivered programming
services that are offered by franchised cable television systems. Moreover,
SMATV systems generally are free of the regulatory burdens imposed on franchised
cable television systems. Although a number of states and some municipalities
have enacted laws and ordinances to afford operators of franchised cable
television systems access to private complexes, several of such laws and
ordinances have been challenged successfully in the courts, and others are under
attack. Because the Partnership generally has been able to enter into access
agreements with owners of private complexes, in Management's opinion, successful
challenges to access statutes would not have a material adverse effect on the
operations of the Partnership.
Reasonably priced earth stations designed for private home use now
enable individual households to receive many of the satellite-delivered
programming services formerly available only to cable television subscribers.
Many satellite programmers now encode their signals in order to allow reception
only by means of authorized decoding equipment.
Direct broadcast satellite ("DBS") service consists of satellite
services that focus on delivering programming services directly to homes using
high-power signals transmitted by satellites to receiving facilities located on
the premises of subscribers. With an antenna as small as 18 inches, a DBS
customer can receive a hundred or more programming signals. Several companies
are preparing to have high-powered DBS systems in place by the middle of this
decade, and two, DirecTv, an affiliate of Hughes Communications, United States
Satellite Broadcasting Co., an affiliate of Hubbard Broadcasting and Primestar,
owned by a consortium of cable television operators, have launched their
systems. It is expected that these DBS operators will use video compression
technology to increase the channel capacity of their systems to provide a
package of movies, broadcast stations and other programming services competitive
with those of cable television systems.
Using a national base of subscribers, it is possible that DBS companies
may be able to offer new and highly specialized services which may not be
available to the cable television industry, but as channel capacity and
penetration of cable television systems increase, the cable industry is expected
to have the ability to offer additional services as well. Because DBS systems
deliver their services using satellite technology, they may not be able to
provide services that are of local interest to their subscribers, and may not be
able to maintain a local presence, which is considered a significant advantage
in developing and maintaining subscriber support. The extent to which DBS
systems will be competitive with the services provided by cable television
systems will depend, among other things, on the ability of DBS operators to
finance substantial start-up costs and to create their own programming or to
obtain access to existing programming. Recent federal legislation requires cable
programmers under certain circumstances to offer their
<PAGE> 7
programming to operators of DBS, MMDS and other multi-channel video systems at
not unreasonably discriminatory prices.
During 1995, the Partnership did not experience any significant
subscriber loss to DBS. There can be no assurance, however, that future
competition brought about by DBS will not have a material adverse impact on
Partnership operations.
Telephone Companies Federal law, FCC regulations and the 1982 federal
court consent decree (the "Modified Final Judgment") that settled the 1974
antitrust suit against AT&T all limit in various ways the provision of video
programming and other information services by telephone companies. Federal law
codifies FCC cross-ownership regulations which, among other things, prohibit
local telephone exchange companies including the seven Regional Bell Operating
Companies ("RBOCs"), from providing video programming directly to subscribers
within their local exchange service areas, except in rural areas or by specific
waiver of FCC rules. These statutory provisions and corresponding FCC
regulations are of particular competitive importance because these telephone
companies already own much of the plant necessary for cable television
operations, such as poles, underground conduits, associated rights-of-way and
connections to the home.
In July 1991, the U.S. District Court responsible for the Modified
Final Judgment lifted the prohibition on the provision of information services
by the RBOCs. As a result, the RBOCs were allowed to acquire or construct cable
television systems outside of their own service areas. Another federal court
held that the cable/telco cross-ownership prohibitions unconstitutionally
abridge the First Amendment rights of the RBOCs and other telephone companies.
Several RBOCs have entered into agreements to purchase cable television systems
outside their service areas. Management believes that such purchases of existing
cable television systems do not represent a significant competitive threat to
the Partnership
In July 1992, the FCC voted to authorize additional competition to
cable television by video programmers using broadband common carrier facilities
constructed by telephone companies. The FCC allowed telephone companies to take
ownership interests of up to 5% in such programmers. Several telephone companies
have sought approval from the FCC to build such "video dialtone" systems and
several experimental systems have been approved by the FCC. No such systems were
proposed in a community in which the Partnership holds a cable franchise.
Recent Federal laws have significantly changed the restrictions on
telephone companies with respect to their ability to own and operate video
programming delivery systems within their own service areas. See "Regulation -
The 1996 Act."
There can be no assurance that future competition brought on by
telephone company participation in the cable television industry will not have a
material adverse effect on the Partnership's operations.
REGULATION
The Partnership's business is subject to intensive regulation at the
federal and local levels, and to a lesser degree, at the state level. The FCC,
the principal federal regulatory agency with jurisdiction over cable television,
is responsible for implementing federal policies such as rate regulation, cable
system relations with other communications media, cross-ownership, signal
carriage, equal employment opportunity and technical performance. Provisions of
regulatory events that have impacted the Partnership's operations are summarized
below.
The 1992 Cable Act. On October 5, 1992, Congress enacted the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), which significantly increased regulation of the cable television
industry. The 1992 Cable Act became generally effective on December 4, 1992,
although certain provisions became effective at later dates. The 1992 Cable Act
represents a significant change in the regulatory framework under which cable
television systems operate and has had and likely
<PAGE> 8
will continue to have a significant impact on the cable industry and the
Partnership's business.
Since the Cable Communications Policy Act of 1984 (the "1984 Cable
Act") became effective, and prior to the enactment of the 1992 Cable Act, rates
for cable services were unregulated for substantially all of the Partnership's
systems. Effective September 1, 1993, rate regulation was instituted for certain
cable television services and equipment in communities that are not subject to
"effective competition" as defined in the legislation. Effective competition is
defined by this law to exist only where (i) fewer than 30 percent of the
households in the franchise area subscribe to the cable service of a cable
system; (ii) there are at least two unaffiliated multichannel video programming
distributors serving the franchise area meeting certain penetration criteria; or
(iii) a multichannel video programming distributor is available to 50 percent of
the homes in the franchise area and is operated by the franchising authority.
Virtually all cable television systems in the United States, including all of
the Partnership's systems, are not subject to effective competition under this
definition and therefore are subject to rate regulation for basic service by
local franchising authority officials under the oversight of the FCC and subject
to rate regulation for their remaining programming services (other than those
offered for a per-channel or per-program charge) by the FCC.
The 1992 Cable Act requires each cable system to establish a basic
service tier consisting, at a minimum, of all local broadcast signals and all
non-satellite delivered distant broadcast signals which the system wishes to
carry, and all public, educational and governmental access programming. On April
1, 1993, the FCC adopted its initial regulations governing rates for the basic
service tier. Under the regulations adopted by the FCC on April 1, 1993, local
franchising authorities, after meeting certain requirements, can require cable
operators to reduce the rates for the basic service tier by up to 10 percent
from the rates in effect on September 30, 1992, if those rates exceed a
per-channel benchmark established by the FCC. Local franchising authorities also
are empowered to regulate the rates charged for installation and lease of the
equipment used by subscribers to receive the basic service tier and the
installation and monthly use of connections for additional television sets. The
FCC's regulations require franchising authorities to regulate these rates on the
basis of actual cost standards developed by the FCC.
A local franchising authority seeking to regulate basic service rates
must certify to the FCC that, among other things, it has adopted regulations
consistent with the FCC's rate regulation guidelines and criteria. If a local
franchising authority's certification is deficient or subsequently is revoked,
then the FCC is required to regulate the cable operator's basic service rates
until the local franchising authority is properly certified or until such time
as effective competition exists within the cable system's franchise area.
Under the initial regulations adopted by the FCC on April 1, 1993, the
FCC, in response to complaints by a subscriber, franchising authority or other
governmental entity, required cable operators to reduce the rates for tiers of
service other than the basic service tier ("CPST's") by up to 10 percent from
the rates in effect on September 30, 1992, if those rates were determined to
exceed a per-channel benchmark established by the FCC. In response to
complaints, the FCC also regulates, on the basis of actual cost, the rates for
equipment used only to receive these higher service tiers.
Only the FCC may regulate CPST's. Neither the FCC nor a local
franchising authority has jurisdiction over a cable system's rates for
programming provided on a per-channel or per-program basis.
As part of the implementation of the new regulations, the FCC froze all
rates in effect on April 5, 1993 until May 15, 1994, except rates for premium
and pay-per-view programming services and equipment. On February 22, 1994, the
FCC adopted rules that modify, among other things, the FCC's benchmark system
for determining the maximum rates for regulated services on cable systems not
subject to effective competition. In addition to adopting new, lower benchmark
levels, the FCC's regulations (i) allow local franchising authorities to require
cable operators to reduce the rate for the basic service tier by up to 17
percent from the rates in effect on September 30, 1992 if those rates exceed the
new per-channel benchmarks by that amount, and (ii) allow the FCC, in response
to a complaint, to require cable operators to reduce the rates for CPST's by up
to 17 percent from the rates in effect on September 30, 1992 if those rates
exceed the new
<PAGE> 9
per-channel benchmarks by that amount.
In late 1994, the FCC revised its regulations governing the manner in which
cable operators may charge subscribers for new cable programming services. The
FCC instituted a three-year flat fee mark-up plan for charges relating to new
channels of cable programming services in addition to the present formula for
calculating the permissible rate for new services. Commencing January 1, 1995,
operators may charge for new channels of cable programming services added after
May 14, 1994 at a rate of up to 20 cents per channel, but may not make
adjustments to monthly rates totaling more than $1.20 plus an additional 30
cents for programming license fees per subscriber over the first two years of
the three-year period for these new services. Cable operators may charge an
additional 20 cents in the third year only for channels added in that year plus
the costs for the programming. Cable operators electing to use the 20 cents per
channel adjustment may not also take a 7.5% mark-up on programming cost
increases, which is permitted under the FCC's current rate regulations. The FCC
indicated that it would request further comment on whether cable operators
should continue to receive the 7.5% mark-up on increases in license fees on
existing programming services.
Additionally, the FCC will permit cable operators to offer New Product
Tiers ("NPT") at rates which they elect so long as, among other conditions,
other channels that are subject to rate regulation are priced in conformity with
applicable regulations and cable operators do not remove programming services
from existing service tiers and offer them on the NPT.
Under the 1992 Cable Act, cable systems may not require subscribers to
purchase any service tier other than the basic tier as a condition of access to
video programming offered on a per-channel or per-program basis. Cable systems
are allowed a 10-year phase-in period to the extent necessary to implement the
required technology to facilitate such access. The FCC may grant extensions of
the 10-year time period, if deemed necessary.
The 1992 Cable Act also provides that the consent of most television
stations (except satellite-delivered television stations that were provided to
the cable television industry as of May 1, 1991, and noncommercial stations)
would be required before a cable system could retransmit their signals.
Alternatively, a television station could elect to exercise must-carry rights.
Must-carry rights entitle a local broadcast station to demand carriage on a
cable system, and a system generally is required to devote up to one-third of
its channel capacity for the carriage of local stations. Litigation challenging
the constitutionality of the mandatory broadcast signal carriage requirements of
the 1992 Cable Act is currently pending before the United States Supreme Court.
The must-carry rules will remain in effect during the pendency of the
proceedings before the Supreme Court. If must-carry requirements withstand
judicial review, the requirements may cause displacement of more attractive
programming. If retransmission consent requirements withstand judicial review
and broadcast stations require significant monetary payments for cable system
carriage of their signals, the cost of such signal carriage may adversely affect
the Partnership's operations.
In addition, the 1992 Cable Act (i) requires cable programmers under
certain circumstances to offer their programming to present and future
competitors of cable television such as multichannel multipoint distribution
services ("MMDS"), satellite master antenna systems ("SMATV") and direct
broadcast satellite system operators; (ii) prohibits new exclusive contracts
with program suppliers without FCC approval; (iii) bars municipalities from
granting exclusive franchises and from unreasonably refusing to grant additional
competitive franchises; (iv) permits municipal authorities to operate a cable
system without a franchise; (v) regulates the ownership by cable operators of
other media such as MMDS and SMATV; (vi) bars, subject to several stated
exceptions, cable operators from selling or transferring ownership in a cable
system for a three-year period following the acquisition or initial construction
of the system; and (vii) prohibits a cable operator from charging a customer for
any service or equipment that the subscriber has not affirmatively requested.
<PAGE> 10
In response to the 1992 Cable Act, the FCC has imposed or will impose
new regulations in the areas of customer service, technical standards,
compatibility with other consumer electronic equipment such as "cable ready"
television sets and video cassette recorders, equal employment opportunity,
privacy, rates for leased access channels, obscene or indecent programming,
limits on national cable system ownership concentration, standards for limiting
the number of channels that a cable television system operator could program
with programming services controlled by such operator and disposition of a
customer's home wiring.
The 1992 Cable Act and subsequent FCC rulings have generally increased
the administrative and operational expenses of cable television systems as a
result of additional regulatory oversight by the FCC and local franchise
authorities. There have been several lawsuits filed by cable operators and
programmers in federal court challenging various aspects of the 1992 Cable Act.
The litigation concerning the must-carry rules is described above. Appeals also
have been filed in connection with litigation resulting from the FCC's rate
regulation rulemaking decisions. The Partnership cannot determine at this time
the outcome of pending FCC rulemakings, the litigation described herein, or the
impact of any adverse judicial or administrative decisions on the Partnership's
systems or business.
Other Regulatory Developments In November 1991, the FCC released a
Report and Order in which it concluded, among other things, that the 1984 Cable
Act and the FCC's regulatory cross-ownership restrictions do not prohibit
interexchange carriers (i.e., long distance telephone companies) from acquiring
cable television systems or entering into joint ventures with cable operators in
areas where such interexchange carriers provide their long distance telephone
services. The FCC also concluded that a local exchange carrier (i.e., the local
telephone company) that provides a common carrier-based system to distribute
video programming to subscribers and a third party programmer using such common
carrier services are not required by federal law to obtain a cable television
franchise from the local franchising authority in order to provide such video
programming services to the public. The FCC's decision described in the
preceding sentence has been appealed and these appeals are currently pending.
