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FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-29354 eff. 7-1-91.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1999
[ ] 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 0-16063
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
--------------------------------------------------
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1318471
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
- -------------------------------------- -----
(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 [X] No [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
(Partially Incorporated into Part IV)
(1) Form S-1 Registration Statement declared effective on July 10, 1986 (No.
33-2928).
(2) Form 10-K Annual Reports for fiscal years ended December 31, 1986,
December 31, 1988, December 31, 1989, December 31, 1990 and December 31,
1992, respectively.
(3) Form 8-A Registration Statement filed July 24, 1987.
(4) Form 10-Q Quarterly Report for period ended September 30, 1988 and
September 30, 1996, respectively.
(5) Form 8-K Registration Statement filed January 15, 1998.
This filing contains ______ pages. Exhibits Index appears on page _____.
Financial Statements/Schedules Index appears on page _____.
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Cautionary statement for purposes of the "Safe Harbor" provisions of the Private
Litigation Reform Act of 1995. Statements contained or incorporated by reference
in this document that are not based on historical fact are "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
Forward-looking statements may be identified by use of forward-looking
terminology such as "believe", "intends", "may", "will", "expect", "estimate",
"anticipate", "continue", or similar terms, variations of those terms or the
negative of those terms.
PART I
ITEM 1. BUSINESS
Northland Cable Properties Six Limited Partnership (the "Partnership") is a
Washington limited partnership consisting of two general partners (the "General
Partners") and approximately 1,835 limited partners as of December 31, 1999.
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 4 limited partnerships. Northland is also the parent company of
Northland Cable Properties, Inc. which was formed in February 1995 and is
principally involved in direct ownership of cable television systems and is the
majority member and manager of Northland Cable Ventures, LLC. Northland is a
subsidiary of Northland Telecommunications Corporation ("NTC"). Other
subsidiaries of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and principally
involved in the direct ownership of cable television systems. Sole
shareholder of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally involved
in the production and development of local news, sports and
informational programming for the Partnership and other Northland
affiliates.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and principally
involved in the development and production of computer software used in
billing and financial record keeping for Northland-affiliated cable systems.
Sole shareholder of Cable Ad-Concepts.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally
involved in the sale, development and production of video commercial
advertisements that are cablecast on Northland-affiliated cable systems.
NORTHLAND MEDIA, INC. - formed in April 1995 as a holding company. Sole
shareholder of the following two entities:
STATESBORO MEDIA, INC. - formed in April 1995 and principally involved
in operating an AM radio station serving the community of Statesboro,
Georgia and surrounding areas.
CORSICANA MEDIA, INC. - purchased in September 1998 and principally
involved in operating an AM radio station serving the community of
Corsicana, Texas and surrounding areas.
The Partnership was formed on January 22, 1986 and began operations in 1986.
In January, 1998, the Partnership purchased the cable television systems serving
the communities of Allendale, Bamberg, Barnwell and Bennettsville, all in the
state of South Carolina (the "Barnwell System" and "Bennettsville System" ). In
April 1999, the Partnership sold the systems serving the communities of
Sandersville, Heidelberg and Laurel, Mississippi. As of December 31, 1999, the
total number of basic subscribers served by the Systems was 32,405, and the
partnership's penetration rate (basic subscribers as a
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percentage of homes passed) was approximately 63%. The Partnership's properties
are located in rural areas which, to some extent, do not offer consistently
acceptable off-air network signals. This factor, combined with the existence of
fewer entertainment alternatives than in large markets contributes to a larger
proportion of the population subscribing to cable television (higher
penetration).
The Partnership has 35 non-exclusive franchises to operate the Systems.
These franchises, which will expire at various dates through the year 2017, have
been granted by local, county, state and other governmental authorities in the
areas in which the Systems currently operate. Franchise fees are paid to the
granting governmental authorities. These fees vary between 2% and 5% of the
respective gross revenues of the system 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 Starkville
and Philadelphia, Mississippi; Highlands, North Carolina; and Barnwell and
Bennettsville, South Carolina. The following is a description of these areas:
Starkville, MS: The City of Starkville is the home of Mississippi State
University with an enrollment of approximately 12,000 students. The university's
10 colleges and schools comprise 58 departments that offer more than 120 majors.
Mississippi State is also the largest employer in Starkville, with nearly 1,300
faculty members or professionals and 1,450 support staff. Also located in
Starkville is the Mississippi Research and Technology Park, which is a
long-range economic development project initiated through the joint efforts of
the City of Starkville, Oktibbeha County, Mississippi State University and the
local business community. The park is located on approximately 220 acres across
from the entrance to the university and will enhance high-technology research
for application to the economic sector. The developers and businesses that
comprise the park intend to work hand in hand with research efforts at the
university, and companies that locate in the park will have the benefit of
university facilities and faculty. Certain information regarding the Starkville,
MS system as of December 31, 1999 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 8,093
Tier Subscribers 3,835
Premium Subscribers 2,766
Estimated Homes Passed 11,085
</TABLE>
Philadelphia, Kosciusko and Forest, MS: The Philadelphia, Kosciusko and
Forest Systems encompass six communities and five counties located in central
Mississippi. These systems are operated as three separate profit centers grouped
as follows:
Profit Center #1 - Philadelphia, Mississippi
Profit Center #2 - Kosciusko and Carthage, Mississippi
Profit Center #3 - Forest and Raleigh, Mississippi
The local economies of the communities included in the Philadelphia System
are based primarily in manufacturing. The region has excellent highway and
railroad transportation, a year-round mild climate, and the availability of a
trained, cost-effective labor force. One of the main industries in the area is
poultry. Nearly two million birds are dressed weekly in the city of Forest,
which ranks as the second-largest producer of broilers in the nation. Other
industries in the area include apparel, ready mix concrete, frozen food
products, lumber, small appliances, electronic assembly, meat processing and
steel. Certain information regarding the Philadelphia, MS and Sandersville, MS
systems as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
PHILADELPHIA KOSCIUSKO FOREST
------------ --------- ------
<S> <C> <C> <C>
Basic Subscribers 3,771 4,280 3,052
Tier Subscriber 1,812 2,007 970
Premium Subscribers 1,506 1,476 1,341
Estimated Homes Passed 4,395 5,440 4,515
</TABLE>
Highlands and Sapphire Valley, NC: Located on a high plateau of the Blue
Ridge Mountains where the corners of Georgia, North Carolina and South Carolina
meet, Highlands has long offered a cool and beautiful summer retreat for the
affluent families from such southern cities as Atlanta, New Orleans and Tampa.
The Highlands region is almost encircled by the 200,000 acres of the End
National Forest, and boasts a lush mixture of hardwoods and evergreens because
of an abundant rainfall. Highlands has an average altitude of over 4,000 feet,
and thus maintains a temperate summer climate. The influx of tourists increases
Highland's year-round population of approximately 2,000 to over 20,000 between
May and October.
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The Highlands area is perhaps best known for its exclusive golf clubs. There
are three beautiful golf courses in the Highlands area, the oldest being the
Highlands Country Club. About half the land in the Highlands area is under
private ownership; the rest is part of the End National Forest, and is open for
hiking, fishing, hunting, camping and other outdoor activities. The private land
near the golf courses consists largely of exclusive housing developments, many
of which feature rambling, ranch-style vacation homes with values ranging from
$200,000 to a half million dollars. The Great Smokey Mountains National Park and
the Blue Ridge Parkway are within easy driving distance of Highlands. Several
lakes in the area offer swimming, boating, skiing, fishing and other water
sports. Rafting is also popular in the area due to the close proximity of the
Chattooga and Cullasaja Rivers. Certain information regarding the Highlands and
Sapphire Valley, NC Systems as of December 31, 1999 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 2,697
Premium Subscribers 526
Estimated Homes Passed 4,190
</TABLE>
Barnwell, SC and Bennettsville, SC: Barnwell, Bamberg and Allendale are
located approximately sixty miles south of Columbia, South Carolina. The economy
is based primarily on agricultural and manufacturing activities. The City of
Bennettsville is located approximately 100 miles northeast of Columbia, South
Carolina and serves as the county seat of Marlboro County. The economy is
primarily driven by agriculture and manufacturing, with three of the largest
employers being Mohawk Carpet, United Technologies Automotive and Williamette
Industries. Certain information regarding the Barnwell and Bennettsville, SC
Systems as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
BARNWELL BENNETTSVILLE
-------- -------------
<S> <C> <C>
Basic Subscribers 5,852 4,660
Premium Subscribers 3,611 2,945
Estimated Homes Passed 12,125 9,090
</TABLE>
The Partnership had 47 employees as of December 31, 1999. Management of
these systems is handled through offices located in the towns of Starkville,
Forest, Kosciusko and Philadelphia, Mississippi; Highlands, North Carolina; and
Barnwell and Bennettsville, South Carolina. 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 Item 13(a) below.)
The Partnership's cable television business is generally 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 programming services the content of which varies from system to system.
"Premium subscribers" are households that subscribe to one or more "pay
channels" in addition to the basic service. These pay channels include such
services as Showtime, Home Box Office, Cinemax, Disney or The Movie Channel.
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COMPETITION
Cable television systems currently experience competition from several
sources, including broadcast television, cable overbuilds, direct broadcast
satellite services, private cable and multichannel multipoint distribution
service systems. Cable television systems are also in competition in various
degrees with other communications and entertainment media, including motion
pictures, home video cassette recorders, internet data delivery and internet
video delivery. The following provides a summary description of these sources of
competition.
BROADCAST TELEVISION
Cable television systems have traditionally competed with broadcast
television, which consists of television signals that the viewer is able to
receive directly on his television without charge using an "off-air" antenna.
The extent of this competition is dependent in part upon the quality and
quantity of signals available by antenna reception as compared to the services
provided by the local cable system. Accordingly, cable operators find it less
difficult to obtain higher penetration rates in rural areas (where signals
available off-air are limited) than in metropolitan areas where numerous, high
quality off-air signals are often available without the aid of cable television
systems. The recent licensing of digital spectrum by the FCC will provide
incumbent broadcast licenses with the ability to deliver high definition
television pictures and multiple digital-quality program streams, as well as
advanced digital services such as subscription video.