In 1989, the FCC issued new syndicated exclusivity and network
non-duplication rules which enable local television broadcasters to compel cable
television operators to delete certain programming on distant broadcast signals.
Those rules took effect January 1, 1990. Under the rules, all television
broadcasters, including independent stations, can compel cable television
operators to delete syndicated programming from distant signals if the local
broadcaster negotiated exclusive rights to such programming. Local network
affiliates may insist that a cable television operator delete a network
broadcast on a distant signal. The rules made certain distant signals a less
attractive source of programming for the Partnership's systems, since much of
such distant signals' programming may have to be deleted.
The FCC currently regulates the rates and conditions imposed by public
utilities for use of their poles, unless, under the Federal Pole Attachments
Act, state public service commissions are able to demonstrate that they regulate
the cable television pole attachment rates. In the absence of state regulation,
the FCC administers pole attachment rates through the use of a formula which it
has devised. The validity of this FCC function was upheld by the United States
Supreme Court.
THE 1996 ACT
On February 8, 1996, the Telecommunications Act of 1996 (the "1996
Act") was enacted which dramatically changed federal telecommunications laws and
the future competitiveness of the industry. Many of the changes called for by
the 1996 Act will not take effect until the FCC issues new regulations which, in
some cases, may not be completed for 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 impacting the cable television industry,
more specifically those impacting the Partnership's operations, follows:
<PAGE> 11
CPST Rate Regulation FCC regulation of rates for CPST's has been
eliminated for small cable systems served by small companies. Small cable
systems are those having 50,000 or fewer subscribers served by companies with
fewer than one percent of national cable subscribers (approximately 600,000).
All of the Partnership's cable systems qualify as small cable systems. Basic
tier rates remain subject to regulation by the local franchising authority under
most circumstances until effective competition exists. The 1996 Act expands the
definition of effective competition to include the offering of video programming
services directly to subscribers in a franchised area by the local exchange
carrier, its affiliates, or any multichannel video programming distributor which
uses the facilities of the local exchange carrier. No penetration criteria
exists that triggers the presence of effective competition under these
circumstances.
Telephone Companies The 1996 Act allows telephone companies to offer
video programming directly to customers in their service areas immediately upon
enactment. They may provide video programming as a cable operator fully subject
to the 1996 Act, or a radio-based multichannel programming distributor not
subject to any provisions of the 1996 Act or through non-franchised "open video
systems" offering non-discriminatory capacity to unaffiliated programmers,
subject to selected provisions of the 1996 Act. Although Management's opinion is
that the probability of competition from telcos in rural areas is unlikely in
the near future, there are no assurances such competition will not materialize.
The 1996 Act encompasses various other aspects of providing cable
television service including prices for equipment, discounting of rates to
multiple dwelling units, lifting of anti-trafficking restrictions,
cable-telephone cross ownership provisions, pole attachment rate formulas, rate
uniformity, program access, scrambling and censoring of PEG and leased access
channels.
Copyright Cable television systems are subject to federal copyright
licensing, covering carriage of television broadcast signals. In exchange for
paying a percentage of their revenues to a federal copyright royalty pool, cable
television operators obtain a compulsory license to retransmit copyrighted
materials from broadcast signals. Existing Copyright Office regulations require
that compulsory copyright payments be calculated on the basis of revenue derived
from any service tier containing broadcast retransmission. Although the FCC has
no formal jurisdiction over this area, it has recommended to Congress to
eliminate the compulsory copyright scheme altogether. The Copyright Office has
similarly recommended such a repeal. Without the compulsory license, cable
television operators would need to negotiate rights from the copyright owners
for each program carried on each broadcast station in each cable system's
channel lineup. Such negotiated agreements could increase the cost to cable
television operators of carrying broadcast signals. Thus, given the uncertain
but possible adoption of this type of copyright legislation, the nature or
amount of the Partnership's future payments for broadcast signal carriage cannot
be predicted at this time.
Local Regulation Cable television systems are generally operated
pursuant to franchises, permits or licenses issued by a municipality or other
local government entity. Each franchise generally contains provisions governing
fees to be paid to the franchising authority, sale or transfer of the franchise,
territory of the franchise, design and technical performance of the system, use
and occupancy of public streets and number and types of cable television
services provided. Franchises are usually issued for fixed terms and must
periodically be renewed. There can be no assurance that the franchises for the
Partnership's systems will be renewed as they expire, although the Partnership
believes that its cable systems generally have been operated in a manner that
satisfies the standards of the 1984 Cable Act, as amended by the 1992 Cable Act,
for franchise renewal. In the event the franchises are renewed, the Partnership
cannot predict the impact of any new or different conditions that might be
imposed by the franchising authorities in connection with such renewals.
Summary The foregoing does not purport to be a summary of all present
and proposed federal, state and local regulations and legislation relating to
the cable television industry. Other existing federal legislation and
regulations, copyright licensing and, in many jurisdictions, state and local
franchise requirements are currently the subject of a variety of judicial
proceedings, legislative hearings and administrative and legislative
<PAGE> 12
proposals which could change, in varying degrees, the manner in which cable
television systems operate. Neither the outcome of these proceedings nor their
impact upon the cable television industry or the Partnership can be predicted at
this time.
The Partnership expects to adapt its business to adjust to the changes
that may be required under any scenario of regulation. At this time, the
Partnership cannot assess the effects, if any, that present regulation may have
on the Partnership's operations and potential appreciation of its Systems. There
can be no assurance, however, that the final form of regulation will not have a
material adverse impact on partnership operations.
ITEM 2. PROPERTIES
The Partnership's cable television systems are located in and around
Chowchilla, California and Flint/Tyler, Whitewright, New Caney, Kaufman,
Hillsboro and Prairie View, Texas. 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 land and
buildings. The Partnership's cable plant passed approximately 39,000 homes as of
December 31, 1995. Management believes that the Partnership's plant passes all
areas which are currently economically feasible to service. Future line
extensions depend upon the density of homes in the area as well as available
capital resources for the construction of new plant. (See Part II. Item 7.
Liquidity and Capital Resources.)
On September 15, 1995, the Partnership acquired substantially all of
the operating assets and franchise rights of cable systems serving approximately
3,500 subscribers in or around the communities of Kaufman, Oak Grove, Hillsboro,
New Waverly and Waterwood, all in the state of Texas. The purchase price for
these systems was $4,492,254, of which $4,226,896 was paid at the closing date.
The balance will be paid in June 1996, net of any purchase price and other
adjustments, under the terms of an unsecured, subordinated hold-back note
bearing interest at the prime rate. At December 31, 1995, the balance owing on
this note was $237,658. The purchase was financed by borrowings under the
Partnership's revolving credit and term loan facility.
On October 31, 1995, the Partnership acquired substantially all
operating assets and franchise rights of the Brookridge system which serves
approximately 3,600 subscribers and the purchase price was $5,585,900 of which
$5,306,510 was paid at the closing date. The balance will be paid in April 1996,
net of any purchase price and other adjustments, under the terms of an
unsecured, subordinated, non-interest bearing hold-back note. At December 31,
1995, the balance owing on this note was $218,111. The purchase was financed by
borrowings under the Partnership's revolving credit and term loan facility.
On February 16, 1996, the Partnership acquired substantially all
operating assets and franchise rights of the cable television system serving
approximately 220 subscribers in and around LeGrand, California. The purchase
price was $271,478 of which $257,978 was paid at the closing date and the
balance of $13,500 was deposited into an escrow account. Final payment from the
escrow account, net of any purchase price adjustments, is due no later than June
15, 1996.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
<PAGE> 13
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, 1995,
is as follows:
<TABLE>
<S> <C>
Limited Partners: 1,028
General Partners: 2
</TABLE>
(c) During 1995, the Partnership made cash distributions of $294,052 to
the limited partners and $2,970 to the Managing General Partner. The limited
partners have received in the aggregate in the form of cash distributions
$5,150,259 on total initial contributions of $7,500,000 as of December 31, 1995.
As of December 31, 1995, the Partnership had repurchased $154,500 of limited
partnership units (267 units at $500 per unit and 70 units at $300 per unit).
Future distributions depend upon results of operations, leverage ratios and
compliance with financial covenants required by the Partnership's lender, but
are expected to remain at their current level (see Item 7 below).
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenue $6,617,205 $5,657,619 $5,406,112 $5,062,574 $4,709,010
Operating income 1,262,398 566,930 630,946 470,985 473,457
Net income (loss) 191,542 (69,278) (92,482) (370,875) (618,933)
Net income (loss) per
limited partner unit
(weighted average) 13 (5) (6) (25) (41)
Cumulative tax losses
per limited partner
unit (567) (589) (647) (695) (720)
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $15,074,134 $ 4,745,345 $ 5,788,906 $ 7,178,850 $ 8,300,267
Notes payable 19,789,175 9,784,068 10,608,934 11,563,866 11,828,811
Total liabilities 20,937,173 10,502,904 11,138,379 12,108,578 12,495,196
General partners'
deficit (120,592) (119,537) (115,866) (111,948) (105,225)
Limited partners'
deficit (5,742,447) (5,638,022) (5,233,607) (4,817,780) (4,089,704)
Distributions per
limited partner unit 20 20 20 20 20
Cumulative distribu-
tions per limited
partner unit 351 330 305 285 265
</TABLE>
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1995 AND 1994
Total revenue reached $6,617,205 for the year ended December 31, 1995,
representing an increase of approximately 17% over 1994. This increase is
primarily due to the acquisition of the SLT and Brookridge systems, in September
1995 and October 1995, respectively. The Partnership experienced a 4% increase
in revenue exclusive of the activity for the SLT and Brookridge systems which is
attributable to a 2% increase in basic subscribers, rate increases placed into
effect during the second quarter 1995, and increases in advertising revenue.
These increases were offset by a 5% decrease in revenue for the Chowchilla, CA
system resulting from the elimination of the Easton headend in January 1995. Of
the 1995 revenue, $4,717,279 (71%) is derived from subscriptions to basic
service, $764,484 (12%) from subscriptions to premium services, $366,870 (6%)
from subscriptions to tier services, $148,911 (2%) from installation charges,
$205,405 (3%) from service contracts and $414,256 (6%) from other sources.
The following table displays historical average rate information for
various services offered by the Partnership's systems (amounts per subscriber
per month):
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Basic Rate $22.41 $21.41 $20.95 $20.15 $19.02
Tier Rate 6.00 5.62 5.50 5.05 5.05
HBO Rate 11.35 11.10 11.10 10.65 10.65
Cinemax Rate 7.65 7.65 7.65 7.65 7.65
Showtime Rate 10.00 9.80 9.80 9.43 9.43
Movie Channel Rate 9.60 9.60 9.65 9.65 9.65
Disney Rate 7.50 7.50 7.65 7.65 7.30
Additional
Outlet Rate ---- ---- ---- 3.48 3.48
Service Contract
Rate 3.00 3.10 3.20 ---- ----
</TABLE>
Operating expenses totaled $838,545 for 1995, representing a decrease
of approximately 1% as compared to 1994. This operating expense decrease was due
to a reduction in pole rental expense resulting from a retroactive charge in the
previous year and a decrease in system maintenance expense. The decrease was
offset by an increase in salary and benefit costs as a result of the SLT and
Brookridge system acquisitions and cost of living increases. 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.
General and administrative expenses totaled $1,740,021 for 1995,
representing an increase of approximately 17% over 1994. Approximately
two-thirds of the increase is attributable to expenses associated with the SLT
and Brookridge acquisitions. The remaining increase is due to increases in
revenue based expenses, such as franchise and management fees. Significant
administrative expenses are based on Partnership revenues, therefore, as the
Partnership's revenues increase, the trend of increased administrative expenses
is expected to continue.
Programming expenses totaled $1,394,806 for 1995, representing an
increase of approximately 27% over 1994. This is due to the additional
subscribers as a result of the SLT and Brookridge system acquisitions, increased
payroll and other costs related to local programming and advertising support,
addition of new channels, and increases in costs charged by the various program
suppliers. Programming expenses mainly consist of payments made to the suppliers
of various cable programming services. As these costs are based on
<PAGE> 15
the number of subscribers, 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 $1,653,369 in 1994
to $1,381,435 in 1995 (approximately 16%). This is due to fixed assets related
to the formation of the Partnership becoming fully depreciated, offset by
depreciation and amortization on plant, equipment and intangible assets acquired
with the purchase of the SLT and Brookridge systems and depreciation on assets
placed into service during 1995.
Interest expense increased from $601,948 in 1994 to $1,005,691 in 1995
(approximately 67%). The Partnership's average debt balance increased from
$10,197,000 in 1994 to $14,559,000 in 1995. In addition, the Partnership's
effective interest rate increased from 5.90% in 1994 to 6.91% in 1995.
1994 AND 1993
Total revenue reached $5,657,619 for the year ended December 31, 1994,
representing an increase of approximately 5% over 1993. This increase is
attributable to rate increases placed into effect as of August 1, 1994, and
significant increases in service contract revenue and revenue from late payment
fees offset by a decrease in additional outlet income. Of the 1994 revenue,
$4,038,071 (71%) is derived from subscriptions to basic service, $691,121 (12%)
from subscriptions to premium services, $310,861 (6%) from subscriptions to tier
services, $140,029 (2%) from installation charges, $205,212 (4%) from service
contracts and $272,325 (5%) from other sources.
Operating expenses totaled $848,919 for 1994, representing an increase
of approximately 15% as compared to 1993. Salary and benefit costs increased 4%
representing cost of living increases, and pole rental expense increased 42% as
a result of retroactive charges for prior years, these increases were partially
offset by a decrease in system maintenance expense.
General and administrative expenses totaled $1,486,927 for 1994,
representing an increase of approximately 5% over 1993. This increase is due to
increased management fees which are based on Partnership revenues and increases
in discretionary incentive compensation during the current year.
Programming expenses totaled $1,101,474, representing an increase of
approximately 9% over 1993. This is mainly due to increased costs charged by
various program suppliers as well as new channel launches in various systems. In
addition, the cost of services provided by NCN and CAC were incurred in the
current year. Programming expenses mainly consist of payments made to the
suppliers of various cable programming services.
Depreciation and amortization expense increased from $1,617,971 in 1993
to $1,653,369 in 1994 (approximately 2%). This is mainly due to depreciation
expense on new assets placed into service during 1994.
Interest expense decreased from $731,802 in 1993 to $601,948 in 1994
(approximately 18%). The Partnership's average debt balance decreased from
approximately $11,079,000 in 1993 to approximately $10,197,000 in 1994. In
addition, the Partnership's effective interest rate decreased from approximately
6.61% in 1993 to approximately 5.90% in 1994.
EFFECTS OF REGULATION
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Act"). The 1992 Act and
subsequent revisions and rulemakings substantially re-regulated the cable
television industry. The regulatory aspects of the 1992 Act included giving the
local franchising authorities and the FCC the ability to regulate rates for
basic services, equipment charges and additional CPST's when
<PAGE> 16
certain conditions were met. All of the Partnership's cable systems were
potentially subject to rate regulation. The most significant impact of rate
regulation was the inability to raise rates for regulated services as costs of
operation rose during an FCC imposed rate freeze from April 5, 1993 to May 15,
1994. This has contributed to operating margins before depreciation and
amortization declining from 48% for the twelve months ended December 31, 1993 to
46% for the same period in 1994.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act)
became law. The 1996 Act will eliminate all rate controls on CPST's of small
cable systems, defined by the 1996 Act as systems serving fewer than 50,000
subscribers owned by operators serving fewer than 1% of all subscribers in the
United States (approximately 600,000 subscribers). All of the Partnership's
cable systems qualify as small cable systems. Many of the changes called for by
the 1996 Act will not take effect until the FCC issues new regulations, a
process that could take from several months to a few years depending on the
complexity of the required changes and the statutory time limits. Because of
this the full impact of the 1996 Act on the Partnership's operations cannot be
determined at this time.
As of the date of this filing, the Partnership has received
notification that local franchising authorities with jurisdiction over
approximately 8% of total subscribers have elected to certify. Based on
Management's analysis, the rates charged by these systems are within the maximum
rates allowed under current FCC rate regulations. No formal requests for rate
justifications have been received from franchise authorities.
LIQUIDITY AND CAPITAL RESOURCES
During 1995, the Partnership's primary source of liquidity was cash
flow from operations and borrowings under the Partnership's credit facility. 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 1995, the cash generated from monthly billings was sufficient
to meet the Partnership's needs for working capital, capital expenditures
(excluding acquisitions) and debt service. Management's projections for 1996
show that the cash generated from monthly subscriber billings should be
sufficient to meet the Partnership's working capital needs, as well as meeting
the debt service obligations of its bank loan.
On August 31, 1995, the Partnership refinanced its senior debt with The
First National Bank of Chicago to finance the acquisitions of the SLT system and
Brookridge system. The credit facility increases the maximum available
borrowings to $23,000,000. Under the terms of the new term and revolving loan
agreement, $20,000,000 converts to a term loan payable in graduating quarterly
installments of principal through December 31, 2003, and the remaining
$3,000,000 is a revolving credit facility through December 31, 1998, at that
date, converting to a term loan payable in graduated quarterly installments
through December 31, 2003.
As of the date of this filing, the Partnership's term and revolving
loan balance was $19,333,406. Certain fixed rate agreements in effect as of
September 30, 1995 expired during the fourth quarter of 1995, and the
Partnership entered into new fixed rate agreements. Currently, the interest
rates on the credit facility are as follows: $5,300,000 fixed at 8.81% expiring
May 9, 1996; $9,800,000 fixed at 8.95% under the terms of a swap agreement with
the Partnership's lender expiring September 29, 1997; and $4,200,000 fixed at
8.99% under the terms of a self-amortizing interest rate swap agreement with the
Partnership's lender expiring September 30, 1997. The balance of $33,406 bears
interest at the prime rate plus 1.75% (currently 10.00%). The above rates
include a margin paid to the lender based on overall leverage, and may increase
or decrease as overall leverage fluctuates.
At December 31, 1995, the Partnership was required under the terms of
its credit agreement to maintain certain financial ratios including a maximum
Leverage Ratio of 5.75 to 1, a minimum Pro Forma Debt Service Ratio of 1.15 to 1
and a minimum Interest Coverage Ratio of 1.75 to 1. As of December 31, 1995, the
Partnership was not in compliance with the requirements for limited partnership
distributions made and the outstanding balance on
<PAGE> 17
a hold-back note payable. The Partnership has received a waiver from the
creditor for these covenant violations and is in compliance with all other
covenants.
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 1995, the Partnership incurred approximately $760,000 (excluding
the SLT system and Brookridge system acquisitions) in capital expenditures.
These expenditures included line extensions/upgrades and computer equipment
purchases in the Tyler and New Caney, TX and Chowchilla, CA systems, channel
additions in the Whitewright and Tyler, TX and Chowchilla, CA systems, a vehicle
replacement in the Tyler, TX system, and mapping of the New Caney, TX system.
Management estimates that the Partnership will spend approximately
$1,400,000 on capital expenditures in 1996. Planned expenditures include line
extensions in the Chowchilla, CA and Tyler, TX systems to pass an additional 250
homes, computer equipment purchases, new channel additions in the Chowchilla
area, a vehicle replacement and microwave interconnect of several systems in the
Tyler, TX system and initial phases of a fiber optic network and upgrade of the
distribution plant to 450 MHz in the New Caney, TX system.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended
December 31, 1995, 1994 and 1993 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.
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The Managing General
Partner of the Partnership is Northland Communications Corporation, a Washington
corporation; the Administrative General Partner of the Partnership is FN
Equities Joint Venture, a California general partnership.
Certain information regarding the officers and directors of Northland
is set forth below.
JOHN S. WHETZELL (AGE 54). 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, Northland Cable Television,
Inc., Northland Cable Services Corporation, Cable Ad-Concepts, Inc., Cable
Television Billing, Inc. and Northland Cable News, Inc. He has been involved
with the cable television industry for over 21 years and currently serves as a
director on the board of the Cable Antenna Television Association, a national
cable television association. Between March 1979 and February 1982 he was in
charge of the Ernst & Whinney national cable television consulting services. Mr.
Whetzell first became involved in the cable television industry when he served
as the Chief Economist of the Cable Television Bureau of the Federal
Communications Commission (FCC) from May 1974 to February 1979. He provided
economic studies which 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 59). Mr. Iverson is the Assistant Secretary of
Northland Communications Corporation and has served on the Board of Directors
since December 1984. He also serves on the Board of Directors of Northland
Telecommunications Corporation, Northland Cable Television, Inc., Northland
Cable Services Corporation, Cable Ad-Concepts, Inc. and Cable Television
Billing, Inc., Northland Investment Corporation and Northland Cable News, Inc.
He is currently a partner in the law firm of Ryan, Swanson & Cleveland,
Northland's general counsel. He is a member of the Washington State Bar
Association and American Bar Association and has been practicing law for more
than 33 years. Mr. Iverson is the past president and a current Trustee of the
Pacific Northwest Ballet Association. Mr. Iverson has a Juris Doctor degree from
the University of Washington.
ARLEN I. PRENTICE (AGE 58). Since July 1985, Mr. Prentice has served on
the Board of Directors of Northland Telecommunications Corporation, and he
served on the Board of Directors of Northland Communications Corporation between
March 1982 and July 1985. Since 1969, Mr. Prentice has been Chairman and Chief
Executive Officer of Kibble & Prentice, a diversified financial services firm.
Kibble & Prentice has four divisions, which include Estate Planning and Business
Insurance, Financial Planning and Investments, Employee Benefit Services, and
Property and Casualty Insurance. Mr. Prentice is a Chartered Life Underwriter,
Chartered Financial Consultant, past President of the Million Dollar Round Table
and a registered representative of Investment Management and Research. Mr.
Prentice has a Bachelor of Arts degree from the University of Washington.
MILTON A. BARRETT, JR. (AGE 61). Since April 1986, Mr. Barrett has
served on the Board of Directors of NTC. In 1995, he retired from the
Weyerhaeuser Company after thirty-four years of service. At the time of his
retirement, Mr. Barrett was a Vice President of Sales and Marketing as well as
chairman of Weyerhaeuser's business ethics committee. Mr. Barrett is a graduate
of Princeton University magna cum laude and of the Harvard University Graduate
School of Business Administration.
RICHARD I. CLARK (AGE 38). Mr. Clark has served as Vice President of
Northland since March 1982. He has served on the Board of Directors of both
Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985.
<PAGE> 19
He also serves as Vice President and Director of Northland Cable Services
Corporation, Cable Ad-Concepts, Inc., Cable Television Billing, Inc., and
Northland Cable News, Inc. Mr. Clark was elected Treasurer in April 1987, prior
to which he served as Secretary from March 1982. He also serves as a registered
principal, President and director of Northland Investment Corporation. Mr. Clark
was an original incorporator of Northland and is responsible for the
administration and investor relations activities of Northland, including
financial planning and corporate development. From July 1979 to February 1982,
Mr. Clark was employed by Ernst & Whinney in the area of providing cable
television consultation services and has been involved with the cable television
industry for nearly 17 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 though the application of these programs. In 1979, Mr. Clark graduated
cum laude from Pacific Lutheran University with a Bachelor of Arts degree in
accounting.
ARTHUR H. MAZZOLA (AGE 73). Mr. Mazzola was elected to the Board of
Directors of Northland Telecommunications Corporation in April 1987. From 1985
to 1990, he was Senior Vice President of Benjamin Franklin Leasing Company,
Inc., an equipment lease financing company. Currently, Mr. Mazzola is serving as
Business Development Coordinator at Bank of California. Prior to his association
with Benjamin Franklin Leasing Company, Mr. Mazzola served as President of
Federal Capital Corporation and Trans Pacific Lease Co., Inc. Both of these
companies also engaged exclusively in equipment lease financing. Mr. Mazzola is
a past Board Chairman and current Trustee of the Pacific Northwest Ballet
Association and current Board Member of the Dante Alighieri Society. Mr. Mazzola
attended Boston University School of Business in 1943 where he studied
economics.
TRAVIS H. KEELER (AGE 55). Mr. Keeler was elected to the Board of
Directors of Northland Telecommunications Corporation in April 1987. Since May
1985, he has served as President of Overall Laundry Services, Inc., an
industrial laundry and garment rental firm. Mr. Keeler received a Bachelor of
Arts degree from the University of Washington in 1962.
JAMES E. HANLON (AGE 62). Since June 1985, Mr. Hanlon has been a
Divisional Vice President for Northland's Tyler, Texas regional office and is
currently responsible for the management of systems serving approximately 92,900
basic subscribers in Texas, Alabama and Mississippi. He also serves as Vice
President for Northland Cable News, Inc. Prior to his association with
Northland, he served as Chief Executive of M.C.T. Communications, a cable
television company, from 1981 to June 1985. His responsibilities included
supervision of the franchise, construction and operation of a cable television
system located near Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of
the CATV Division of Buford Television, Inc., and from 1973 to 1979, he served
as President and General Manager of Suffolk Cablevision in Suffolk County, New
York. Mr. Hanlon has also served as Vice President and Corporate Controller of
Viacom International, Inc. and Division Controller of New York Yankees, Inc. Mr.
Hanlon has a Bachelor of Science degree in Business Administration from St.
Johns University.
JAMES A. PENNEY (AGE 41). Mr. Penney is Vice President and General
Counsel for Northland. He has served as Vice President and General Counsel for
Northland Telecommunications Corporation, Northland Communications Corporation,
Northland Cable Television, Inc. and Northland Cable News, Inc. since September
1985 and was elected Secretary in April 1987. He also serves as Vice President
and General Counsel for Northland Cable Services Corporation, Cable Ad-Concepts,
Inc. and Cable Television Billing, Inc. He is responsible for advising all
Northland systems with regard to legal and regulatory matters, and also is
involved in the acquisition and financing of new cable systems. From 1983 until
1985 he was associated with the law firm of Ryan, Swanson & Cleveland,
Northland's general counsel. Mr. Penney holds a Bachelor of Arts Degree from the
University of Florida and a Juris Doctor from The College of William and Mary,
where he was a member of The William and Mary Law Review.
GARY S. JONES (AGE 38). Mr. Jones is Vice President of Northland. Mr.
Jones joined Northland in March 1986 as Controller and has been Vice President
of Northland
<PAGE> 20
Telecommunications Corporation, Northland Communications Corporation and
Northland Cable Television, Inc. since October 1986. He also serves as Vice
President for Northland Cable Services Corporation, Cable Ad-Concepts, Inc.,
Cable Television Billing, Inc. and Northland Cable News, Inc. Mr. Jones is
responsible for cash management, financial reporting and banking relations for
Northland and is involved in the acquisition and financing of new cable systems.
Prior to joining Northland, Mr. Jones was employed as a Certified Public
Accountant with Laventhol & Horwath from 1980 to 1986. Mr. Jones received his
Bachelor of Arts degree in Business Administration with a major in accounting
from the University of Washington in 1979.
RICHARD J. DYSTE (AGE 50). Mr. Dyste has served as Vice
President-Technical Services of Northland Telecommunications Corporation,
Northland Communications Corporation and Northland Cable Television, Inc. since
April 1987. He also serves as Vice President for Cable Ad-Concepts, Inc. and
Northland Cable News, Inc. He is currently responsible for the management of
systems serving approximately 48,600 basic subscribers in California, Idaho,
Oregon and Washington. Mr. Dyste is the past president and a 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. Mr.
Dyste is a graduate of Washington Technology Institute.
H. LEE JOHNSON (AGE 52). Mr. Johnson has served as Divisional Vice
President for Northland's Statesboro, Georgia regional office since March 1994.
Mr. Johnson is responsible for the management of systems serving over 50,400
subscribers located in South Carolina, North Carolina, Georgia and Mississippi.
He also serves as Vice President for Northland Cable News, Inc. Mr. Johnson has
been employed in the cable industry for nearly 27 years. Mr. Johnson has
attended and received certificates of completion from numerous industry training
seminars including courses sponsored by Jerrold Electronics, Scientific Atlanta,
and the Society of Cable Television Engineers. Mr. Johnson also received a
certificate of completion from CATA in public relations.