OVERBUILDS
Cable television franchises are not exclusive, so that more than one cable
television system may be built in the same area. This is known as an
"overbuild." Overbuilds have the potential to result in loss of revenues to the
operator of the original cable television system. Constructing and developing a
cable television system is a capital intensive process, and it is often
difficult for a new cable system operator to create a marketing edge over the
existing system. Generally, an overbuilder would be required to obtain
franchises from the local governmental authorities, although in some instances,
the overbuilder could be the local government itself. In any case, an
overbuilder would be required to obtain programming contracts from entertainment
programmers and, in most cases, would have to build a complete cable system such
as headends, trunk lines and drops to individual subscribers homes throughout
the franchise areas.
Federal cross-ownership restrictions historically limited entry by local
telephone companies into the cable television business. The 1996 Telecom Act
eliminated this cross-ownership restriction. See "Regulation and Legislation"
below. It is therefore possible for companies with considerable resources to
overbuild existing cable operators and enter the business. Several telephone
companies have begun seeking cable television franchises from local governmental
authorities and constructing cable television systems. The Partnership cannot
predict at this time the extent of telephone company competition that will
emerge in areas served by the Partnership's cable television systems. The entry
of telephone companies as direct competitors, however, is likely to continue
over the next several years and could adversely affect the profitability and
market value of the Partnership's systems. The entry of electric utility
companies into the cable television business, as now authorized by the 1996
Telecom Act, could have a similar adverse effect.
DIRECT BROADCAST SATELLITE SERVICE
High powered direct-to-home satellites have made possible the wide-scale
delivery of programming to individuals throughout the United States using small
roof-top or wall-mounted antennas. The two leading DBS providers have
experienced dramatic growth over the last several years and together now serve
over 10 million customers nationwide. Companies offering direct broadcast
satellite service use video compression technology to increase channel capacity
of their systems to more than 100 channels and to provide packages of movies,
satellite networks and other program services which are competitive to those of
cable television systems. DBS companies historically faced significant legal and
technological impediments to providing popular local broadcast programming to
their customers. Recent federal legislation reduced this competitive
disadvantage. Nevertheless, technological limitations still affect DBS
companies, and it is expected that DBS companies will offer local broadcast
programming only in the top 50 to 100 U.S. markets for the foreseeable future.
The same legislation reduced the compulsory copyright fees paid by DBS companies
and allowed them to continue offering distant network signals to rural
customers. In addition to emerging high-powered DBS competition, cable
television systems face competition from several low-powered providers, whose
service requires use of much larger home satellite dishes. The availability of
DBS equipment at reasonable prices, and the relative attractiveness of the
programming options offered by
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the cable television industry and direct broadcast satellite competitors will
impact the ability of providers of DBS service providers to compete successfully
with the cable television industry.
PRIVATE CABLE
Additional competition is provided by private cable television systems,
known as satellite master antenna television, serving multi-unit dwellings such
as condominiums, apartment complexes, and private residential communities. These
private cable systems may enter into exclusive agreements with apartment owners
and homeowners associations, which may preclude operators of franchised systems
from serving residents of these private complexes. Operators of private cable,
which do not cross public rights of way, are free from the federal, state and
local regulatory requirements imposed on franchised cable television operators.
MULTICHANNEL MULTIPOINT DISTRIBUTION SERVICE SYSTEMS
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service systems, commonly
called wireless cable, which are licensed to serve specific areas. Multichannel,
multipoint distribution service systems use low-power microwave frequencies to
transmit television programming over-the-air to paying subscribers. This
industry is less capital intensive than the cable television industry, and it is
therefore more practical to construct systems using this technology in areas of
lower subscriber penetration.
REGULATION AND LEGISLATION
SUMMARY
The following summary addresses the key regulatory developments and
legislation affecting the cable television industry. Other existing federal
legislation and regulations, copyright licensing and, in many jurisdictions,
state and local franchise requirements are currently the subject of a variety of
judicial proceedings, legislative hearings and administrative and legislative
proposals which could change, in varying degrees, the manner in which cable
television systems operate. Neither the outcome of these proceedings nor their
impact upon the cable television industry or the Partnership can be predicted at
this time.
The Partnership expects to adapt its business to adjust to the changes that
may be required under any scenario of regulation. At this time, the Partnership
cannot assess the effects, if any, that present regulation may have on the
Partnership's operations and potential appreciation of its Systems. There can be
no assurance that the final form of regulation will not have a material adverse
impact on the Partnership's operations.
The operation of a cable system is extensively regulated by the FCC, some
state governments and most local governments. The 1996 Telecommunications Act
has altered the regulatory structure governing the nation's communications
providers. It removes barriers to competition in both the cable television
market and the local telephone market. Among other things, it also reduces the
scope of cable rate regulation and encourages additional competition in the
video programming industry by allowing local telephone companies to provide
video programming in their own telephone service areas.
The 1996 Telecommunications Act requires the FCC to undertake a host of
implementing rulemakings. Moreover, Congress and the FCC have frequently
revisited the subject of cable regulation. Future legislative and regulatory
changes could adversely affect the Company's operations.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the cable
television industry, which limited the ability of cable companies to increase
subscriber fees. Under that regime, all cable systems were subject to rate
regulation, unless they face "effective competition" in their local franchise
area. Federal law now defines "effective competition" on a community-specific
basis as requiring satisfaction of conditions rarely satisfied in the current
marketplace.
Although the FCC established the underlying regulatory scheme, local
government units, commonly referred to as local franchising authorities, are
primarily responsible for administering the regulation of the lowest level of
cable service called the basic service tier. The basic service tier typically
contains local broadcast stations and public, educational, and government access
channels.
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Before a local franchising authority begins basic service rate regulation, it
must certify to the FCC that it will follow applicable federal rules. Many local
franchising authorities have voluntarily declined to exercise their authority to
regulate basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
As of December 31, 1999, approximately 14% of the Partnership's local
franchising authorities were certified to regulate basic tier rates. The 1992
Cable Act permits communities to certify and regulate rates at any time, so that
it is possible that additional localities served by the systems may choose to
certify and regulate rates in the future.
The FCC itself historically administered rate regulation of cable
programming service tiers, which represent the expanded level of packaged,
non-"premium", programming services typically containing satellite-delivered
programming.
The 1996 Telecom Act, however, provides special rate relief for small cable
operators. For franchising units with less than 50,000 subscribers and owned by
an operator with less than one percent of the nation's cable subscribers (i.e.,
approximately 600,000 subscribers) that is not affiliated with any entities with
aggregate annual gross revenue exceeding $250 million, cable programming service
tier rate regulation was automatically eliminated. All of the Partnership's
systems qualify for this cable programming service tier deregulation. The
elimination of cable programming service tier regulation, which is the rate
regulation of a particular level of packaged programming services, typically
referring to the expanded basic level of services, in a prospective basis
affords the Partnership substantially greater pricing flexibility.
Under the rate regulations of the FCC, most cable systems were required to
reduce their basic service tier and cable programming service tier rates in 1993
and 1994, and have since had their rate increases governed by a complicated
price cap scheme that allows for the recovery of inflation and certain increased
costs, as well as providing some incentive for expanding channel carriage. The
FCC has modified its rate adjustment regulations to allow for annual rate
increases and to minimize previous problems associated with regulatory lag.
Operators also have the opportunity to bypass this "benchmark" regulatory scheme
in favor of traditional "cost-of-service" regulation in cases where the latter
methodology appears favorable. Cost of service regulation is a traditional form
of rate regulation, under which a utility is allowed to recover its costs of
providing the regulated service, plus a reasonable profit. In a particular
effort to ease the regulatory burden on small cable systems, the FCC created
special rate rules applicable for systems with fewer than 15,000 subscribers
owned by an operator with fewer than 400,000 subscribers. The special rate rules
allow for a simplified cost-of-service showing. All of the Partnership's systems
are eligible for these simplified cost-of-service rules, and have calculated
rates generally in accordance with those rules. To the extent the Partnership's
systems remain rate regulated on the basic service tier, this regulatory option
affords the Partnership significant regulatory options.
The FCC and Congress have provided various forms of rate relief for smaller
cable systems owned by smaller operators. Premium cable services offered on a
per-channel or per-program basis remain unregulated, as do affirmatively
marketed packages consisting entirely of new programming product. However,
federal law requires that the basic service tier be offered to all cable
subscribers and limits the ability of operators to require purchase of any cable
programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis, subject to a technology exception
which sunsets in 2002.
Regulation by the FCC of cable programming service tier rates for all
systems, regardless of size, became sunset pursuant to the 1996 Telecom Act on
March 31, 1999. Certain legislators, however, have called for new rate
regulations if unregulated cost rates increase dramatically. Should this occur,
all rate deregulation including that applicable to small operators like the
Partnership could be jeopardized. The 1996 Telecom Act also relaxes existing
"uniform rate" requirements by specifying that uniform rate requirements do not
apply where the operator faces "effective competition," and by exempting bulk
discounts to multiple dwelling units, although complaints about predatory
pricing still may be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom Act creates a more favorable environment for the
Partnership to provide telecommunications services beyond traditional video
delivery. It provides that no state or local laws or regulations may prohibit or
have the effect of prohibiting any entity from providing any interstate or
intrastate telecommunications service. A cable operator is authorized under the
1996 Telecom Act to provide telecommunications services without obtaining a
separate local franchise. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way and
may require reasonable, competitively
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neutral compensation for management of the public rights-of-way when cable
operators provide telecommunications service. The favorable pole attachment
rates afforded cable operators under federal law can be gradually increased by
utility companies owning the poles, beginning in 2001, if the operator provides
telecommunications service, as well as cable service, over its plant. The FCC
recently clarified that a cable operator's favorable pole rates are not
endangered by the provision of Internet access.
Cable entry into telecommunications will be affected by the regulatory
landscape now being developed by the FCC and state regulators. One critical
component of the 1996 Telecom Act to facilitate the entry of new
telecommunications providers, including cable operators, is the interconnection
obligation imposed on all telecommunications carriers. In July 1997, the Eighth
Circuit Court of Appeals vacated certain aspects of the FCC's initial
interconnection order. However, most of that decision was reversed by the U.S.
Supreme Court in January 1999. The Supreme Court effectively upheld most of the
FCC interconnection regulations. Although these regulations should enable new
telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including which specific network elements the
FCC can mandate that incumbent carriers make available to competitors, remain
subject to administrative and judicial appeal. If the FCC's current list of
unbundled network elements is upheld on appeal, it could facilitate the
provision of telecommunications services by new entrants, including the
Partnership.
INTERNET SERVICE
There is at present no significant federal regulation of cable system
delivery of Internet services. Furthermore, the FCC recently issued several
reports finding no immediate need to impose this type of regulation. However,
this situation may change as cable systems expand their broadband delivery of
Internet services. In particular, proposals have been advanced at the FCC and
Congress that would require cable operators to provide access to unaffiliated
Internet service providers and online service providers. Certain Internet
service providers also are attempting to use existing commercial leased access
rules (originally designed for video programming) to gain access to cable system
delivery. A petition on this issue is now pending before the FCC. Finally, some
local franchising authorities are considering the imposition of mandatory
Internet access requirements as part of cable franchise renewals or transfers. A
federal district court in Portland, Oregon recently upheld the legal ability of
local franchising authority to impose these type of conditions, but an appeal
was filed with the Ninth Circuit Court of Appeals, oral argument has been held,
and the parties are awaiting a decision. Other local authorities have imposed or
may impose mandatory Internet access requirements on cable operators. These
developments could, if they become widespread, burden the capacity of cable
systems and complicate any plans the Partnership may have or develop for
providing Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Telecom Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers, including the regional telephone
companies, can now compete with cable operators both inside and outside their
telephone service areas with certain regulatory safeguards. Because of their
resources, local exchange carriers could be formidable competitors to
traditional cable operators. Various local exchange carriers currently are
providing video programming services within their telephone service areas
through a variety of distribution methods, including both the deployment of
broadband wire facilities and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system. To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. The Fifth Circuit Court of Appeals reversed certain of
the FCC's open video system rules, including its preemption of local
franchising. The FCC recently revised its OVS rules to eliminate this general
preemption, thereby leaving franchising discretion to local and state
authorities. It is unclear what effect this ruling will have on entities
pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Co-located cable
systems are cable systems serving an overlapping territory. Cable operator
buyouts of co-located local exchange carrier systems and joint ventures between
cable operators and local exchange carriers in the same market also are
prohibited. The 1996 Telecom Act provides a few limited exceptions to this
buyout prohibition, including a carefully circumscribed "rural exemption." The
1996 Telecom Act also provides the FCC with the limited authority to grant
waivers of the buyout prohibition.
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ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utility Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several of these utilities have been granted broad authority by the FCC to
engage in activities which could include the provision of video programming.
ADDITIONAL OWNERSHIP RESTRICTIONS
The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable
cross-ownership, including broadcast network/cable restrictions, but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Telecommunications
Act also eliminates the three year holding period required under the 1992 Cable
Act's "anti-trafficking" provision. The 1996 Cable Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
and multichannel multipoint distribution service facilities, but lifts those
restrictions where the cable operator is subject to effective competition. FCC
regulations permit cable operators to own and operate satellite master antenna
television systems within their franchise area, provided that their operation is
consistent with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national video program services. Although the 1992 Cable
Act also precluded any cable operator from serving more than 30% of all U.S.
domestic cable subscribers, this provision has been stayed pending further
judicial review and FCC rulemaking.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements.
Broadcast signal carriage is the transmission of broadcast television signals
over a cable system to cable customers. These requirements, among other things,
allow local commercial television broadcast stations to elect once every three
years between a "must carry" status or a "retransmission consent" status. Less
popular stations typically elect must carry, which is the broadcast signal
carriage requirement that allows local commercial television broadcast stations
to require a cable system to carry the station. More popular stations, such as
those affiliated with a national network, typically elect retransmission
consent, which is the broadcast signal carriage requirement that allows local
commercial television broadcast stations to negotiate for payments for granting
permission to the cable operator to carry the stations. Must carry requests can
dilute the appeal of a cable system's programming offerings because a cable
system with limited channel capacity may be required to forego carriage of
popular channels in favor of less popular broadcast stations electing must
carry. Retransmission consent demands may require substantial payments or other
concessions. Either option has a potentially adverse effect on the Partnership's
business.
To date, compliance with the "retransmission consent" and "must carry"
provisions of the 1992 Cable Act has not had a material effect on the
Partnership, although these provisions may affect the operations of the
Partnership in the future, depending on factors such as market conditions, the
introduction of digital broadcasts, channel capacity and similar matters when
these arrangements are renegotiated. (As of the date of this filing,
retransmission consent agreements are pending with certain broadcasters
affecting systems serving approximately 17,730 basic subscribers. Although the
Partnership expects to reach agreement with the broadcasters, no assurances can
be given that such agreements can be obtained or that they will not result in
increased operating costs to the Partnership.)
The burden associated with must carry may increase substantially if
broadcasters proceed with planned conversion to digital transmission and the FCC
determines that cable systems must carry all analog and digital broadcasts in
their entirety. This burden would reduce capacity available for more popular
video programming and new internet and telecommunication offerings. A rulemaking
is now pending at the FCC regarding the imposition of dual digital and analog
must carry.
ACCESS CHANNELS
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<PAGE> 11
Local franchising authorities can include franchise provisions requiring
cable operators to set aside certain channels for public, educational and
governmental access programming. Federal law also requires cable systems to
designate a portion of their channel capacity, up to 15% in some cases, for
commercial leased access by unaffiliated third parties. The FCC has adopted
rules regulating the terms, conditions and maximum rates a cable operator may
charge for commercial leased access use. The Partnership believes that requests
for commercial leased access carriages have been relatively limited. A new
request has been forwarded to the FCC, however, requesting that unaffiliated
Internet service providers be found eligible for commercial leased access.
Although the Partnership does not believe this use is in accord with the
governing statute, a contrary ruling could lead to substantial leased activity
by Internet service providers and disrupt the Partnership's plans for Internet
service.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes video
programmers affiliated with cable companies from favoring their cable operators
over new competitors and requires these programmers to sell their programming to
other multichannel video distributors. This provision limits the ability of
vertically integrated cable programmers to offer exclusive programming
arrangements to cable companies. There also has been interest expressed in
further restricting the marketing practices of cable programmers, including
subjecting programmers who are not affiliated with cable operators to all of the
existing program access requirements, and subjecting terrestrially delivered
programming to the program access requirements. Terrestrially delivered
programming is programming delivered other than by satellite. These changes
should not have a dramatic impact on the Partnership, but would limit potential
competitive advantages the Partnership enjoys.
INSIDE WIRING; SUBSCRIBER ACCESS
In an order issued in 1997, the FCC established rules that require an
incumbent cable operator upon expiration of a multiple dwelling unit service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a multiple dwelling unit building. These inside wiring rules
are expected to assist building owners in their attempts to replace existing
cable operators with new programming providers who are willing to pay the
building owner a higher fee, where this fee is permissible. The FCC has also
proposed abrogating all exclusive multiple dwelling unit service agreements held
by incumbent operators, but allowing such contracts when held by new entrants.
In another proceeding, the FCC has preempted restrictions on the deployment of
private antenna on rental property within the exclusive use of a tenant, such as
balconies and patios. This ruling by the FCC may limit the extent to which the
Partnership along with multiple dwelling unit owners may enforce certain aspects
of multiple dwelling unit agreements which otherwise prohibit, for example,
placement of digital broadcast satellite receiver antennae in multiple dwelling
unit areas under the exclusive occupancy of a renter. These developments may
make it even more difficult for the Partnership to provide service in multiple
dwelling unit complexes.
OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as:
- equal employment opportunity,
- subscriber privacy,
- programming practices, including, among other things,
- syndicated program exclusivity
- network program nonduplication,
- local sports blackouts,
- indecent programming,
11
<PAGE> 12
- lottery programming,
- political programming,
- sponsorship identification,
- children's programming advertisements, and
- closed captioning,
- registration of cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
- lockbox availability,
- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
- technical standards,
- consumer electronics equipment compatibility, and
- emergency alert systems.
The FCC recently ruled that cable customers must be allowed to purchase
cable converters from third parties and established a multi-year phase-in during
which security functions, which would remain in the operator's exclusive
control, would be unbundled from basic converter functions, which could then be
satisfied by third party vendors.
The FCC has the authority to enforce its regulations through the imposition
of substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
COPYRIGHT
Cable television systems are subject to federal copyright licensing covering
carriage of television and radio broadcast signals. In exchange for filing
certain reports and contributing a percentage of their revenues to a federal
copyright royalty pool, cable operators can obtain blanket permission to
retransmit copyrighted material included in broadcast signals. The possible
modification or elimination of this compulsory copyright license is the subject
of continuing legislative review and could adversely affect the Partnership's
ability to obtain desired broadcast programming. We cannot predict the outcome
of this legislative activity. Copyright clearances for nonbroadcast programming
services are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers (ASCAP)
and BroadcastMusic, Inc. (BMI). The cable industry has had a long series of
negotiations and adjudications with both organizations. A prior voluntarily
negotiated settlement with BMI has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for ASCAP music based on the previously negotiated BMI
rate. Although the Partnership cannot predict the ultimate outcome of these
industry proceedings or the amount of any license fees that they may be required
to pay
12
<PAGE> 13
for past and future use of association-controlled music, the Partnership does
not believe these license fees will be significant to their business and
operations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in order to cross public rights-of-way. Federal law now prohibits local
franchising authorities from granting exclusive franchises or from unreasonably
refusing to award additional franchises. Cable franchises generally are granted
for fixed terms and in many cases include monetary penalties for non-compliance
and may be terminable if the franchisee failed to comply with material
provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, service rates, franchising fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states subject
cable systems to the jurisdiction of centralized state governmental agencies,
some of which impose regulation of a character similar to that of a public
utility. Although local franchising authorities have considerable discretion in
establishing franchise terms, there are certain federal limitations. For
example, local franchising authorities cannot insist on franchise fees exceeding
5% of the system's gross cable-related revenues, cannot dictate the particular
technology used by the system, and cannot specify video programming other than
identifying broad categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, the local franchising authority may attempt to impose more burdensome
or onerous franchise requirements in connection with a request for consent.