Certain information regarding the officers and directors of FN Equities
Joint Venture is set forth below:
MILES Z. GORDON (AGE 48). Mr. Gordon, President and Chief Executive
Officer of Financial Network Investment Corporation (FNIC), has a comprehensive
background in both the securities industry and securities law and regulation. In
1972, he joined the Los Angeles office of the Securities and Exchange Commission
(SEC), and in 1974 he was appointed Branch Chief of the Investment Company and
Investment Advisors Examination Division. Mr. Gordon left the SEC in 1978 to
practice law. Within one year, he accepted a position as Vice President of a
major national securities broker/dealer firm headquartered in Long Beach,
California. He subsequently accepted the presidency of this firm in early 1980.
In 1983, he helped form and became President and Chief Executive Officer of
FNIC. This leading firm is now one of the largest independent broker/dealers in
the United States. A graduate of Michigan State University (and current board
member of the Visitors for the College of Social Science for MSU), Mr. Gordon
received his Juris Doctorate from the University of California at Los Angeles
School of Law. He presently serves as Chairman of the Securities Industry
Association Independent Contractor Firms Committee. Mr. Gordon was also Chairman
and a member of the NASD District Business Conduct Committee and a former member
of the NASD Board of Governors. He is past president of the California
Syndication Forum and has also served on several committees for the Securities
Industry Association. Mr. Gordon has appeared on television and radio programs,
been featured in numerous magazine and newspaper articles as an industry
spokesperson, and is a frequent speaker at many industry seminars and
conventions.
JOHN S. SIMMERS (AGE 45). Mr. Simmers, Executive Vice President and
Chief Operating Officer of Financial Network Investment Corporation (FNIC), has
an extensive background in the securities industry. He began his career as a
reporter for Dunn and Bradstreet, then joined the National Association of
Securities Dealers (NASD) in 1974. Knowledgeable in all aspects of broker/dealer
regulations, operations, and products, Mr. Simmers was responsible for reviewing
the activities of member firms in twelve states. Mr. Simmers
<PAGE> 21
left the NASD seven years later to accept a position as Vice President of the
securities broker/dealer, retail, wholesale and investment advisory subsidiaries
of a publicly held investment company headquartered in Long Beach, California.
He left this firm in 1983 to help form and become Executive Vice President and
Chief Operating Officer of FNIC. This full service broker/dealer firm has
offices located across the United States. Mr. Simmers is a graduate of Ohio
State University. He served on the Board of Directors of the California
Association of Independent Broker/Dealers and was a member of the Real Estate
Securities and Syndication Institute, the NASD District Business Conduct
Committee (District 2 South), and the International Association for Financial
Planning Due Diligence Steering Committee, which was organized to work toward
improving the quality and consistency of due diligence in the securities
industry. Mr. Simmers currently serves as a member of the NASD Direct
Participation Programs Committee, and has spoken at numerous seminars and
conventions.
HARRY M. KITTER (AGE 40). Mr. Kitter has served as Controller for
Financial Network Investment Corporation since 1983. Prior to this association
from 1981 to 1983 he was employed as the Los Angeles Internal Audit Manager at
the Pacific Stock Exchange. From 1978 to 1981, he was Senior Accountant at
Arthur Young & Co., C.P.A. He holds an MBA from the University of Pittsburgh and
a bachelor's degree in economics from Lafayette College, Easton, Pennsylvania.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation
was paid to the Managing General Partner during 1995 as indicated in Note 3 of
the Notes to Financial Statements--December 31, 1995 (see Items 13(a) and
14(a)(1) below). In addition, cash distributions were made to the Managing
General Partner in 1995 (see Item 5(c) above).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1995 is as follows:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ----------------- ------------------- ----------------- ----------
<S> <C> <C> <C>
General Partner's Northland Communications (See Note A) (See Note A)
Interest Corporation
1201 Third Avenue
Suite 3600
Seattle, Washington 98101
General Partner's FN Equities Joint Venture (See Note B) (See Note B)
Interest 2780 Skypark Dr.
Suite 300
Torrance, California 90505
</TABLE>
Note A: Northland has a 1% interest in the Partnership, which
increases to 20% interest in the Partnership at such time as the limited
partners have received 100% of their aggregate cash contributions. Northland
also owns 20 units of limited partnership interest in the Partnership. The
natural person who exercises voting and/or investment control over these
interests is John S. Whetzell.
Note B: FN Equities Joint Venture has no interest (0%) in the
Partnership until such time as the limited partners have received 100% of their
aggregate cash contributions, at which time FN Equities Joint Venture will have
a 5% interest in the Partnership. The natural person who exercises voting and/or
investment control over these interests in John S. Simmers.
<PAGE> 22
(A) CHANGES IN CONTROL. Northland has pledged its ownership interest as
Managing General Partner of the Partnership to its lender as collateral pursuant
to the terms of the revolving credit and term loan agreement between Northland
and its lender.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Managing General
Partner receives a management fee equal to 6% of the gross revenues of the
Partnership, not including revenues from any sale or refinancing of the
Partnership's Systems. The Managing General Partner also receives reimbursement
of normal operating and general and administrative expenses incurred on behalf
of the Partnership.
The Partnership has an agreement with Northland Cable Properties Two
Limited Partnership ("NCP-Two") and Northland Cable Properties Five Limited
Partnership ("NCP-Five"), affiliated partnerships owned and managed by
Northland. Under the terms of these agreements, the Partnership provides certain
programming services to Mexia, TX and Cedar Creek, TX systems and is reimbursed
for its costs. During 1994, the Partnership discontinued providing programming
services to these affiliates because it is now provided by Northland Cable News,
Inc. ("NCN").
The Partnership has agreements with Northland Cable Properties Seven
Limited Partnership ("NCP-Seven"), an affiliated partnership organized and
managed by Northland. Under the terms of this agreement, NCP-Seven provides
certain administrative and programming services to the New Caney, TX system and
is reimbursed for its costs.
Cable Television Billing, Inc. ("CTB"), an affiliate of Northland,
provides software installation and billing services to the Partnership's
Systems.
NCN, an affiliate of Northland, provides programming to the
Partnership's systems.
Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides
the production and development of video commercial advertisements and
advertising sales support.
See Note 3 of the Notes to Financial Statements--December 31, 1995 for
disclosures regarding transactions with the General Partners or affiliates.
The following schedule summarizes these transactions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Partnership management fees $396,408 $339,457 $324,367
Operating expense reimbursements 324,511 270,988 266,449
Software installation and
billing service fees to CTB 42,444 37,481 36,161
Programming fees to NCN 24,619 40,002 ------
Reimbursements to CAC for
services 14,296 11,950 ------
Reimbursements from NCP-Two
and NCP-Five ------ 23,272 30,408
Reimbursements to NCP-Seven 29,856 20,590 23,788
Amounts due to General Partner
and affiliates at year end 116,345 58,851 21,322
</TABLE>
Management believes that all of the above transactions are on terms as
favorable to the Partnership as could be obtained from unaffiliated third
parties for comparable goods or services.
<PAGE> 23
As disclosed in the Partnership's Prospectus (which has been
incorporated by reference), certain conflicts of interest may arise between the
Partnership and the General Partners and their Affiliates. Certain conflicts may
arise due to the allocation of management time, services and functions between
the Partnership and existing and future partnerships as well as other business
ventures. The General Partners have sought to minimize these conflicts by
allocating costs between systems on a reasonable basis. Each limited partner may
have access to the books and non-confidential records of the Partnership. A
review of the books will allow a limited partner to assess the reasonableness of
these allocations. The Agreement of Limited Partnership provides for any limited
partner owning 10% or more of the Partnership units to call a special meeting of
the Limited Partners, by giving written notice to the General Partners
specifying in general terms the subjects to be considered. In the event of a
dispute between the General Partners and Limited Partners which cannot be
otherwise resolved, the Agreement of Limited Partnership provides steps for the
removal of a General Partner by Limited Partners.
(B) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a
Director and Assistant Secretary of the Managing General Partner, is a partner
of the law firm of Ryan, Swanson & Cleveland, which has rendered and is expected
to continue to render legal services to the Managing General Partner and the
Partnership.
(C) INDEBTEDNESS OF MANAGEMENT. None.
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS A PART OF THIS REPORT:
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
PAGE
------------
<S> <C> <C>
(1) FINANCIAL STATEMENTS:
Auditors' Report............................................................... ____
Balance Sheets--December 31, 1995 and 1994..................................... ____
Statements of Operations for the years
ended December 31, 1995, 1994 and 1993......................................... ____
Statements of Changes in Partners' Deficit
for the years ended December 31, 1995, 1994
and 1993....................................................................... ____
Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993......................................... ____
Notes to Financial Statements--December 31,
1995........................................................................... ____
</TABLE>
(2) EXHIBITS:
4.1 Amended and Restated Certificate and
Agreement of Limited Partnership Dated April
19, 1985(1)
4.2 Amendment to Agreement of Limited Partnership
Dated June 28, 1990(6)
10.1 Management Agreement dated as of December 15,
1984(2)
10.2 Merced Franchise(2)
10.3 Madera Franchise(2)
10.4 Fresno Franchise(2)
10.5 Chowchilla Franchise(2)
10.6 Whitewright Franchise(7)
10.7 Van Alstyne Franchise(7)
10.8 Trenton Franchise(2)
10.9 Tom Bean Franchise(7)
10.10 Savoy Franchise(7)
10.11 Howe Franchise(2)
10.12 Bells Franchise(7)
10.13 Frankston Franchise(2)
<PAGE> 25
10.14 Bullard Franchise(2)
10.15 Stoneridge Addition Development Franchise(2)
10.16 Chandler Franchise(2)
10.17 Tyler Franchise(2)
10.18 Woodard Place Development Franchise(2)
10.19 Berryville Franchise(2)
10.20 Hide Away Bay Franchise(2)
10.21 Emerald Bay Franchise(2)
10.22 Chapel Hill Franchise(7)
10.23 Patton Village Franchise(3)
10.24 Roman Forest Franchise(3)
10.25 Splendora Franchise(3)
10.26 Woodbranch Franchise(3)
10.27 Brownsboro Franchise(4)
10.28 Noonday Franchise(4)
10.29 Buddy Perkins Franchise(4)
10.30 Pinecrest Subdivision Franchise(4)
10.32 Revolving Credit and Term Loan Agreement with
U.S. Bank of Washington dated July 5, 1990(5)
10.33 Amendment to Revolving Credit and Term Loan
Agreement with U.S. Bank of Washington dated
February 15, 1991(6)
10.34 Second Amendment to the Loan Agreement with
U.S. Bank of Washington dated October 22,
1992(8)
10.35 Subordination Agreement dated as of July 25,
1991(9)
10.36 Franchise Agreement with the City of Noonday,
TX, effective as of August 24, 1992(9)
10.37 Asset Purchase Agreement between Northland
Telecommunications Corporation and SLT Cable
TV, Inc., dated April 10, 1995(10)
10.38 Credit Agreement between Northland Cable
Properties Four Limited Partnership and the
First National Bank of Chicago dated August
31, 1995(11)
10.39 Franchise Agreement with City of Hillsboro,
TX - Assignment and Assumption dated August
15, 1995(11)
10.40 Franchise Agreement with City of Kaufman, TX
- Assignment and Assumption dated September
15, 1995(11)
<PAGE> 26
10.41 Asset Purchase Agreement between Northland
Cable Properties Four Limited Partnership and
Brookridge Cable Special Purpose Partnership;
Brookridge Cable Special Purpose Partnership
II; Brookshire Cable TV, Limited Partnership;
Carthage Cable TV, Limited Partnership; and
Hillsboro Cable TV, Limited Partnership dated
September 13, 1995(12)
10.42 Franchise Agreement with City of Oak Grove,
TX - Assignment and Assumption dated
September 15, 1995(11)
10.43 Franchise Agreement with City of New Waverly,
TX - Assignment and Assumption dated
September 15, 1995(11)
- --------------------
(1) Incorporated by reference from the Partnership's
Form 8-A Registration Statement filed July 24,
1987.
(2) Incorporated by reference from the Partnership's
Form 10-K Annual Report for the fiscal year
ended December 31, 1986.
(3) Incorporated by reference from the Partnership's
Form 10-K Annual Report for the fiscal year
ended December 31, 1987.
(4) Incorporated by reference from the Partnership's
Form 10-K Annual Report for the fiscal year
ended December 31, 1988.
(5) Incorporated by reference from the Partnership's
Form 10-Q Quarterly Report for the period ended
June 30, 1990.
(6) Incorporated by reference from the Partnership's
Form 10-K Annual Report for the fiscal year
ended December 31, 1990.
(7) Incorporated by reference from the Partnership's
Form 10-K Annual Report for the fiscal year
ended December 31, 1991.
(8) Incorporated by reference from the Partnership's
Form 10-Q Quarterly Report for the period ended
September 30, 1992.
(9) Incorporated by reference from the Partnership's
Form 10-K Annual Report for the fiscal year
ended December 31, 1992.
(10) Incorporated by reference from the Partnership's
Form 10-Q Quarterly Report for the period ended
June 30, 1995.
(11) Incorporated by reference from the Partnership's
Form 8-K dated September 15, 1995.
(12) Incorporated by reference from the Partnership's
Form 8-K dated November 1, 1995.
(B) REPORTS ON FORM 8-K. Form 8-K dated November 1, 1995, was
filed November 16, 1995 reporting the acquisition of the Brookridge System.
<PAGE> 27
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 FOUR LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION
(Managing General Partner)
By /s/ John S. Whetzell Date: 3/28/96
--------------------------- -----------
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.