Historically, most franchises have been renewed for and consents granted to
cable operators that have provided satisfactory services and have complied with
the terms of their franchise.
Under the 1996 Telecom Act, cable operators are not required to obtain
franchises for the provision of telecommunications services, and local
franchising authorities are prohibited from limiting, restricting, or
conditioning the provision of these services. In addition, local franchising
authorities may not require a cable operator to provide any telecommunications
service or facilities, other than institutional networks under certain
circumstances, as a condition of an initial franchise grant, a franchise
renewal, or a franchise transfer. The 1996 Telecom Act also provides that
franchising fees are limited to an operator's cable-related revenues and do not
apply to revenues that a cable operator derives from providing new
telecommunications services.
ITEM 2. PROPERTIES
The Partnership's cable television systems are located in and around
Starkville, Philadelphia, Kosciusko, Carthage, Forest and Raleigh, Mississippi;
Highlands and Sapphire Valley, North Carolina; and Barnwell, Bamberg, Allendale
and Bennettsville, South Carolina. The principal physical properties of the
Systems consist of system components (including antennas, coaxial cable,
electronic amplification and distribution equipment), motor vehicles,
miscellaneous hardware, spare parts and real property, including office
buildings and land on which towers and antennas are located. The Partnership's
cable plant passed approximately 50,840 homes as of December 31, 1999.
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.)
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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<PAGE> 14
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, 1999, is as
follows:
<TABLE>
<S> <C>
Limited Partners: 1,835
General Partners: 2
</TABLE>
(c) The Partnership made no cash distributions during 1999, 1998 and 1997.
The limited partners have received in the aggregate in the form of cash
distributions $3,817,998 on total initial contributions of $15,000,000 as of
December 31, 1999. As of December 31, 1999, the Partnership had repurchased
$100,475 of limited partnership units (173 units at $500 per unit and 43 units
at $325 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.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenue $ 15,005,218 $ 14,746,766 $ 9,644,320 $ 9,262,702 $ 8,611,947
Operating income 1,312,323 1,621,138 2,061,496 1,394,255 1,123,277
Gain/(Loss) on retirement
of assets 1,330,533 (229,940) 7,095 (152,698) 0
Net income (loss) 98,856 (1,369,601) 1,215,899 381,451 206,173
Net income (loss)per
limited partner unit
(weighted average) 3 (46) 40 13 7
Cumulative tax losses
per limited partner
unit (342) (342) (342) (342) (345)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 30,603,533 $ 32,971,969 $ 13,609,386 $ 13,253,610 $ 14,778,671
Notes payable 28,965,281 31,372,848 10,899,421 11,920,821 13,914,689
Total liabilities 30,786,279 33,249,571 12,513,387 13,365,510 15,196,729
General partners'
deficit (128,842) (129,831) (116,135) (128,294) (131,356)
Limited partners'
(deficit)capital (53,904) (147,771) 1,212,134 16,394 (286,702)
Distributions per
limited partner unit 0 0 0 3 10
Cumulative distribu-
tions per limited
partner unit 128 128 128 128 125
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Under the terms of the Partnership's credit agreement, all amounts
outstanding under the note payable become due and payable on December 31, 2000.
The Partnership's continuing operations will not provide sufficient liquidity to
satisfy this obligation at its stated maturity. Alternatives available to the
Partnership include a sale of a portion or all of its assets to generate
proceeds sufficient to repay the outstanding debt or to renegotiate the terms of
the credit agreement with its lenders to extend the maturity date. Management
believes agreement by the lenders to extend the maturity date would be
contingent upon the approval of the limited partners to extend the expiration of
the Partnership's life, which currently expires on December 31, 2001.
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<PAGE> 15
The General Partners are currently in the process of formulating a proposal
to liquidate the assets of the partnership, which, in the opinion of the General
Partners, would provide sufficient proceeds to retire all the Partnership's
obligations. Such a proposal would require approval by a majority in interest of
limited partners. It is anticipated this liquidation would occur in the first
quarter of 2001. Based on preliminary discussions with the lenders, management
and the lenders believe it is not unreasonable that the Partnership could
arrange financing to continue its operations if necessary, assuming no
deterioration in its operations and the bank credit markets remain open.
RESULTS OF OPERATIONS
1999 AND 1998
Total revenue reached $15,005,218 for the year ended December 31, 1999,
representing an increase of approximately 2% over 1998. Of the 1999 revenue,
$10,781,941 (72%) is derived from subscriptions to basic services, $1,509,949
(10%) from subscriptions to premium services, $846,215 (6%) from subscriptions
to tier services, $507,932 (3%) from advertising, $384,380 (3%) from service
maintenance revenue, $367,300 (2%) from installation charges and $607,501 (4%)
from other sources. The increase in revenue is attributable primarily to rate
increases placed into effect in August 1999 as well as new product services
introduced in 1999. In April 1999, the Partnership sold the cable television
system and assets relating to its Sandersville, Mississippi system, resulting in
the disposition of approximately 1,400 subscribers and decreased revenues
approximately $200,000 or 2%. Assuming the Sandersville, Mississippi system was
disposed of at the beginning of each of the respective periods, revenues would
have increased approximately 4%.
The following table displays historical average rate information for various
services offered by the Partnership's systems (amounts per subscriber per
month):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Basic Rate $ 26.50 $ 24.20 $ 23.00 $ 22.24 $ 21.53
Tier Rate 8.50 7.65 6.90 6.35 5.95
HBO Rate 10.25 10.50 11.35 11.25 11.10
Cinemax Rate 7.70 7.30 8.70 8.50 8.25
Showtime Rate 7.95 6.30 4.50 8.45 8.45
Movie Channel Rate 6.00 6.60 -- -- 7.00
Disney Rate 6.50 6.20 5.10 6.00 6.75
Encore Rate 1.50 1.50 -- -- --
Starz Rate 8.50 8.50 -- -- --
Service Contract
Rate 2.30 2.35 2.60 2.65 2.65
</TABLE>
Operating expenses totaled $1,320,255 for the year ended December 31, 1999,
representing an increase of approximately 5% over the same period in 1998.
Excluding the impact of the disposition of the Sandersville, Mississippi system,
operating expenses would have increased approximately 9% for the year. This is
primarily due to increased operating salaries and pole rental expense offset by
decreased system maintenance expenses and drop materials. Salary and benefit
costs are a major component of operating expenses. Employee wages are reviewed
annually and, in most cases, increased based on cost of living adjustments and
other factors. Therefore, management expects operating expenses to increase in
future years.
General and administrative expenses totaled $4,064,866 for the year ended
December 31, 1999, representing an increase of approximately 7% over the same
period in 1998. Excluding the impact of the Sandersville, Mississippi system
disposition, general and administrative expenses would have increased
approximately 10% compared to the same period in 1998. This is due to higher
revenue based expenses such as management fees and franchise fees as well as
increased utilities, legal expenses, property taxes and bad debt expense offset
by reduced billing expenses, marketing expense and copyright fees. Significant
general and administrative expenses are based on revenues. As the Partnership's
revenue increases the trend of increased administrative expenses is expected to
continue.
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<PAGE> 16
Programming expenses totaled $3,915,701 for the year ended December 31,
1999, representing an increase of approximately 3% over 1998. Adjusting for the
Sandersville, Mississippi system disposition, programming expenses would have
increased approximately 6% compared to the same period in 1998. This is mainly
due to higher costs charged by various program suppliers as well as increased
advertising expenses and production expense. Programming expenses consist mainly
of payments made to the suppliers of various cable programming services. Since
these costs are based on the number of subscribers served, future subscriber
increases will cause the trend of increasing programming costs to continue.
Additionally, rate increases from program suppliers, as well as new fees
associated with the launch of additional channels will also contribute to
increased programming costs.
Depreciation and amortization expenses totaled $4,392,073 for the year ended
December 31, 1999, representing an increase of approximately 2% over the same
period in 1998. This increase is due to depreciation and amortization on
purchases of plant and equipment in 1999 offset by assets becoming fully
depreciated.
Interest expense for the 1999 decreased approximately 7% over 1998. The
average bank debt decreased from $31,373,000 during 1998 to $30,169,000 during
1999, offset by an increase to the Partnership's effective interest rate from
7.88% in 1998 to 8.18% in 1999.
1998 AND 1997
Total revenue reached $14,746,766 for the year ended December 31, 1998,
representing an increase of approximately 53% over 1997. Of the 1998 revenue,
$10,772,905 (73%) was derived from subscriptions to basic services, $1,581,530
(11%) from subscriptions to premium services, $685,200 (5%) from subscriptions
to tier services, $456,007 (3%) from advertising, $396,381 (3%) from service
maintenance revenue, $356,404 (2%) from installation charges and $498,339 (3%)
from other sources. The January 1998 addition of approximately 11,200
subscribers acquired in the purchase of cable systems serving the communities of
Bennettsville, Barnwell, Bamberg and Allendale, South Carolina increased
revenues 49%. The remaining 4% of revenue growth is attributable to rate
increases placed into effect in August of 1998.
Operating expenses totaled $1,262,672 for the year ended December 31, 1998,
representing an increase of approximately 38% as compared to 1997. The
acquisition of the Bennettsville, Barnwell, Bamberg and Allendale, South
Carolina systems increased operating expenses 43%. The expenses for the other
systems decreased approximately 5% primarily related to a reduction in regional
management costs offset by increased salary and benefit costs. Salary and
benefit costs are a major component of operating expenses. Employee wages are
reviewed annually and, in most cases, increased based on cost of living
adjustments and other factors. Therefore, management expects operating expenses
to increase in future years.
General and administrative expenses totaled $3,790,975 for the year ended
December 31, 1998, representing an increase of approximately 61% over 1997. The
acquisition of the Bennettsville, Barnwell, Bamberg and Allendale, South
Carolina systems increased general and administrative expenses 60%. The expenses
for the remaining systems increased 1% primarily due to higher revenue based
expenses such as franchise fees, copyright fees and management fees as a result
of revenue gains discussed above, offset by a one time correction to copyright
fees. Significant general and administrative expenses are based on revenues. As
the Partnership's revenue increases the trend of increased administrative
expenses is expected to continue.