<TABLE>
<CAPTION>
SIGNATURES CAPACITIES DATE
---------- ---------- ----
<S> <C> <C>
/s/ John S. Whetzell Chief executive officer, principal 3/28/96
- ---------------------- financial officer, and principal ------------
John S. Whetzell accounting officer of registrant;
chief executive officer, principal
financial officer and chairman of the
board of directors of Northland
Communications Corporation
/s/ Richard I. Clark Director of Northland Communications 3/28/96
- ---------------------- Corporation ------------
Richard I. Clark
/s/ John E. Iverson Director of Northland Communications 3/28/96
- ---------------------- Corporation ------------
John E. Iverson
/s/ Gary S. Jones Vice President and principal accounting 3/28/96
- ---------------------- officer of Northland Communications ------------
Gary S. Jones Corporation
</TABLE>
<PAGE> 28
EXHIBITS INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ------------------------------------------------ ------------
<S> <C> <C>
10.44 Asset Purchase Agreement between Northland Cable
Properties Four Limited Partnership and UACC
Midwest, Inc. dated November 17, 1995.
27.0 Financial Data Schedule.
</TABLE>
<PAGE> 29
NORTHLAND CABLE PROPERTIES FOUR LIMITED
PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
<PAGE> 30
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Four Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Four Limited Partnership (a Washington limited partnership) as of December 31,
1995 and 1994, and the related statements of operations, changes in partners'
deficit and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties Four
Limited Partnership as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
March 4, 1996
<PAGE> 31
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
----------- -----------
<S> <C> <C>
CASH $ 384,304 $ 350,892
ACCOUNTS RECEIVABLE 378,621 135,960
PREPAID EXPENSES 86,313 56,210
INVESTMENT IN CABLE TELEVISION
PROPERTIES:
Property and equipment, at cost 24,772,312 16,209,792
Less--accumulated depreciation (13,265,067) (12,415,608)
----------- -----------
11,507,245 3,794,184
Franchise agreements (net of
accumulated amortization of
$899,053 in 1995 and $770,734
in 1994) 1,801,801 329,130
Noncompetition agreements and
other intangibles (net of
accumulated amortization of
$496,982 in 1995 and $489,328
in 1994) 915,850 78,969
----------- -----------
Total investment in cable
television properties 14,224,896 4,202,283
----------- -----------
Total assets $15,074,134 $ 4,745,345
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
1995 1994
----------- -----------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued
expenses $ 801,634 $ 489,794
Due to General Partner and
affiliates 116,345 58,851
Deposits 44,184 31,995
Subscriber prepayments 185,835 138,196
Notes payable 19,789,175 9,784,068
----------- -----------
Total liabilities 20,937,173 10,502,904
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' DEFICIT:
General partners-
Contributed capital, net (50,875) (47,905)
Accumulated deficit (69,717) (71,632)
----------- -----------
(120,592) (119,537)
----------- -----------
Limited partners-
Contributed capital, net - 14,663
units in 1995 and 1994 1,159,414 1,453,466
Accumulated deficit (6,901,861) (7,091,488)
----------- -----------
(5,742,447) (5,638,022)
----------- -----------
Total liabilities and
partners' deficit $15,074,134 $ 4,745,345
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 32
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE $ 6,617,205 $ 5,657,619 $ 5,406,112
----------- ----------- -----------
EXPENSES:
Operating (including $52,395,
$32,848 and $33,084 paid to
affiliates in 1995, 1994 and 1993,
respectively) 838,545 848,919 735,936
General and administrative
(including $681,345, $570,155 and
$548,091 paid to affiliates in
1995, 1994 and 1993, respectively) 1,740,021 1,486,927 1,409,693
Programming 1,394,806 1,101,474 1,011,566
Depreciation and amortization 1,381,435 1,653,369 1,617,971
----------- ----------- -----------
5,354,807 5,090,689 4,775,166
----------- ----------- -----------
Operating income 1,262,398 566,930 630,946
OTHER INCOME (EXPENSE):
Interest income 5,601 3,827 8,374
Interest expense (1,005,691) (601,948) (731,802)
Other expense (15,467) (25,000) --
Loss on disposal of assets (55,299) (13,087) --
----------- ----------- -----------
Net income (loss) $ 191,542 $ (69,278) $ (92,482)
=========== =========== ===========
ALLOCATION OF NET INCOME (LOSS):
General partners $ 1,915 $ (693) $ (925)
=========== =========== ===========
Limited partners $ 189,627 $ (68,585) $ (91,557)
=========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 13 $ (5) $ (6)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 33
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
---------- ------------ ------------
<S> <C> <C> <C>
BALANCE, December 31, 1992 $(111,948) $(4,817,780) $(4,929,728)
Repurchase of limited partnership
units - (28,000) (28,000)
Cash distributions ($20 per limited
partnership unit) (2,993) (296,270) (299,263)
Net loss (925) (91,557) (92,482)
--------- ----------- -----------
BALANCE, December 31, 1993 (115,866) (5,233,607) (5,349,473)
Repurchase of limited partnership
units - (41,000) (41,000)
Cash distributions ($20 per limited
partnership unit) (2,978) (294,830) (297,808)
Net loss (693) (68,585) (69,278)
--------- ----------- -----------
BALANCE, December 31, 1994 (119,537) (5,638,022) (5,757,559)
Cash distributions ($20 per limited
partnership unit) (2,970) (294,052) (297,022)
Net income 1,915 189,627 191,542
--------- ----------- -----------
BALANCE, December 31, 1995 $(120,592) $(5,742,447) $(5,863,039)
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 34
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 191,542 $ (69,278) $ (92,482)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 1,381,435 1,653,369 1,617,971
Loss on disposal of assets 55,299 13,087 -
(Increase) decrease in operating assets:
Accounts receivable (193,261) 10,199 (7,606)
Prepaid expenses (30,103) 12,571 831
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 311,840 134,928 13,266
Due to General Partner and affiliates 57,494 37,529 (14,170)
Deposits 12,189 (1,035) 1,401
Subscriber prepayments 47,639 17,969 (15,764)
----------- ---------- ----------
Net cash provided by operating activities 1,834,074 1,809,339 1,503,447
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (769,176) (509,415) (494,810)
Purchases of cable television systems (10,229,571) - -
Hold-back note payable 455,769 - -
----------- ---------- ----------
Net cash used in investing activities (10,542,978) (509,415) (494,810)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 19,333,406 - -
Principal payments on notes payable (9,784,068) (824,866) (955,071)
Distributions to partners (297,022) (297,808) (299,263)
Loan fees and other costs incurred (510,000) - -
Repurchase of limited partnership units - (41,000) (28,000)
----------- ---------- ----------
Net cash provided by (used in) financing activities 8,742,316 (1,163,674) (1,282,334)
----------- ---------- ----------
INCREASE (DECREASE) IN CASH 33,412 136,250 (273,697)
CASH, beginning of year 350,892 214,642 488,339
----------- ---------- ----------
CASH, end of year $ 384,304 $ 350,892 $ 214,642
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 978,220 $ 601,973 $ 760,223
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 35
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Four Limited Partnership (the Partnership), a
Washington limited partnership, was formed on January 2, 1985. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on April 19, 1985, by acquiring cable television
systems in the city of Sherman, Texas. Additional systems were acquired in San
Joaquin, California, and Tyler, Texas. In September of 1995, the Partnership
acquired cable television systems serving the areas of Hillsboro, Kaufman, New
Waverly, Waterwood and Oak Grove, Texas. In October of 1995, the Partnership
acquired cable television systems serving the areas of Huffman, Prarie View, Cut
and Shoot, Brookshire, Tarkenton, Ace, Simonton and Fulshear, Texas. The
Partnership has 41 nonexclusive franchises to operate the cable systems for
periods which will expire at various dates through the year 2012.
Northland Communications Corporation is the Managing General Partner (the
General Partner) of the Partnership. The General Partner and its affiliates also
own and operate cable television systems. In addition, the General Partner
manages cable television systems for other limited partnerships for which it is
the General Partner.
FN Equities Joint Venture is the Administrative General Partner of the
Partnership.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' deficit. No limited partner is obligated to
make any additional contribution to partnership capital.
The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to partnership capital.
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate of
the Administrative General Partner and other offering costs are recorded as a
reduction of limited partners' capital.
<PAGE> 36
-2-
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Depreciation
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
<TABLE>
<S> <C>
Buildings 20 years
Distribution plant 10 years
Other equipment 5-10 years
</TABLE>
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocates the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to the franchise and other determinable intangible costs;
then, any excess would have been allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements and noncompetition agreements and other
intangibles are being amortized using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Franchise agreements 12-23 years
Noncompetition agreements and
other intangibles 5-15 years
</TABLE>
Revenue Recognition
The Partnership recognizes revenue in the month service is provided to customers
and accounts for advance payments on services to be rendered as subscriber
prepayments.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, 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.
Reclassifications
Certain reclassifications have been made to conform prior years' data with the
current year presentation.
<PAGE> 37
-3-
3. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner manages the Partnership and receives a fee for its services
equal to 6% of the gross revenues of the Partnership, excluding revenues from
the sale of cable television systems or franchises. The amount of management
fees charged by the General Partner was $396,408, $339,457 and $324,367 during
1995, 1994 and 1993, respectively.
Income Allocation
All items of income, loss, deduction and credit are allocated 99% to the limited
partners and 1% to the general partners until the limited partners have received
aggregate cash distributions in an amount equal to aggregate capital
contributions. Thereafter, the general partners receive 25% and the limited
partners are allocated 75% of partnership income, losses and distributions. In
any year after the limited partners have received cumulative cash distributions
equal to 100% of their contributions, the limited partners will receive cash
distributions equal to at least 50% of the net taxable income allocated to them
prior to any cash distribution to the general partners. Any distributions other
than from cash flow, such as from the sale or refinancing of a system or upon
dissolution of the Partnership, will be determined according to contractual
stipulations in the Partnership Agreement.
The limited partners' total initial contributions to capital were $7,500,000
($500 per limited partnership unit). As of December 31, 1995, $5,150,259 ($351
per limited partnership unit) has been distributed to the limited partners and
the Partnership has repurchased $154,500 of limited partnership units (267 units
at $500 per unit and 70 units at $300 per unit).
Reimbursements
The General Partner provides certain centralized services to the Partnership and
other affiliated entities. As set forth in the Partnership Agreement, the
Partnership reimburses the General Partner for the cost of those services
provided by the General Partner to the Partnership. These services include
engineering, marketing, management services, accounting, bookkeeping, legal,
copying, office rent and computer services.
The amounts billed to the Partnership for these services are based on the
General Partner's cost. The cost of certain services is charged directly to the
Partnership, based upon actual time spent by employees of the General Partner.
The cost of other services is allocated to the Partnership, and other affiliated
entities, based upon their relative size, revenue and other factors. Amounts
charged to the Partnership by the General Partner for these services were
$324,511, $270,988 and $266,449 for 1995, 1994 and 1993, respectively.
In 1995, 1994 and 1993, the Partnership paid billing service fees to an
affiliate, amounting to $42,444, $37,481 and $36,161, respectively.
<PAGE> 38
-4-
The Partnership has entered into an operating management agreement with an
affiliate managed by the General Partner. Under the terms of these agreements,
the affiliate serves as the managing agent for one of the Partnership's cable
television systems and is reimbursed for certain operating, administrative and
programming expenses. The Partnership paid $29,856, $20,590 and $23,788 under
the terms of these agreements during 1995, 1994 and 1993, respectively.
During 1994 and 1993 the Partnership served as the managing agent for an
affiliate's cable television system and was reimbursed for certain operating and
programming expenses. The Partnership received $23,272 and $30,408 under the
terms of these agreements during 1994 and 1993, respectively.
In September 1994, the Partnership began paying monthly program license fees to
Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the
rights to distribute programming developed and produced by NCN. Total license
fees paid to NCN during 1995 and 1994 were $24,619 and $40,002, respectively.
Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner, was formed
in 1993 and began operations in 1994. CAC was organized to assist in the
development of local advertising markets and management and training of local
sales staffs. CAC billed the Partnership $14,296 and $11,950 in 1995 and 1994,
respectively, for these services.
Due to General Partner and Affiliates
The liability to the General Partner and affiliates consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
-------- -------
<S> <C> <C>
Management fees $ 40,574 $28,913
Reimbursable operating costs
and other 39,016 26,474
Due to affiliates 36,755 3,464
-------- -------
$116,345 $58,851
======== =======
</TABLE>
<PAGE> 39
-5-
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Land and buildings $ 346,392 $ 287,892
Distribution plant 23,009,700 14,714,120
Other equipment 1,382,604 1,168,295
Construction in progress 33,616 39,485
----------- -----------
24,772,312 16,209,792
Less--accumulated depreciation 13,265,067 12,415,608
----------- -----------
$11,507,245 $ 3,794,184
=========== ===========
</TABLE>
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
5. NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
----------- ----------
<S> <C> <C>
Revolving credit and term loan agreement,
collateralized by a first lien position on all
present and future assets of the Partnership.
Interest rates vary based on certain financial
covenants; currently 8.92% (weighted average).
Graduated principal payments plus interest are due
quarterly until maturity on December 31, 2003. $19,333,406 $ -
Unsecured, subordinated hold-back note, bearing
interest at the prime rate, currently 8.5%,
payable June 1996. 237,658 -
Unsecured, subordinated, non-interest bearing hold-
back note, payable April 1996. 218,111 -
Term loan, repaid in 1995, collateralized by a first
lien position on all present and future assets of
the Partnership. - 9,784,068
----------- ----------
$19,789,175 $9,784,068
=========== ==========
</TABLE>
<PAGE> 40
-6-
Annual maturities of notes payable after December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $ 1,132,438
1997 1,353,388
1998 1,546,672
1999 2,030,008
2000 2,610,010
Thereafter 11,116,659
-----------
$19,789,175
===========
</TABLE>
Under the terms of the revolving credit and term loan agreement, the Partnership
has agreed to restrictive covenants which require the maintenance of certain
ratios, including a maximum Leverage Ratio of 5.75 to 1, a minimum Pro Forma
Debt Service Ratio of 1.15 to 1 and a minimum Interest Coverage Ratio of 1.75 to
1. As of December 31, 1995, the Partnership was not in compliance with the
requirements for limited partnership distributions made and the outstanding
balance on a hold-back note payable. The Partnership has received a waiver from
the creditor for these covenant violations. The General Partner submits
quarterly debt compliance reports to the Partnership's creditor under this
agreement.