Programming expenses totaled $3,784,358 for the year ended December 31,
1998, representing an increase of approximately 64% over 1997. Approximately 9%
of the increase is the result of increased costs charged by various program
suppliers and new channel launches, as well as additional salary and benefit
costs related to local programming and production support, with the acquisition
of the Bennettsville, Barnwell, Bamberg and Allendale, South Carolina systems
resulting in the remaining 55%. Programming expenses consist mainly of payments
made to the suppliers of various cable programming services. Since these costs
are based on the number of subscribers served, future subscriber increases will
cause the trend of increasing programming costs to continue. Additionally, rate
increases from program suppliers, as well as new fees associated with the launch
of additional channels will also contribute to increased programming costs.
Depreciation and amortization expenses totaled $4,287,623 for the year ended
December 31, 1998, representing an increase approximately 113% over 1997.
Excluding the effects of the acquisition of the Bennettsville, Barnwell, Bamberg
and Allendale, South Carolina systems, depreciation and amortization decreased
2% as a result of assets becoming fully depreciated and amortized in 1998,
offset by depreciation and amortization on current year purchases. The addition
of assets acquired in the purchase of the Bennettsville, Barnwell, Bamberg and
Allendale, South Carolina systems increased depreciation and amortization
expense 115%.
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<PAGE> 17
Interest expense increased from $846,609 in 1997 to $2,566,743 in 1998
(approximately 203%). The Partnership's average debt balance increased from
approximately $11,410,121 during 1997 to $21,136,135 during 1998. The
Partnership's effective interest rate decreased from approximately 8.75% in 1997
to 7.88% in 1998. The increase in average debt outstanding was a result of
borrowings to finance the acquisition of the Bennettsville, Barnwell, Bamberg
and Allendale, South Carolina systems.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of liquidity are cash flow provided from
operations and availability under an $8 million revolving credit line, of which
approximately $6.2 million was outstanding as of December 31, 1999. Based on
management's analysis, the Partnership's cash flow from operations and amounts
available for borrowing under its loan agreement are sufficient to cover
operating costs, debt service and planned capital expenditures up to December
31, 2000, at which time all amounts outstanding under the revolving credit and
term loan agreement become due. Total amounts outstanding at December 31, 2000
are expected to approximate $28,965,000. This obligation can be satisfied by a
sale of all or a significant portion of The Partnership's assets or through an
amendment to the loan agreement to extend the maturity of these amounts. Based
on discussion with the lenders it is unlikely that any significant extension of
maturity would be approved unless the limited partnership agreement were amended
to extend the life of the partnership which currently expires on December 31,
2001. Should the term of the partnership be extended it is management's opinion
that acceptable terms could be negotiated with the lenders and such terms would
have no material adverse effect on the Partnership.
During 1999, the Partnership's primary sources of liquidity were cash
provided from operations, credit available under its revolving credit and term
loan agreement and proceeds received from the sale of the Sandersville,
Mississippi system. 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 1999, cash generated from monthly
billings was sufficient to meet the Partnership's needs for working capital,
capital expenditures and scheduled debt service.
On December 31, 1997, the Partnership amended and restated its credit
agreement with its current lender to finance the acquisition of the
Bennettsville, Barnwell, Bamberg and Allendale, South Carolina systems. This
credit facility provides for borrowings up to $33 million, including a $25
million term loan and an $8 million revolving credit facility which mature
December 31, 2000. In July 1999, the Partnership further amended its credit
agreement to modify the amortization of its term loan and certain financial
covenants.
Under the terms of the loan agreement, the Partnership has agreed to
restrictive covenants which require the maintenance of financial ratios,
including a senior debt to annualized operating cash flow ratio of 5.25 to 1 and
an annual operating cash flow to interest expense ratio of not less than 2.25 to
1. As of December 31, 1999, the Partnership was in compliance with its required
financial covenants.
As of December 31, 1999, the balance under the credit facility was
$28,965,281 and $1.8 million was available for borrowing by the Partnership
subject to compliance with financial covenants. Certain fixed rate agreements
expired during the fourth quarter of 1999. As of December 31, 1999, interest
rates on the credit facility were as follows: approximately $28,965,281 fixed at
Libor based rate of 8.18375% expiring March 31, 2000. The above includes a
margin paid to the lender based on overall leverage, and may increase or
decrease as the Partnership's leverage fluctuates.
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Partnership enters into interest rate swap
agreements with major banks or financial institutions (typically its bank) in
which the Partnership pays a fixed rate and receives a floating rate with the
interest payments being calculated on a notional amount. Gains or losses
associated with changes in fair values of these swaps and the underlying
notional principal amounts are deferred and recognized against interest expense
over the term of the agreements the Partnership's statements of operations. As
of December 31, 1999, the Partnership had no interest rate swap agreements
outstanding.
CAPITAL EXPENDITURES
During 1999, the Partnership incurred approximately $2,660,000 in capital
expenditures. These expenditures included the ongoing system upgrade to 550 MHz
and a vehicle replacement in the Starkville System, the completion of a system
upgrade to 450 MHz in the Koscuisko System, the continued system upgrade to 450
MHz, a vehicle replacement and channel additions in the Philadelphia
17
<PAGE> 18
System, the continued deployment of fiber in the Highlands System, a vehicle
replacement and a standby generator in the Bennettsville System and a vehicle
replacement and continued system upgrade to 450 MHz in the Barnwell System, as
well as various line extensions in all of the systems.
Management estimates that the Partnership will spend approximately
$2,600,000 on capital expenditures during 2000. These expenditures include
specific digital services, the continuation of the fiber network for data
transmission and ongoing system upgrade construction to 550 MHz in the
Starkville System, a continued system upgrade to 450 MHz in the Philadelphia
System, the continued deployment of fiber and a system upgrade in the Highlands
System, a continued upgrade to 450 MHz in the Barnwell System, the initial
phases of an upgrade to 550 MHz in the Forest System, and various line
extensions and channel additions in all of the systems.
RECENT ACQUISITIONS AND DISPOSITIONS
On April 30, 1999, the Partnership sold the assets of its cable television
system serving approximately 1,400 subscribers in and around the communities of
Sandersville, Mississippi. The sales price for the system was $1.9 million, and
the net proceeds were utilized to reduce outstanding debt. The Partnership
determined to sell the Sandersville system due to the significant overbuild
situation facing the system and the surrounding geographic area. Due to the
overbuild and the lack of other interested purchasers for the system, the
Partnership sold the Sandersville system to the overbuilder.
On January 2, 1998, the Partnership purchased cable television systems
serving approximately 11,200 subscribers in and around the communities of
Allendale, Bamberg, Barnwell and Bennettsville, South Carolina. The purchase
price of these systems was $20.5 million. The Partnership borrowed approximately
$20.47 million under an amended and restated revolving credit and term loan
agreement with its lender to finance the acquisition of the South Carolina cable
systems.
Pro forma operating results of the Partnership for the years ending December
31, 1999 and 1998, assuming the disposition of the Sandersville system had been
completed as of the beginning of 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenue $ 14,813,800 $ 14,183,431
============ ============
Net loss $ (1,482,272) $ (1,271,034)
============ ============
Net loss per limited
partnership unit $ (50) $ (43)
============ ============
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended
December 31, 1999, 1998 and 1997 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.
18
<PAGE> 19
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 58). Mr. Whetzell is the founder of Northland
Communications Corporation and has been President since its inception and a
Director since March 1982. Mr. Whetzell became Chairman of the Board of
Directors in December 1984. He also serves as President and Chairman of the
Board of Northland Telecommunications Corporation and each of its subsidiaries.
He has been involved with the cable television industry for over 25 years.
Between March 1979 and February 1982 he was in charge of the Ernst & Whinney
national cable television consulting services. Mr. Whetzell first became
involved in the cable television industry when he served as the Chief Economist
of the Cable Television Bureau of the Federal Communications Commission (FCC)
from May 1974 to February 1979. He provided economic studies to support the
deregulation of cable television both in federal and state arenas. He
participated in the formulation of accounting standards for the industry and
assisted the FCC in negotiating and developing the pole attachment rate formula
for cable television. His undergraduate degree is in economics from George
Washington University, and he has an MBA degree from New York University.
JOHN E. IVERSON (AGE 63). Mr. Iverson is the Assistant Secretary of
Northland Communications Corporation and has served on the Board of Directors
since December 1984. He also serves on the Board of Directors of Northland
Telecommunications Corporation and each of its subsidiaries. He is currently a
partner in the law firm of Ryan, Swanson & Cleveland, Northland's general
counsel. He is a member of the Washington State Bar Association and American Bar
Association and has been practicing law for more than 35 years. Mr. Iverson is
the past president and a Trustee of the Pacific Northwest Ballet Association.
Mr. Iverson has a Juris Doctor degree from the University of Washington.
RICHARD I. CLARK (AGE 42). Mr. Clark has served as Vice President of
Northland since March 1982. He has served on the Board of Directors of both
Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. He also serves as Vice President and Director of
all subsidiaries of Northland Telecommunications Corporation. Mr. Clark was
elected Treasurer in April 1987, prior to which he served as Secretary from
March 1982. Mr. Clark was an original incorporator of Northland and is
responsible for the administration and investor relations activities of
Northland, including financial planning and corporate development. From July
1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the area of
providing cable television consultation services and has been involved with the
cable television industry for nearly 19 years. He has directed cable television
feasibility studies and on-site market surveys. Mr. Clark has assisted in the
design and maintenance of financial and budget computer programs, and he has
prepared documents for major cable television companies in franchising and
budgeting projects through the application of these programs. In 1979, Mr. Clark
graduated cum laude from Pacific Lutheran University with a Bachelor of Arts
degree in accounting.
JAMES E. HANLON (AGE 66). Since June 1985, Mr. Hanlon has been a Divisional
Vice President for Northland and is currently responsible for the management of
systems serving subscribers in Texas, Alabama and parts of Mississippi. Prior to
his association with Northland, he served as Chief Executive of M.C.T.