The Partnership has entered into interest rate swap agreements to reduce the
impact of changes in interest rates. Interest rate swap transactions generally
involve the exchange of fixed and floating interest payment obligations without
the exchange of the underlying principal amounts. At December 31, 1995, the
Partnership had outstanding two interest rate swap agreements with its creditor,
having a notional principal amount of $14,000,000. These agreements effectively
change the Partnership's interest rate exposure to a fixed rate of 5.96%
(weighted average), plus an applicable margin based on certain financial
covenants (the margin at December 31, 1995 was 3.0%). Both interest rate swap
agreements expire in September of 1997. At December 31, 1995, the Partnership
would have been required to pay approximately $173,000 to settle these
agreements, based on the fair value estimated by the counterparty.
The counterparty to the Partnership's interest rate swap agreements is the
Partnership's creditor. The Partnership is exposed to credit risk to the extent
of nonperformance by this counterparty; however, management believes the risk of
incurring losses due to credit risk is remote. The notional amount of the
instruments discussed above reflects the extent of involvement in the
instruments, but does not represent the Partnership's exposure to market risk.
Considerable judgment is required to develop the estimates of fair value; thus,
the estimates provided above are not necessarily indicative of the amounts that
could be realized in a current market exchange.
6. INCOME TAXES:
Income taxes have not been recorded in the accompanying financial statements
because they are obligations of the partners. The federal and state income tax
returns of the Partnership are prepared and filed by the General Partner.
The tax returns, the qualification of the Partnership as such for tax purposes
and the amount of distributable partnership income or loss are subject to
<PAGE> 41
-7-
examination by federal and state taxing authorities. If such examinations result
in changes with respect to the Partnership's qualification or in changes with
respect to the income or loss, the tax liability of the partners would likely be
changed accordingly.
Taxable income to the limited partners was approximately $321,000, $846,000 and
$710,000 for the three years in the period ended December 31, 1995, and is
different from that reported in the statements of operations due to the
difference in depreciation expense allowed for tax purposes and that amount
recognized under generally accepted accounting principles. There were no other
significant differences between taxable income and the net income (loss)
reported in the statements of operations.
In general, under current federal income tax laws, a limited partner's allocated
share of tax losses from a partnership is allowed as a deduction on his
individual income tax return only to the extent of the partner's adjusted basis
in his partnership interest at the end of the tax year. Any excess losses over
adjusted basis may be carried forward to future tax years, and are allowed as a
deduction to the extent the partner has an increase in his adjusted basis in the
partnership through either an allocation of partnership income or additional
capital contributions to the partnership.
In addition, the current tax law does not allow a taxpayer to use losses from a
business activity in which he does not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset other
income such as salary, active business income, dividends, interest, royalties
and capital gains. However, such losses can be used to offset other income from
passive activities. Disallowed losses can be carried forward indefinitely to
offset future income from passive activities. Disallowed losses can be used in
full when the taxpayer recognizes gain or loss upon the disposition of his
entire interest in the passive activity.
7. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership rents tower sites, office facilities and pole attachments under
leases accounted for as operating leases. Rental expense included in operations
was $169,945, $190,215 and $138,503 in 1995, 1994 and 1993, respectively.
Minimum lease payments to the end of the lease terms are as follows:
<TABLE>
<S> <C>
1996 $ 31,624
1997 21,005
1998 17,835
1999 16,920
2000 16,720
Thereafter 55,170
--------
$159,274
========
</TABLE>
<PAGE> 42
-8-
Effects of Regulation
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the Federal
Communications Commission (FCC) adopted rules implementing rate regulation and
certain other provisions of the 1992 Act, which became effective September 1,
1993. On February 22, 1994, the FCC adopted further rate regulation rules
requiring additional reductions, which became effective May 15, 1994, and
revised the benchmarks and formulas used to calculate such rates. Also in
February, the FCC's initial rules governing cost-of-service showings were
adopted, with an effective date of May 15, 1994. Cable operators may pursue
cost-of-service showings to justify charging rates for regulated services in
excess of those established by the FCC in its benchmark regulatory scheme.
On May 5, 1995, the FCC announced the adoption of a simplified set of rate
regulation rules applicable to small cable systems, defined as a system serving
15,000 or fewer subscribers, owned by small companies, defined as a company
serving 400,000 or fewer subscribers. Under the FCC's definition, the
Partnership is a small company and each of the Partnership's cable systems are
small systems. Maximum permitted rates under these revised rules are dependent
on several factors including the number of regulated channels offered, the net
asset basis of plant and equipment used to deliver regulated services, the
number of subscribers served and a reasonable rate of return.
It is management's opinion that, in all material respects, the rates in effect
in the Partnership's cable systems are within the maximum allowable rates
permitted under the FCC's small cable system rules.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became
law. The 1996 Act will eliminate all rate controls on cable programming service
tiers of small cable systems, defined by the 1996 Act as systems serving fewer
than 50,000 subscribers owned by operators serving fewer than 1% of all
subscribers in the United States (approximately 600,000 subscribers). All of the
Partnership's cable systems qualify as small cable systems. Many of the changes
called for by the 1996 Act will not take effect until the FCC issues new
regulations, a process that could take from several months to a few years
depending on the complexity of the required changes and the statutory time
limits. Because of this the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time.
8. CABLE TELEVISION SYSTEM ACQUISITION:
On September 15, 1995, the Partnership acquired substantially all of the
operating assets and franchise rights of cable systems serving approximately
3,500 subscribers in or around the communities of Kaufman, Oak Grove, Hillsboro,
New Waverly and Waterwood, all in the state of Texas. The purchase price for
these systems was $4,492,254, of which $4,226,896 was paid at the closing date.
The balance will be paid in June 1996, net of any purchase price and other
adjustments, under the terms of an unsecured, subordinated hold-back note
bearing interest at the prime rate. At December 31, 1995, the balance owing on
this note was $237,658. The purchase was financed by borrowings under the
Partnership's revolving credit and term loan facility.
<PAGE> 43
-9-
On October 31, 1995, the Partnership acquired substantially all operating assets
and franchise rights of the cable television systems in or around Huffman,
Prairie View, Waller, Cut and Shoot, Brookshire, Tarkenton, Ace, Simonton and
Fulshear, all in the state of Texas (the Brookridge system). The Brookridge
system serves approximately 3,600 subscribers and the purchase price was
$5,585,900 of which $5,306,510 was paid at the closing date. The balance will be
paid in April 1996, net of any purchase price and other adjustments, under the
terms of an unsecured, subordinated, non-interest bearing hold-back note. At
December 31, 1995, the balance owing on this note was $218,111. The purchase was
financed by borrowings under the Partnership's revolving credit and term loan
facility.
Pro forma operating results (unaudited) of the Partnership for 1995, assuming
the acquisitions of the systems described above had been made at the beginning
of year, follow.
<TABLE>
<CAPTION>
For the year ended
December 31,
1995
(unaudited)
------------------
<S> <C>
Revenue $ 8,799,777
===========
Net loss $(1,101,961)
===========
Net loss per limited partnership unit $ (74)
===========
</TABLE>
<PAGE> 1
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is made as of November __, 1995, by and
between NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP, a Washington
limited partnership ("Buyer"), and UACC MIDWEST, INC., a Delaware corporation
("Seller").
RECITALS
A. Seller owns the cable television system and currently is engaged in
the business of providing cable television services in the unincorporated
community of LeGrand and nearby areas of Merced County, California.
B. Buyer desires to purchase, and Seller desires to sell and convey,
substantially all of the assets of Seller used or useful in connection with such
cable television business, all as more particularly described below.
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
SECTION 1. DEFINITIONS
The following terms shall have the following meanings:
1.1 Agreement shall mean this Asset Purchase Agreement, as amended,
supplemented or modified from time to time, including all agreements,
instruments and documents delivered in connection with this Agreement and all
Schedules and Exhibits annexed hereto.
1.2 Assets shall include all of the franchises, licenses, permits,
certificates, and other similar authorities used or usable in connection with
the operations of the CATV System, all real and personal property, all converter
and other deposits, all prepaid revenues and accounts receivable, and all other
tangible and intangible assets comprising and used or usable in connection with
the operations of the System, except only for the Excluded Assets as defined in
Section 1.12. Assets include without limitation the items which are listed in
Schedule 1.2 (except only the Excluded Assets listed in Schedule 1.12).
Notwithstanding the generality of the foregoing, Assets include only the assets
of Seller that relate specifically to the CATV System, it being understood and
acknowledged by Buyer that Seller owns assets that relate to cable television
systems operated by Seller in areas that are in close proximity to the CATV
System, which assets may have been used tangentially by Seller in the operation
of the CATV System but are excluded from the Assets.
Asset Purchase Agreement Page 1
<PAGE> 2
1.3 Basic Package Services shall mean the package of cable television
programming, including broadcast and satellite service programming (but
excluding premium or pay-television programming) offered at the monthly rate of
$17.38 per subscriber.
1.4 Basic Subscribers shall mean, as of any date and for any franchise
area served by the CATV System, an individually billed residential subscriber to
Basic Package Services of the CATV System (which will not include "additional
outlets" or "second connects" as such terms are commonly understood in the CATV
industry), except any such subscriber (a) who is more than sixty (60) calendar
days past due (from the original due date as stated on the billing statement) in
the payment of any amount exceeding Ten Dollars ($10), (b) who have not paid at
least two (2) months' payment for Basic Package Services in full without
discount and all installation charges billed therefor, or (c) whose service is
pending disconnection for any reason.
1.5 CATV System shall refer to Seller's complete cable television
reception and distribution system as presently conducted by Seller in and around
the unincorporated community of LeGrand and nearby areas of Merced County,
California.
1.6 CLI Rules shall refer to the Cumulative Leakage Index ("CLI")
standards under applicable FCC rules and regulations.
1.7 Closing and Closing Date shall refer to the consummation of the
transactions contemplated by this Agreement, to be held at the place and on the
date specified in Section 8.1. The day on which such meeting takes place shall
be referred to as the "Closing Date."
1.8 Closing Documents shall refer to the agreements, contracts,
instruments and other documents listed in Exhibit G.
1.9 Contracts shall refer to all instruments, agreements, leases, and
contracts listed in Schedule 1.2.
1.10 Equivalent Billing Units shall mean a hypothetical equivalent to a
Basic Subscriber determined, as of any date and for each franchise area served
by the CATV System, by dividing (a) the total monthly billings for sales by the
CATV System to bulk and commercial accounts for Basic Package Services during
the most recent full month ended prior to the date of calculation, by (b) the
standard monthly rate (without discount of any kind) charged during such month
to single family households for Basic Package Services sold by the CATV System,
except any such bulk subscriber (a) who is more than sixty (60) calendar days
past due (from the original due date as stated on the billing statement) in the
payment of any amount exceeding Ten Dollars ($10), (b) who have not paid at
least two (2) months' payment for Basic Package Services in full without
discount and all installation charges billed therefor, or (c) whose service is
pending disconnection for any reason.
Asset Purchase Agreement Page 2
<PAGE> 3
1.11 Equivalent Subscribers shall mean with respect to the CATV System,
the sum of (a) the number of Basic Subscribers, and (b) the number of Equivalent
Billing Units.
1.12 Excluded Assets shall include (a) Seller's cash on hand, accounts,
and investments which are not related to converter and other CATV System
deposits, (b) all PrimeStar and DMX commercial accounts of Seller, (c) all pole
attachment agreements, all programming agreements and all retransmission consent
agreements, (d) all of Seller's trade names, and (e) those assets listed on
Schedule 1.12.
1.13 FCC shall mean the Federal Communications Commission.
1.14 Required Consents shall refer to the third party consents listed
in Schedule 5.6.
1.15 Security Interest shall mean any mortgage, deed-of-trust, lien,
security agreement, limitation, pledge, hypothecation, assignment for security
purposes, option, put, charge, capital or financing lease arrangement, priority,
encumbrance, claim, suit, judgment or restraint on transfer (including, without
limitation, any agreement to give or suffer to exist any of the foregoing)
against title with respect to any Asset to be sold under this Agreement, except
for those security interests that Buyer has agreed to assume and are listed in
Schedule 4.1.
SECTION 2. SALE OF ASSETS
2.1 Agreement to Purchase and Sell. Subject to the terms and conditions
set forth in this Agreement, at Closing Buyer shall purchase and Seller shall
sell, transfer, assign, convey and deliver the Assets to Buyer.
2.2 Assets to Be Sold. Except as otherwise specifically provided in
this Agreement, all of the Assets are intended to be sold, transferred,
assigned, conveyed and delivered to Buyer, free and clear of all Security
Interests.
SECTION 3. PURCHASE PRICE
3.1 Purchase Price. Buyer shall pay to Seller total consideration of
Two Hundred Sixty Eight Thousand Seven Hundred Fifty Dollars ($268,750) (the
"Purchase Price"), as adjusted pursuant to Sections 3.2 and 3.3. The Purchase
Price shall be paid as follows:
3.1.1 Cash. At Closing, Buyer shall pay to Seller Two Hundred
Fifty Five Thousand Two Hundred Fifty Dollars ($255,250) as adjusted pursuant to
Section 3.2, by wire transfer of immediately available funds on the Closing
Date; and
3.1.2 Escrow. At Closing, Buyer shall deposit into an escrow
account Thirteen Thousand Five Hundred Dollars ($13,500), pursuant to an Escrow
Agreement substantially in the
Asset Purchase Agreement Page 3
<PAGE> 4
form of Exhibit F, which escrow account shall be held back from Seller until the
earlier of (i) one hundred twenty (120) days after the Closing Date, or (ii)
immediately after payment of the post- Closing adjustment has been made as
provided in Section 3.3. The escrow account shall be subject to Buyer's
continuing right to offset or recoup for post-closing adjustments to be made
pursuant to Section 3.3.
3.2 Adjustments and Prorations to the Purchase Price at Closing .
Appropriate adjustments to the Purchase Price and the portion thereof payable
under Section 3.1.1 shall be made on a prorata basis as of the Closing Date to
the extent reasonably possible for all prepaid expenses, accrued expenses and
prepaid revenue, all as determined in accordance with generally accepted
accounting principles, to reflect the principle that all expenses arising out of
and all income attributable to the CATV System for the period prior to 11:59
p.m. local time on the Closing Date are for the account of Seller, and that all
expenses arising out of and all income attributable to the CATV System for the
period after 11:59 p.m. local time on the Closing Date are for the account of
Buyer. Such adjustments shall be made on the basis of a certificate delivered by
Seller to Buyer at least five (5) business days prior to Closing setting forth
Seller's good faith estimate of any adjustments or prorations required by this
Section 3.2. All overlapping items of income or expense shall be prorated or
reimbursed, as the case may be, as of 11:59 p.m. local time on the Closing Date,
including without limitation the following: expenses and deposits prepaid by
Seller; deposits and prepayments received but unearned by Seller; liabilities
for incurred but unpaid expenses; real and personal property taxes and utility
charges relating to the CATV System; and all other items normally prorated in
the sale of the assets of a going concern cable television business. In
addition, the Purchase Price and the portion thereof payable under Section 3.1.1
shall be reduced by the amount payable by Seller for one-half (1/2) of the fees
and expenses payable under the Escrow Agreement in substantially the form
attached hereto as Exhibit E. Finally, the Purchase Price and the portion
thereof payable under Section 3.1.1 shall be increased by the value of Seller's
accounts receivable existing as of the Closing Date with respect to subscribers
to the CATV System in accordance with the following:
(i) For accounts receivable aged zero (0) through thirty
(30) days, one hundred percent (100%) of the
aggregate amount of such accounts receivable; and
(ii) For accounts receivable aged thirty one (31) through
ninety (90) days, eighty five percent (85%) of the
aggregate amount of such accounts receivable.
No adjustments to the Purchase Price shall be made with respect to accounts
receivable aged over ninety (90) days. The age of such accounts receivable shall
be measured from the original due date of billing as stated on Seller's billing
statements.
3.3 Post-Closing Adjustments. As soon as practicable, but in any event
within sixty (60) days after the Closing Date, Seller shall prepare and deliver
to Buyer a certificate setting
Asset Purchase Agreement Page 4
<PAGE> 5
forth Seller's computations of the amount of all prorations and adjustments, if
any, called for in Section 3.2. Buyer and Seller shall work together in good
faith to resolve any disagreement with respect to any matter set forth in such
certificate. A payment shall be made by Seller or Buyer within five (5) business
days after reaching agreement as to the proper amounts of the adjustments. If
Seller and Buyer are unable to agree upon the amounts of the adjustments within
fifteen (15) days of Seller's delivery of the certificate to Buyer, then the
matter shall be submitted to an accounting firm mutually acceptable to Buyer and
Seller for prompt resolution, and the fees for such firm shall be paid one-half
by Buyer and one-half by Seller.
3.4 Allocation of Purchase Price. The Purchase Price shall be allocated
among the Assets in such amounts as set forth in Schedule 3.4. Buyer and Seller
agree to be bound by such allocation and to file all federal, state, and local
tax returns on the basis of such allocation.
SECTION 4. ASSUMPTION OF LIABILITIES
4.1 Limited Assumption of Liabilities. All of Seller's obligations with
respect to the CATV System are set forth in the agreements listed in Schedule
1.2. Except as specifically set forth in Schedule 4.1, Buyer will not assume any
of Seller's obligations at Closing. It is expressly understood and agreed that
Buyer shall not be liable for, and does not assume, any obligations or
liabilities of Seller of any kind or nature, other than obligations expressly
assumed by Buyer pursuant to the terms of this Section or the Assignment and
Assumption Agreement to be executed by Buyer and Seller in substantially the
form attached hereto as Exhibit B.
4.2 Sales and Transfer Taxes; Third-Party Consents. Seller shall assume
the liability for and shall pay any and all taxes that may be imposed on Seller
on the basis of Seller's income. Buyer shall assume the liability for and shall
pay any and all other reasonable costs, fees and taxes associated with the
consummation of the transactions contemplated by this Agreement, including
without limitation the expenses associated with obtaining the consent or
agreement of any governmental authority or any independent third-party with whom
Seller is contractually bound; provided, however, that Buyer shall not be
obligated under this Section either to pay any unreasonable fees or expenses or
to undertake any unreasonable obligations as a part of Buyer's performance.
Notwithstanding the foregoing, unless specifically set forth herein, each party
shall bear the expenses of its own attorneys, accountants and experts.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF SELLER
To induce Buyer to enter into this Agreement, Seller represents and
warrants to Buyer as follows:
5.1 Organization and Authority. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and is qualified to transact business in the State of California and in all
other jurisdictions in which the failure to so qualify
Asset Purchase Agreement Page 5
<PAGE> 6
would have a material adverse effect on its business or properties; openly and
lawfully does business under the names "UACC Midwest, Inc.," "TCI" and "TCI
Cablevision of Merced," but no other name; has full power and authority to
execute, deliver, and perform this Agreement; has all requisite power and
authority to carry on its business as currently conducted and to own, lease,
use, and operate the Assets at the places they are located and in the manner in
which the CATV System is conducted; has taken all corporate action required by
law, its articles of incorporation and otherwise, and as of Closing will have
received all necessary consents and approvals, including without limitation the
approval of the directors of Seller, to authorize the execution, delivery, and
performance of this Agreement; and has not, since December 2, 1991, changed its
name, been the surviving entity of a merger or consolidation, or acquired all or
substantially all of the assets of any person, company or entity.
5.2 Schedules. The Schedules to this Agreement are true, accurate, and
complete in all material respects.
5.3 No Breach or Violation. To Seller's knowledge, the execution of
this Agreement and the consummation of the transactions contemplated hereby will
not violate or cause a default under any agreement to which Seller is a party or
give rise to any Security Interest with respect to the Assets, except such
violations, defaults, or security interests as would not, individually or in the
aggregate, have a material adverse effect on the validity, binding effect or
enforceability of this Agreement, on the CATV System, or on the ability of
Seller to perform its obligations under this Agreement. The Agreement
constitutes the legal, valid, and binding obligation of Seller, enforceable in
accordance with its terms, except insofar as enforceability may be affected by
applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
now or hereafter in effect affecting creditors' rights generally or by
principles governing the availability of equitable remedies.
5.4 Effectiveness of Contracts. All of the Contracts are currently in
full force and effect and are valid and enforceable in accordance with their
respective terms, except insofar as enforceability may be affected by applicable
bankruptcy, insolvency, reorganization, moratorium, or similar laws now or
hereafter in effect affecting creditors' rights generally or by principles
governing the availability of equitable remedies, and Seller is not in violation
or default of any material provision of any Contract. To Seller's knowledge,
Seller is in compliance with the applicable requirements of all governing or
regulatory authorities relating to the Contracts. To Seller's knowledge, the
Contracts represent all of the agreements necessary for Seller to operate the
CATV System in the ordinary course of business, as and in the manner in which it
presently is conducted and in accordance with all applicable federal, state and
local laws. True, correct and complete copies of all Contracts have been
delivered by Seller to Buyer.
5.5 Title to Assets. Seller has good, marketable and indefeasible
title, both legal and equitable, to all of the Assets which are owned, and a
valid leasehold interest in all of the Assets which are leased; and the Assets
are free and clear of all Security Interests of any kind or nature,
Asset Purchase Agreement Page 6
<PAGE> 7
except for those Security Interests which shall be removed and released at or
prior to Closing. To Seller's knowledge, the Assets and the programming offered
over the CATV System are free and clear of any rightful claim of any third
person by way of copyright infringement, and Seller has timely made all
requisite filings with and payments to, and is otherwise in material compliance
with, all applicable rules and regulations of the Copyright Office. The real
property is accessible by roads over which Seller has a valid right-of-way, the
real property is served by all utilities and services reasonably necessary or
convenient for its normal and intended use, improvements on the real property do
not encroach on the property of others, and Seller has all easements and rights
of way necessary for the operation, repair, and maintenance of the CATV System.
5.6 Required Consents. Schedule 5.6 sets forth a true, correct and
complete list of all Required Consents, including without limitation all
governmental and third-party franchises, approvals, licenses, consents,
landlord's consents, other agreements, and other approvals necessary or required
for Buyer to conduct the CATV System and to own, lease, use, and operate, as the
case may be, the Assets at the places and in the manner in which the CATV System
and Assets are presently conducted or used and will be conducted or used on the
Closing Date.
5.7 FCC Compliance. As of Closing, Seller shall be duly authorized
under and in material compliance with applicable rules, regulations and orders
of the FCC and any other governmental authority necessary to conduct the
business of the CATV System in the manner in which such business has been
conducted prior to Closing, including without limitation the CLI Rules. Prior to
Closing, Seller will have delivered to Buyer true and correct copies of all
current and past reports, filings and notices, for the immediately past two
years, from or with, or necessary to support compliance with, FCC rules and
regulations for the immediately past two years. As of Closing, Seller will have
materially complied with and will have provided Buyer with true, correct and
complete copies of all Syndicated Exclusivity, Network Nonduplication and Sports
Blackout requests and all notices received by Seller relating to the mandatory
carriage of off-air broadcast signals on the CATV System.
5.8 Assets and CATV Business. Except as expressly set forth in the
Schedules to this Agreement, at Closing all Assets shall be in operating
condition, ordinary wear and tear excepted. None of the Assets materially
violate applicable laws, ordinances, codes, regulations or restrictive
covenants. The CATV System and the Assets are suitable for continued use in the
manner in which they are presently operated without the need for repairs or
replacement (except such repairs and replacements as would be expected of a
cable system of the same age and in the same geographical location as the CATV
System). All cable used in the CATV System is coaxial, and, except for such
conditions as might be expected for a cable system of its age and geographic
location, is water-tight and properly joined and connected.
5.9 Litigation and Proceedings. There is no litigation at law, or in
equity, and there is no other proceeding or investigation pending or, to
Seller's knowledge, threatened against, Seller
Asset Purchase Agreement Page 7
<PAGE> 8
which reasonably could be expected, individually or in the aggregate, to have a
material adverse effect on the CATV System or on Seller's ability to perform its
obligations under this Agreement, and Seller does not know of any basis for such
litigation or proceedings. Seller is not materially in default in any manner
with respect to any order, writ, injunction, or decree of any court or federal,
State, municipal, or other governmental department, commission, board, bureau,
agency, or instrumentality which relates to the operation of the CATV System,
and Seller has materially complied with all laws, rules, or regulations
applicable to the CATV System and the operation thereof.
5.10 Subscribers, Fees, Rates and Homes Passed. The CATV System has no
fewer than 215 Equivalent Subscribers. The number of Equivalent Subscribers, the
monthly rates currently charged by Seller for each of the services offered on
the CATV System, and the number of homes passed by the CATV System are listed on
Schedule 5.10. The monthly Basic Package Services rate of at least $17.38, and
the other rates listed on Schedule 5.10 have been in effect for no fewer than
two standard billing cycles and Seller has not been ordered by any governmental
or franchising authority to reduce such rates.
5.11 Finders and Brokers. Neither Seller nor its officers, directors,
shareholders or employees has entered into any contract, arrangement, or
understanding with any person or firm which may result in the obligation of
Seller or Buyer to pay any finder's, brokerage, or agent's fees, commission or
other like payment or compensation. Within the three years preceding the date of
this Agreement, Seller has not entered into any agreement, whether written,
oral, express or implied, directly or indirectly regarding the sale or other
disposition of the CATV System.
5.12 Overbuilds; Competition. To Seller's knowledge, no area presently
served by the CATV System or within the scope of any of Seller's CATV franchises
is presently subject to, or to Seller's knowledge is likely to become subject to
within the foreseeable future, an overbuild situation or competition from a
multipoint distribution service, multichannel multipoint distribution service or
other wireless cable services, or any other circumstances which would have a
negative material impact on the CATV System or Seller's business, except for
Choice TV, PrimeStar and DMX Services.
5.13 Financial Information. To Seller's knowledge, the financial
information pertaining to the CATV System attached as Schedule 5.13: (i) has
been prepared in the ordinary course of business for the purpose of calculating
franchise fees of the CATV System on a consistent basis throughout the period
involved; and (ii) is true, correct, complete and accurate in all material
respects, subject to normal year-end adjustments.
5.14 Free CATV Service. Except as set forth in Schedule 5.14 to this
Agreement, there is no agreement, obligation or other requirement for Seller to
provide free cable television service to any person, entity or firm.
Asset Purchase Agreement Page 8
<PAGE> 9
SECTION 6. BUYER'S REPRESENTATIONS AND WARRANTIES
6.1 Organization and Authority. Buyer represents and warrants to Seller
that Buyer is a limited partnership duly formed and validly existing under the
laws of the State of Washington; has full power and authority to execute,
deliver and perform this Agreement; and has taken all partnership action
required by law and otherwise to authorize the execution, delivery and
performance of this Agreement. This Agreement constitutes the legal, valid and
binding obligation of Buyer enforceable in accordance with its terms, except
insofar as enforceability may be affected by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws now or hereafter in effect affecting
creditors' rights generally or by principles governing the availability of
equitable remedies.
6.2 Finders and Brokers. Neither Buyer nor its officers or employees
has entered into any contract, arrangement, or understanding with any person or
firm, which may result in the obligation of Seller or Buyer to pay any finder's,
brokerage, or agent's fees, commission or other like payment or compensation.
6.3 No Breach or Violation. To Buyer's knowledge, the execution,
delivery and performance of this Agreement will not (a) conflict with or result
in a breach or violation by Buyer of, or (b) constitute default by Buyer under,
any statute, ordinance, rule, regulation or order, or any material agreement,
lease, instrument, document or arrangement, except such conflicts, breaches,
violations or defaults as would not, individually or in the aggregate, have a
material adverse effect on Buyer's ability to perform its obligations pursuant
to this Agreement.
6.4 No Consents. Except as provided in Schedule 5.6, Buyer does not
need to give any notice to, make any filing with, or obtain any authorization,
consent or approval of any government or governmental agency in order for the
consummation of the transactions contemplated by this Agreement.