Communications, a cable television company, from 1981 to June 1985. His
responsibilities included supervision of the franchise, construction and
operation of a cable television system located near Tyler, Texas. From 1979 to
1981, Mr. Hanlon was President of the CATV Division of Buford Television, Inc.,
and from 1973 to 1979, he served as President and General Manager of Suffolk
Cablevision in Suffolk County, New York. Mr. Hanlon has also served as Vice
President and Corporate Controller of 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 45). Mr. Penney is Vice President and General Counsel
for Northland Telecommunications Corporation and each of its subsidiaries and
has served in this role since September 1985. He was elected Secretary in April
1987. Mr. Penney is responsible for advising all Northland systems with regard
to legal and regulatory matters, and also is involved in the acquisition and
financing of new cable systems. From 1983 until 1985 he was associated with the
law firm of Ryan, Swanson &
19
<PAGE> 20
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 42). Mr. Jones is Vice President for Northland. Mr. Jones
joined Northland in March 1986 as Controller and has been Vice President of
Northland Telecommunications Corporation and each of its subsidiaries since
October 1986. Mr. Jones is responsible for cash management, financial reporting
and banking relations for Northland and is involved in the acquisition and
financing of new cable systems. Prior to joining Northland, Mr. Jones was
employed as a Certified Public Accountant with Laventhol & Horwath from 1980 to
1986. Mr. Jones received his Bachelor of Arts degree in Business Administration
with a major in accounting from the University of Washington in 1979.
RICHARD J. DYSTE (AGE 54). Mr. Dyste has served as Vice President-Technical
Services of Northland Telecommunications Corporation and each of its
subsidiaries since April 1987. Mr. Dyste is responsible for planning and
advising all Northland cable systems with regard to technical performance as
well as system upgrades and rebuilds. He is a past president and current member
of the Mount Rainier Chapter of the Society of Cable Television Engineers, Inc.
Mr. Dyste joined Northland in 1986 as an engineer and served as Operations
Consultant to Northland Communications Corporation from August 1986 until April
1987. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is
a graduate of Washington Technology Institute.
LEE JOHNSON (AGE 56). Mr. Johnson has served as Divisional Vice President
for Northland's Statesboro, Georgia regional office since March 1994. He is
responsible for the management of systems serving subscribers in Georgia,
Mississippi, North Carolina and South Carolina. Prior to his association with
Northland he served as Regional Manager for Warner Communications, managing four
cable systems in Georgia from 1968 to 1973. Mr. Johnson has also served as
President of Sunbelt Finance Corporation and was employed as a System Manager
for Statesboro CATV when Northland purchased the system in 1986. Mr. Johnson has
been involved in the cable television industry for over 29 years and is a
current member of the Society of Cable Television Engineers. He is a graduate of
Swainsboro Technical Institute and has attended numerous training seminars,
including courses sponsored by Jerrold Electronics, Scientific Atlanta, The
Society of Cable Television Engineers and CATA.
R. GREGORY FERRER (AGE 44). Mr. Ferrer is a Vice President of Northland. He
joined Northland in March 1984 as Assistant Controller and was promoted to
Assistant treasurer in 1986. Mr. Ferrer became Vice President of Northland
Communications Corporation in 1988 and in December of 1998, he was promoted to
Vice President of Northland Telecommunications Corporation. Mr. Ferrer is
responsible for coordinating all of Northland's property tax filings, insurance
requirements and system programming contracts as well as interest rate
management and other treasury functions. Prior to joining Northland, he was a
Certified Public Accountant with Benson & McLaughlin, a local public accounting
firm, from 1981 to 1984. Mr. Ferrer received his Bachelor of Arts in Business
Administration from Washington State University with majors in marketing in 1978
and accounting and finance in 1981.
MATTHEW J. CRYAN (AGE 35). Mr. Cryan is Vice President - Budgets and
Planning and has been with Northland since September 1990. Mr. Cryan is
responsible for the development of current and long-term operating budgets for
all Northland entities. Additional responsibilities include the development of
financial models used in support of acquisition financing, analytical support
for system and regional managers, financial performance monitoring and reporting
and program analysis. Prior to joining Northland, Mr. Cryan was employed as an
analyst with NKV Corp., a securities litigation support firm located in Redmond,
Washington. Mr. Cryan graduated from the University of Montana in 1988 with
honors and holds a Bachelor of Arts in Business Administration with a major in
finance.
Certain information regarding the officers and directors of FN Equities
Joint Venture is set forth below:
MILES Z. GORDON (AGE 52). Mr. Gordon is President of FNE and President and
Chief Executive Officer of Financial Network Investment Corporation (FNIC), and
has held those positions since 1983. From 1979 through April 1983 he was
President of University Securities Corporation. In 1978, Mr. Gordon was engaged
in the private practice of law, and from 1973 through 1978 he was employed by
the Securities and Exchange commission. 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.
JOHN S. SIMMERS (AGE 49). Mr. Simmers is Vice President and Secretary of FNE
and Executive Vice President and Chief Operating Officer of FNIC and has held
those positions since 1983. From June 1980 through April 1983 he was Executive
Vice
20
<PAGE> 21
President of University Securities Corporation, Vice President of University
Capital Corporation, and Vice President of University Asset Management Group.
From 1974 through May 1980 he was employed by the National Association of
Securities Dealers.
HARRY M. KITTER (AGE 44). Mr. Kitter is Treasurer of FNE and Controller for
FNIC and has held those positions 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 1999 as indicated in Note 3 of the
Notes to Financial Statements--December 31, 1999 (see Items 13(a) and
14(a)(1)below).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1999 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 a
20% interest in the Partnership at such time as the limited partners have
received 100% of their aggregate cash contributions. 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 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 is John S. Simmers.
(b) CHANGES IN CONTROL. Northland has pledged its ownership interest as
Managing General Partner of the Partnership to the Partnership's lender as
collateral pursuant to the terms of the term loan agreement between the
Partnership and its lender.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Managing General Partner
receives a management fee equal to 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 entered into an operating agreement with Northland Premier
Cable Limited Partnership ("Premier"), an affiliated partnership organized and
managed by Northland. Under the terms of this agreement, Premier serves as the
exclusive managing agent for the Highlands NC system, and is reimbursed for
certain operating and administrative costs.
21
<PAGE> 22
Northland Cable Services Corporation ("NCSC"), an affiliate of Northland,
provides software installation and billing services to the Partnership's
Systems.
Northland Cable News, Inc. ("NCN"), an affiliate of Northland, provides
programming to certain of 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, 1999 for
disclosures regarding transactions with the General Partners and affiliates.
The following schedule summarizes these transactions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Partnership management fees $900,313 $884,806 $578,720
Operating expense reimbursements 719,456 663,191 497,964
Software installation and
billing service fees to NCSC 73,965 79,590 68,685
Programming fees to NCN 178,797 165,147 176,333
Reimbursements to CAC for services 69,752 57,611 70,777
Reimbursements to Premier 160,722 290,147 179,807
Amounts due to General Partner
and affiliates at year end 46,388 142,746 154,836
</TABLE>
Management believes that all of the above transactions are on terms as
favorable to the Partnership as could be obtained from unaffiliated parties for
comparable goods or services.
As disclosed in the Partnership's Prospectus (which has been incorporated by
reference), certain conflicts of interest may arise between the Partnership and
the General 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 that any
limited partner owning 10% or more of the Partnership units may call a special
meeting of the Limited Partners, by giving written notice to the General
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 the Limited Partners.
(b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and
Assistant Secretary of the Managing General Partner, is a member of the law
firm of Ryan, Swanson & Cleveland, PLLC, 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.
22
<PAGE> 23
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:
Report of Independent Public Accountants.......................................... ____
Balance Sheets--December 31, 1999 and 1998........................................ ____
Statements of Operations for the years ended December 31, 1999, 1998 and 1997.....
Statements of Changes in Partners' Capital (Deficit) for the years ended
December 31, 1999, 1998 and 1997.................................................. ____
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997..... ____
Notes to Financial Statements--December 31, 1999.................................. ____
</TABLE>
(2) EXHIBITS:
<TABLE>
<S> <C>
4.1 Amended and Restated Certificate and Agreement of Limited
Partnership dated November 3, 1986(3)
10.1 Agreement of Purchase and Sale with Highlands Community Cable
Television, Inc.(2)
10.2 Mississippi State University Contract(2)
10.3 Mathiston Franchise(2)
10.4 Maben Franchise(2)
10.5 Starkville Franchise(2)
10.6 Oktibbeha County Franchise(2)
10.7 Raleigh Franchise(2)
10.8 Philadelphia Franchise(2)
10.9 Neshoba Franchise(2)
10.10 Mississippi Band of Choctaw Indians Franchise(2)
10.11 Carthage Franchise(2)
10.12 Kosciusko Franchise(2)
10.13 Morton Franchise(2)
10.14 Forest Franchise(2)
10.15 Scott County Franchise(2)
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
10.16 Highlands Franchise(2)
10.17 Macon County Franchise(2)
10.18 Jackson County Franchise(2)
10.19 Heidelberg Franchise(2)
10.20 Jasper County Franchise(2)
10.21 Jones County Franchise(2)
10.22 Sandersville Franchise(2)
10.23 Golf Properties Franchise(2)
10.24 Management Agreement dated as of October 10, 1986(2)
10.25 Credit Agreement with National Westminster Bank USA dated as of
October 31, 1986 ("Credit Agreement")(1)
10.26 First Amendment to Credit Agreement dated as of December 12,
1986(5)
10.27 Second Amendment to Credit Agreement dated as of October 26,
1987(5)
10.28 Third Amendment to Credit Agreement dated as of September 26,
1988(5)
10.29 Agreement of Purchase and Sale with Starkville TV Cable
Company(1)
10.30 Agreement of Purchase and Sale between Northland
Telecommunications Corporation and Seemore TV, Inc.(1)
10.31 Agreement of Purchase and Sale between Northland
Telecommunications Corporation and Central Cable TV, Inc.(1)
10.32 Agreement of Purchase and Sale between Northland
Telecommunications Corporation and Clear Vision TV Company of
Kosciusko, A Corporation(1)
10.33 Agreement of Purchase and Sale between Northland
Telecommunications Corporation and Scott Cable TV, Inc.(1)
10.34 Agreement of Purchase and Sale with SCAN, Inc. and South Central
Antenna Network Inc. dated July 18, 1988(4)
10.35 Fourth Amendment to Credit Agreement dated as of March 31,
1989(6)
10.36 Fifth Amendment to Credit Agreement dated as of February 15,
1990(6)
10.37 Leake County Franchise(7)
10.38 Sixth Amendment to Credit Agreement dated as of May 28, 1992(8)
10.39 Loan Agreement with First Union Bank of North Carolina dated as
of February 16, 1993(8)
10.40 Asset Purchase Agreement between TCI Cablevision of Georgia,
Inc. and Northland Cable Properties Six Limited Partnership,
dated July 19, 1996(9)
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
10.41 Asset Purchase and Sale Agreement between InterMedia Partners of
Carolina, L.P. and Robin Cable Systems, L.P. as Sellers and
Northland Cable Television, Inc. as Buyer, dated August 27,
1997(10)
10.42 Assignment and Assumption of Asset Purchase and Sale Agreement
between Northland Cable Television, Inc. and Northland Cable
Properties Six Limited Partnership, dated October 27, 1997(10)
10.43 Amended and Restated Credit Agreement with First Union National
Bank, dated December 31, 1997(10)
10.44 First Amendment to the Asset Purchase and Sale Agreement between
Northland Cable Television, Inc. and InterMedia Partners of
Carolina, L.P. and Robin Cable Systems, L.P., dated December 31,
1997(10)
10.45 Amendment to Credit Agreement dated as of July 20, 1999
</TABLE>
- ------------
(1) Incorporated by reference from the Partnership's Form S-1 Registration
Statement declared effective on July 10, 1986 (No. 33-2928).