SECTION 7. CONDUCT PENDING CLOSING
7.1 Access to Premises and Records. Between the date of execution and
delivery of this Agreement and the Closing Date, Seller shall allow Buyer full
access at reasonable times to all of the premises and books and records of
Seller and the CATV System and shall furnish to Buyer and its representatives
all information regarding the business and properties of Seller as may
reasonably be requested by Buyer or its representatives. In particular, Seller
shall allow Buyer to perform, at Buyer's expense, a "Level I" environmental
audit of any real property used in connection with the CATV System. Buyer (a)
will treat and hold, and will cause its employees and representatives to treat
and hold, as confidential any information concerning the business and affairs of
Seller that is not already generally available to the public received by Buyer,
its employees, or its representatives from Seller pursuant to this Section 7.1
or otherwise, (b) will not use any such information except in connection with
this Agreement, and (c) if this
Asset Purchase Agreement Page 9
<PAGE> 10
Agreement is terminated for any reason whatsoever, will return to Seller all
tangible embodiments (and copies thereof) of such information in its possession.
7.2 Continuity and Maintenance of Operations. Seller shall continue to
operate the CATV System, shall maintain the Assets (including maintenance and
replenishment of all inventories of spare equipment and parts reasonably
adequate for the needs of the CATV System for a period of one month, including
without limitation those listed in Schedule 1.2), and shall keep all of its
business books, records, and files all in the ordinary course of business in
accordance with past practices, consistently applied.
7.3 Existing Relationships. Except as otherwise requested by Buyer,
Seller shall use its best efforts to preserve the CATV System as a going concern
and to preserve existing relation ships with suppliers, customers, governmental
entities and others having business dealings with Seller.
7.4 Approvals. Seller shall deliver to Buyer for Buyer's review and
approval a copy of Seller's request for each Required Consent, together with
evidence of such consent satisfactory to Buyer.
SECTION 8. CLOSING; CLOSING DATE; TERMINATION
8.1 Closing Date. Subject to the terms and conditions of this
Agreement, Closing shall be conducted at the offices of Buyer or such other
location on a Closing Date as may be mutually agreed to by the parties. Timing
of the Closing shall be subject to the following terms: Closing shall take place
not later than twenty (20) Business Days after Seller has obtained all Required
Consents and has complied with all other terms and conditions of this Agreement;
or on such later date as may be acceptable to Buyer and Seller.
8.2 Termination. This Agreement may be terminated at any time prior to
Closing (a) by the mutual written consent of Seller and Buyer; (b) by Buyer in
its reasonable discretion, if Seller fails to demonstrate to Buyer's reasonable
satisfaction that the CATV System has at least 215 Equivalent Subscribers, or if
Seller after using its best efforts, is unable to obtain each and every Required
Consent; (c) by either Seller or Buyer, in the event of a material breach or
misrepresentation under this Agreement by the other party which breach or
misrepresentation remains uncured fifteen (15) days after the receipt of notice
of such breach given by the other party; (d) by Buyer if Buyer gives written
notice to Seller of termination within ten (10) days of giving notice to Seller
of its dissatisfaction with the technical, engineering or financial inspections,
or environmental audit pursuant to Section 10.1; or (e) by either party in such
party's sole and absolute discretion, if the transactions contemplated by this
Agreement shall not have been consummated on or before January 31, 1996.
Asset Purchase Agreement Page 10
<PAGE> 11
SECTION 9. SELLER'S OBLIGATIONS AT AND PRIOR TO CLOSING
Unless delivery is required prior to Closing by the terms of this
Agreement, Seller, at its sole cost and expense, shall deliver to Buyer at the
Closing all of the following (collectively, the "Closing Documents"): (a)
executed originals of a bill of sale, an assignment and assumption agreement, an
assignment and assumption of franchises, a Seller's certificate, a
Noncompetition Agreement and an Escrow Agreement, each substantially in the
forms of Exhibits A, B, C, D, E and F, respectively; (b) all documents,
certificates and papers which are reasonably necessary or appropriate to vest in
Buyer all right, title, and interest in and to the Assets free and clear of all
Security Interests, which documents, certificates and papers shall be listed on
the Closing Documents Checklist in the form of Exhibit G; (c) UCC searches, tax
lien searches, pending litigation searches and judgment searches of the county
and state public records from each county in which any of the Assets are
located, performed at Seller's sole expense, within thirty (30) days after the
execution of this Agreement, and any releases necessary to remove any liens on
the Assets and evidence of the dismissal of any suits or the satisfaction of any
judgments revealed by such searches; and (d) certificates from each appropriate
taxing authority stating that all applicable state and/or local taxes due in
connection with the transactions contemplated by this Agreement have been timely
paid in full and that no obligation or liability is outstanding in connection
therewith.
SECTION 10. BUYER'S OBLIGATIONS PRIOR TO, AT, AND AFTER CLOSING
10.1 Prior to Closing. Prior to Closing, Buyer will notify Seller of
its reasonable dissatisfaction, including therein the reasons for such
dissatisfaction, with the results and findings of Buyer's technical and
engineering inspections, financial inspections, and "Level I" environmental
audit with respect to the Assets within ten (10) days after Buyer's receipt of
the results of such inspections or audit, but in no event less than twenty (20)
days prior to the latest date that Seller and Buyer reasonably anticipate will
be the Closing Date.
10.2 At Closing. At Closing, Buyer shall: (a) deliver to Seller payment
of the portion of the Purchase Price required by Section 3.1.1; (b) deposit into
the escrow account of the portion of the Purchase Price pursuant to the Escrow
Agreement (in the form of Exhibit F); and (c) deliver to Seller executed
originals of an assignment and assumption agreement, an assignment and
assumption of franchises, a Noncompetition Agreement and an Escrow Agreement,
each substantially in the forms of Exhibits B, C, E and F, respectively.
10.3 After Closing. After Closing, Buyer shall perform and pay any
and all obligations assumed by it pursuant to Section 4.1.
Asset Purchase Agreement Page 11
<PAGE> 12
SECTION 11. CONDITIONS OF BUYER'S OBLIGATIONS
Buyer's obligations to close hereunder are subject to the satisfaction
of all of the following conditions, each of which must be satisfied on or before
the Closing Date and any of which may be waived in writing by Buyer: (a) the
representations and warranties contained in Section 5 of this Agreement shall be
true, accurate, and complete; (b) Seller shall have updated all Schedules at
Closing and certified that such updated Schedules conform to the appropriate
representations and warranties made by Seller in this Agreement; (c) Seller
shall have certified to Buyer its compliance with the CLI Rules and with all
other applicable technical standards; (d) Seller shall have complied in all
material respects with all covenants and performed in all material respects all
actions required under Section 7 of this Agreement; (e) Seller shall have
complied with all of its obligations contained in Section 9 of this Agreement;
and (f) the CATV System shall not have suffered, on or prior to the Closing, any
loss, claim, casualty, or calamity that materially adversely affects the Assets
or the operations or future prospects of the CATV System.
SECTION 12. CONDITIONS OF SELLER'S OBLIGATIONS
Seller's obligations to close are subject to all of the following
conditions, any of which may be waived in writing by Seller: (a) Buyer shall
have performed in all material respects all of its agreements and covenants
under this Agreement to the extent such are required to be performed at or prior
to Closing, and (b) Buyer shall have certified to Seller that Buyer's
representations and warranties set forth in this Agreement are true and correct
as of Closing.
SECTION 13. INDEMNIFICATION
13.1 Seller's Indemnification of Buyer. Seller shall defend, indemnify
and hold harmless Buyer, its affiliates, subsidiaries, shareholders, directors,
officers, agents, and assigns, from and against any loss, liability, damage, or
expense (including attorney's and other experts' fees) (a) resulting from any
claim by any third party relating to Seller's ownership and operation of the
Assets prior to and on the Closing Date, or (b) arising from any breach of any
representation, warranty, or covenant by Seller in this Agreement, including
without limitation any liabilities and costs arising from any pending or
threatened litigation involving Seller, or (c) resulting from any claim asserted
against Buyer for any finder's, brokerage, or agent's fees, commission or other
like payments or compensation.
13.2 Buyer's Indemnification of Seller. Buyer shall defend, indemnify
and hold harmless Seller, its affiliates, subsidiaries, shareholders, directors,
officers, agents, and assigns, from and against any loss, liability, damage, or
expense (including attorney's and other experts' fees) (a) resulting from any
claim by any third party relating to Buyer's ownership and operation of the
Assets after the Closing Date, or (b) arising from any breach of any
representation, warranty, or covenant by Buyer in this Agreement, or (c)
resulting from any claim asserted
Asset Purchase Agreement Page 12
<PAGE> 13
against Seller for any finder's, brokerage, or agent's fees, commission or other
like payments or compensation.
SECTION 14. MISCELLANEOUS
14.1 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
14.2 Assignment of Agreement. Neither party may assign this Agreement
or any interest in this Agreement without the prior written consent of the other
party, which consent shall not be unreasonably withheld; provided, however, that
Buyer may assign and delegate, at or prior to Closing, all or a part of its
rights and obligations under this Agreement to one or more entities formed and
controlled by Buyer without the prior written consent of Seller. In no event
shall any such assignment and delegation relieve Buyer from any liability under
this Agreement, including without limitation the payment of the Purchase Price.
14.3 Entire Agreement; Amendments. This Agreement constitutes and
embodies the entire agreement and understanding between the parties with respect
to the subject matter hereof and supersedes all prior or contemporaneous written
or oral agreements and understandings between the parties with respect thereto.
This Agreement may not be modified or amended except by a written instrument
executed by the parties.
14.4 Survival of Representations and Obligations. The obligations of
Seller pursuant to Sections 5.5, 13.1(a) and 13.1(c), shall survive the Closing
indefinitely. All other obligations of Seller, Seller's affiliates, and their
respective shareholders, pursuant to the terms of this Agreement, including
without limitation the provisions of Section 13.1(b), and the covenants,
representations and warranties of Seller, Seller's affiliates, and their
respective shareholders, directors, and officers, made in this Agreement, shall
survive the Closing for a period of eighteen (18) months. The obligations of
Buyer pursuant to Sections 13.2(a) and 13.2(c) shall survive the Closing
indefinitely. All other obligations of Buyer pursuant to the terms of this
Agreement, including without limitation the provisions of Section 13.2(b), and
the covenants, representations and warranties of Seller, Seller's affiliates,
and their respective shareholders, directors, and officers, made in this
Agreement, shall survive the Closing for a period of eighteen (18) months.
14.5 Notices. All notices and communications required or permitted to
be given under any of the provisions of this Agreement shall be in writing and
shall be deemed to have been duly given when delivered by messenger, by
overnight delivery service, by facsimile transmission (receipt confirmed), or
mailed by first class certified mail, return receipt requested, addressed to the
parties at the addresses set forth below or at such other addresses as either
party shall notify the other in accordance with this Section 14.5:
Asset Purchase Agreement Page 13
<PAGE> 14
If to Buyer: and to:
Northland Cable Properties Four
Limited Partnership John E. Iverson, Esq.
1201 Third Avenue, Suite 3600 Ryan Swanson & Cleveland
Seattle, Washington 98101 1201 Third Avenue, Suite 3400
Attn: John S. Whetzell and James A. Penney Seattle, Washington 98101
Facsimile (206) 623-9015 Facsimile (206) 583-0359
If to Seller: and to:
UACC Midwest, Inc. UACC Midwest, Inc.
c/o Tele-Communications, Inc. c/o Tele-Communications, Inc.
Terrace Tower Terrace Tower
5619 DTC Parkway 5619 DTC Parkway
Englewood, Colorado 80111-3000 Englewood, Colorado 80111-3000
Attention: Gary S. Howard and Attention: Legal Department
Ramona L. Whitman Facsimile: (303) 488-3217
Facsimile: (303) 488-3209
15.6 Legal Expenses. If any proceeding is brought by either party to
enforce or interpret any term or provision of this Agreement, the substantially
prevailing party in such proceeding shall be entitled to recover, in addition to
all other relief as set forth in this Agreement, such party's reasonable
attorneys' and experts' fees and expenses.
15.7 Seller's Knowledge. As used throughout this Agreement, the phrase
"to Seller's knowledge" means the actual knowledge of a particular matter of any
of the executive officers of Seller or on-site general managers of the CATV
System, after reasonable investigation of the CATV System.
BUYER: NORTHLAND CABLE PROPERTIES FOUR
LIMITED PARTNERSHIP
By Northland Communications Corporation,
Managing General Partner
By /s/ James A. Penney
---------------------------
Its Vice President
---------------------------
Asset Purchase Agreement Page 14
<PAGE> 15
SELLER: UACC MIDWEST, INC.
By /s/ Gary S. Howard
---------------------------
Its Vice President
---------------------------
Asset Purchase Agreement Page 15
<PAGE> 16
AMENDMENT
TO
ASSET PURCHASE AGREEMENT
Section 8.2 of the Asset Purchase Agreement dated as of November 17,
1995 by and between Northland Cable Properties Four Limited Partnership and
UACC Midwest, Inc. is hereby amended by deleting January 31, 1996 and inserting
in its place February 29, 1996. This amendment will be effective as of January
31, 1996.
UACC MIDWEST, INC.
By: /s/ Gary S. Howard
----------------------------------
Gary S. Howard, Vice President
NORTHLAND CABLE PROPERTIES
FOUR LIMITED PARTNERSHIP
By: Northland Communications Corporation, G.P.
By: /s/ James A. Penney
----------------------------------
James A. Penney, Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 384,304
<SECURITIES> 0
<RECEIVABLES> 378,621
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 849,238
<PP&E> 24,772,312
<DEPRECIATION> 13,265,067
<TOTAL-ASSETS> 15,074,134
<CURRENT-LIABILITIES> 1,147,998
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (5,863,039)
<TOTAL-LIABILITY-AND-EQUITY> 15,074,134
<SALES> 0
<TOTAL-REVENUES> 6,617,205
<CGS> 0
<TOTAL-COSTS> 838,545
<OTHER-EXPENSES> 4,516,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,005,691
<INCOME-PRETAX> 191,542
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,542
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