(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 8-A Registration
Statement filed July 24, 1987.
(4) Incorporated by reference from the partnership's Form 10-Q Quarterly
Report for the period ended September 30, 1988.
(5) Incorporated by reference from the partnership's Form 10-K Annual Report
for the fiscal year ended December 31, 1988.
(6) Incorporated by reference from the partnership's Form 10-K Annual Report
for the fiscal year ended December 31, 1989.
(7) Incorporated by reference from the partnership's Form 10-K Annual Report
for the fiscal year ended December 31, 1990.
(8) Incorporated by reference from the partnership's Form 10-K Annual Report
for the fiscal year ended December 31, 1992.
(9) Incorporated by reference from the partnership's Form 10-Q Quarterly
Report for the period ended September 30, 1996.
(10) Incorporated by reference from the partnership's Form 8-K Registration
Statement filed January 15, 1998.
(b) REPORTS ON FORM 8-K. No Partnership reports on Form 8-K have been filed
for the fourth quarter of the fiscal year ended December 31, 1999.
25
<PAGE> 26
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 SIX LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION
(Managing General Partner)
By: /s/ John S. Whetzell Date:
---------------------------------- ----------------
John S. Whetzell, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES CAPACITIES DATE
---------- ---------- ----
<S> <C> <C>
/s/ John S. Whetzell Chief executive officer of registrant; chief executive officer _______
- ----------------------------------- and chairman of the board of directors of Northland
John S. Whetzell Communications Corporation
/s/ Richard I. Clark Director of Northland Communications Corporation _______
- -----------------------------------
Richard I. Clark
/s/ John E. Iverson Director of Northland Communications Corporation _______
- -----------------------------------
John E. Iverson
/s/ Gary S. Jones Vice President and principal accounting officer of Northland _______
- ----------------------------------- Communications Corporation
Gary S. Jones
</TABLE>
26
<PAGE> 27
EXHIBITS INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------- ---------------------------------------------------------------- ------------
<S> <C> <C>
10.45 Amendment to Credit Agreement dated as of July 20, 1999
27.0 Financial Data Schedule.
</TABLE>
28
<PAGE> 28
NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH AUDITORS' REPORT
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Six Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Six Limited Partnership (a Washington limited partnership) as of December 31,
1999 and 1998, 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, 1999. 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 Six
Limited Partnership as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Seattle, Washington,
January 28, 2000
<PAGE> 30
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH $ 556,962 $ 706,907
ACCOUNTS RECEIVABLE, including $24,885 and $43,766 due
from affiliates in 1999 and 1998, respectively 806,712 722,919
PREPAID EXPENSES AND OTHER ASSETS 78,012 109,387
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 28,912,812 28,835,350
Less- Accumulated depreciation (14,639,656) (14,744,674)
------------ ------------
14,273,156 14,090,676
Franchise agreements (net of accumulated
amortization of $13,309,803 in 1999 and
$11,179,542 in 1998) 13,917,591 16,047,851
Acquisition costs (net of accumulated
amortization of $107,709 in 1999 and $60,545
in 1998) 129,862 177,026
Loan fees and other intangibles (net of
accumulated amortization of $911,862 in 1999
and $609,832 in 1998) 841,238 1,117,203
------------ ------------
Total investment in cable television
properties 29,161,847 31,432,756
------------ ------------
Total assets $ 30,603,533 $ 32,971,969
============ ============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Accounts payable $ 607,156 $ 399,031
Other current liabilities 719,404 782,712
Due to general partner and affiliates
46,388 142,746
Deposits 35,422 57,057
Subscriber prepayments 412,628 495,177
Note payable 28,965,281 31,372,848
------------ ------------
Total liabilities 30,786,279 33,249,571
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' DEFICIT:
General partners-
Contributed capital, net (37,565) (37,565)
Accumulated deficit (91,277) (92,266)
------------ ------------
(128,842) (129,831)
------------ ------------
Limited partners-
Contributed capital, net -
29,784 units in 1999 and 29,792 in 1998 8,982,444 8,986,444
Accumulated deficit (9,036,348) (9,134,215)
------------ ------------
(53,904) (147,771)
------------ ------------
Total liabilities and partners' deficit $ 30,603,533 $ 32,971,969
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 31
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE $ 15,005,218 $ 14,746,766 $ 9,644,320
------------ ------------ ------------
EXPENSES:
Operating (including $286,365, $285,212
and $238,691, net, paid to affiliates
in 1999, 1998 and 1997, respectively) 1,320,255 1,262,672 913,361
General and administrative (including
$1,575,500, $1,632,936 and $1,075,881,
net, paid to affiliates in 1999, 1998
and 1997, respectively) 4,064,866 3,790,975 2,357,842
Programming (including $233,163, $241,521
and $258,388, net, paid to affiliates
in 1999, 1998 and 1997, respectively) 3,915,701 3,784,358 2,301,320
Depreciation and amortization 4,392,073 4,287,623 2,010,301
------------ ------------ ------------
13,692,895 13,125,628 7,582,824
------------ ------------ ------------
Operating income 1,312,323 1,621,138 2,061,496
OTHER INCOME (EXPENSE):
Interest income 26,668 17,932 9,074
Interest expense (2,379,744) (2,566,743) (846,609)
Gain (loss) on disposal of assets 1,330,533 (229,940) 7,095
Other expense (190,924) (211,988) (15,157)
------------ ------------ ------------
Net income (loss) $ 98,856 $ (1,369,601) $ 1,215,899
============ ============ ============
ALLOCATION OF NET INCOME (LOSS):
General partners $ 989 $ (13,696) $ 12,159
============ ============ ============
Limited partners $ 97,867 $ (1,355,905) $ 1,203,740
============ ============ ============
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $ 3 $ (46) $ 40
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 32
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ (128,294) $ 16,394 $ (111,900)
Repurchase of limited partnership units -- (8,000) (8,000)
Net income 12,159 1,203,740 1,215,899
----------- ----------- -----------
BALANCE, December 31, 1997 (116,135) 1,212,134 1,095,999
Repurchase of limited partnership units -- (4,000) (4,000)
Net loss (13,696) (1,355,905) (1,369,601)
----------- ----------- -----------
BALANCE, December 31, 1998 (129,831) (147,771) (277,602)
Repurchase of limited partnership units -- (4,000) (4,000)
Net income 989 97,867 98,856
----------- ----------- -----------
BALANCE, December 31, 1999 $ (128,842) $ (53,904) $ (182,746)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 33
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 98,856 $ (1,369,601) $ 1,215,899
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization expense 4,392,073 4,287,623 2,010,301
Amortization of loan costs 190,923 182,859 15,157
(Gain) loss on disposal of assets (1,330,533) 229,940 (7,095)
(Increase) decrease in operating assets:
Accounts receivable 131,092 (278,190) (74,688)
Prepaid expenses and other assets (120,998) 153,371 (181,817)
Increase (decrease) in operating liabilities:
Accounts payable and other current liabilities 144,817 224,658 254,763
Due to General Partner and affiliates (121,243) (12,090) (57,662)
Deposits (21,635) (35,036) (22,106)
Subscriber prepayments (82,549) 85,225 (5,718)
------------ ------------ ------------
Net cash provided by operating activities 3,280,803 3,468,759 3,147,034
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,659,141) (2,820,143) (1,662,999)
Acquisition of cable system -- (20,500,000) --
Proceeds from disposal of assets 1,726,026 500 9,475
Purchase of other intangibles (59,887) (77,199) (210,414)
------------ ------------ ------------
Net cash used in investing activities (993,002) (23,396,842) (1,863,938)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 20,473,427 760,000
Principal payments on notes payable (2,407,567) -- (1,781,400)
Repurchase of limited partnership units (4,000) (4,000) (8,000)
Loan fees and other costs (26,179) (7,471) (495,637)
------------ ------------ ------------
Net cash (used in) provided by financing activities (2,437,746) 20,461,956 (1,525,037)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH (149,945) 533,873 (241,941)
CASH, beginning of year 706,907 173,034 414,975
------------ ------------ ------------
CASH, end of year $ 556,962 $ 706,907 $ 173,034
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 2,373,440 $ 2,562,492 $ 847,682
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 34
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Six Limited Partnership (the Partnership), a
Washington limited partnership, was formed on January 22, 1986. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on November 3, 1986 by acquiring a cable television
system in Mississippi. Subsequently, additional cable television systems were
acquired in Mississippi, North Carolina and South Carolina. The Partnership has
35 nonexclusive franchises to operate cable systems for periods, which will
expire at various dates through 2017.
Northland Communications Corporation is the Managing General Partner (the
General Partner) of the Partnership. Certain affiliates of the Partnership also
own and operate other cable television systems. In addition, the General Partner
manages cable television systems for other limited partnerships for which it is
General Partner.
FN Equities Joint Venture, a California joint venture, is the Administrative
General Partner of the Partnership.
Under the terms of the Partnership's credit agreement, all amounts outstanding
under the note payable become due and payable on December 31, 2000. The
Partnership's continuing operations will not provide sufficient liquidity to
satisfy this obligation at its stated maturity. Alternatives available to the
Partnership include a sale of a portion or all of its assets to generate
proceeds sufficient to repay the outstanding debt or to renegotiate the terms of
the credit agreement with its lenders to extend the maturity date. Management
believes agreement by the lenders to extend the maturity date would be
contingent upon the approval of the limited partners to extend the expiration of
the Partnership's life, which currently expires on December 31, 2001.
The general partners are currently in the process of formulating a proposal to
liquidate the assets of the partnership, which, in the opinion of the General
Partner, would provide sufficient proceeds to retire all the Partnership's
obligations. Such a proposal would require approval by a majority in interest of
limited partners. It is anticipated this liquidation would occur in the first
quarter of 2001. Based on preliminary discussions with the lenders, management
and the lenders believe it is not unreasonable that the Partnership could
arrange financing to continue its operations if necessary, assuming no
deterioration in its operations and the bank credit markets remain open.
<PAGE> 35
-2-
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 paid to the General
Partner were recorded as a reduction of limited partners' capital. The
Administrative General Partner received a fee for providing certain
administrative services to the Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred.
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
<TABLE>
<S> <C>
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold
improvements 5-20 years
</TABLE>
The Partnership periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated undiscounted future cash inflows
attributable to the asset, less estimated undiscounted future cash outflows, is
less than the carrying amount, an impairment loss would be recognized.
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocated the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to the franchise and other determinable intangible costs;
then any excess is allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, loan fees, acquisition costs and other
intangibles are being amortized using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Franchise agreements 10-20 years
Acquisition costs 5 years
Loan fees and other intangibles 1-10 years
</TABLE>
<PAGE> 36
-3-
Revenue Recognition
Cable television service revenue, including service maintenance and installation
revenues, is recognized in the month service is provided to customers. Advance
payments on cable services to be rendered are recorded as subscriber
prepayments. Revenues resulting from the sale of local spot advertising are
recognized when the related advertisements or commercials appear before the
public. Local spot advertising revenues earned were $507,932, $456,007, and
$441,308 respectively, in 1999, 1998 and 1997.
Derivatives
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Partnership periodically enters into
interest rate swap agreements with major banks or financial institutions
(typically its bank) in which the Partnership pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
Gains or losses associated with changes in fair values of these swaps and the
underlying notional principal amounts are deferred and recognized against
interest expense over the term of the agreements in the Partnership's statements
of operations.
The Partnership is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but does not expect
any counterparties to fail to meet their obligations, as the Partnership
currently deals only with its bank. Notional amounts do not represent amounts
exchanged by the parties and, thus, are not a measure of exposure to the
Partnership through its use of derivatives. The exposure in a derivative
contract is the net difference between what each party is required to pay based
on the contractual terms against the notional amount of the contract, which in
the Partnership's case are interest rates. The use of derivatives does not have
a significant effect on the Partnership's result of operations or its financial
position.
Reclassifications
Certain reclassifications have been made to conform prior years' financial
statements with the current year presentation.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133 - In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the statement of
operations, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that are subject to hedge accounting.
<PAGE> 37
-4-
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB No. 133 - an Amendment to
FASB Statement No. 133" the effective date of SFAS No. 133 has been deferred
until fiscal years beginning after January 15, 2000. SFAS No. 133 cannot be
applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at the company's election, before January 1, 1999).
The Partnership has not yet quantified the impacts of adopting SFAS No. 133 on
the financial statements and has not determined the timing or method of adoption
of SFAS No. 133. However, the statement could increase volatility in earnings
and other comprehensive income.
Staff Accounting Bulletin (SAB) No. 101 - In November of 1999, the SEC released
SAB No. 101 "Revenue Recognition in Financial Statements." This bulletin will
become effective for the quarter ended March 31, 2000. This bulletin establishes
more clearly defined revenue recognition criteria, than previously existing
accounting pronouncements, and specifically addresses revenue recognition
requirements for nonrefundable fees, such as installation fees, collected by a
company upon entering into an arrangement with a customer. The Partnership
believes that the effects of this bulletin will not have a material impact on
the Partnership's financial position or results of operations.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner receives a fee for managing the Partnership 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 $900,313, $884,806, and $578,720 in 1999, 1998 and 1997,
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 and losses. Prior to the
general partners receiving a distribution in any year, the limited partners must
receive distributions equal to at least 50% of their allocable share of net
income for such year, based on projections by the Managing General Partner of
the net income of the Partnership for the year. If cash distributions to the
general partners are deferred because of this 50% limitation, those deferred
cash distributions will be paid to the general partners in subsequent years or
upon liquidation of the Partnership. Any
<PAGE> 38
-5-
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 $15,000,000
($500 per partnership unit). As of December 31, 1999, $3,817,997 ($127.50 per
partnership unit) has been distributed to the limited partners, and the
Partnership has repurchased $100,745 of limited partnership units (173 units at
$500 per unit and 43 units at $325 per unit).
Reimbursements
The General Partner provides or causes to be provided certain centralized
services to the Partnership and other affiliated entities. The General Partner
is entitled to reimbursement from the Partnership for various expenses incurred
by it or its affiliates on behalf of the Partnership allocable to its management
of the Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and
licenses, headquarters supplies and expenses, pay television expenses, equipment
and vehicle charges, operating salaries and expenses, administrative salaries
and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by affiliates
in rendering the services. The costs of certain services are charged directly to
the Partnership, based upon the personnel time spent by the employees rendering
the service. The cost of other services is allocated to the Partnership and
affiliates based upon relative size and revenue. Management believes that the
methods used to allocate services to the Partnership are reasonable. Amounts
charged for these services were $719,456, $663,191, and $497,964 for 1999, 1998
and 1997, respectively.
In 1999, 1998 and 1997, the Partnership paid installation charges and
maintenance fees for billing system support provided by an affiliate, amounting
to $73,965, $79,590, and $68,685, respectively.
The Partnership has entered into operating management agreements with affiliates
managed by the General Partner. Under the terms of these agreements, the
Partnership or an affiliate serves as the executive managing agent for certain
cable television systems and is reimbursed for certain operating and
administrative expenses. The Partnership paid $160,722, $290,147, and $179,807,
net, under the terms of these agreements during 1999, 1998 and 1997,
respectively.
The Partnership pays 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
1999, 1998 and 1997 were $178,797, $165,147, and $176,333, 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 staff. CAC billed the Partnership $69,752, $57,611, and $70,777 in 1999,
1998 and 1997, respectively, for these services.
<PAGE> 39
-6-
Due to General Partner and Affiliates
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Management fees $ -- $ 68,187
Reimbursable operating costs and other 12,417 45,940
Other amounts due to affiliates, net 33,971 28,619
-------- --------
$ 46,388 $142,746
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Land and buildings $ 858,198 $ 881,669
Distribution plant 26,230,081 26,424,483
Other equipment 1,738,465 1,488,648
Leasehold improvements 40,550 40,550
Construction in progress 45,518 --
----------- -----------
$28,912,812 $28,835,350
=========== ===========
</TABLE>
5. OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Programmer license fees $ 52,159 $363,130
Accrued property taxes 133,728 12,653
Accrued franchise fees 253,003 245,867
Other 280,514 161,062
-------- --------
$719,404 $782,712
======== ========
</TABLE>
6. NOTE PAYABLE:
The Partnership's note payable consisted of a 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 8.18%. It is due in full on December 31, 2000.
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 an Annual Operating Cash Flow to Interest Expense Ratio
greater than 2.25 to 1, and a Senior Debt to Annualized Operating Cash Flow
Ratio of 5.25 to 1, amongst others. The General Partner submits quarterly debt
compliance reports to the Partnership's creditor under this agreement. As of
December 31, 1999, the Partnership was in compliance with the terms of the loan
agreement.
<PAGE> 40
-7-
7. INCOME TAXES:
Income taxes payable have not been recorded in the accompanying financial
statements because they are obligations of the partners. The federal and state
income tax returns of the Partnership are prepared and filed by the General
Partner.
The tax returns, the qualification of the Partnership as such for tax purposes,
and the amount of distributable partnership income or loss are subject to
examination by federal and state taxing authorities. If such examinations result
in changes with respect to the Partnership's qualification or in changes with
respect to the income or loss, the tax liability of the partners would likely be
changed accordingly.
There was no taxable income to the limited partners in any of the three years in
the periods ended December 31, 1999. Generally, subject to the allocation
procedures discussed in the following paragraph, taxable income to the limited
partners is different from that reported in the statements of operations
principally due to differences in depreciation and amortization expense allowed
for tax purposes and the amount recognizable under generally accepted accounting
principles. Traditionally, there are no other significant differences between
taxable income and the net income reported in the statements of operations.
The Partnership agreement provides that tax losses may not be allocated to the
Limited Partners if such loss allocation would create a deficit in the Limited
Partners' Capital Account. Such excess losses are reallocated to the General
Partner ("Reallocated Limited Partner Losses"). In general, in subsequent years,
100% of the Partnership's net income is allocated to the General Partner until
the General Partner has been allocated net income in amounts equal to the
Reallocated Limited Partner Losses.
In general, under current federal income tax laws, a partner's allocated share
of tax losses from a partnership is allowed as a deduction on 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 income from other
passive activities. In addition, disallowed losses can be carried forward
indefinitely to offset future income from passive activities. Disallowed losses
can be used in full when the taxpayer recognizes gain or loss upon the
disposition of his entire interest in the passive activity.
<PAGE> 41
-8-
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $214,581, $209,627, and $123,776 in 1999,
1998 and 1997, respectively. Minimum lease payments through the end of the lease
terms are as follows:
<TABLE>
<S> <C>
2000 $15,583
2001 12,431
2002 3,133
2003 1,083
2004 283
Thereafter 1,954
-------
$34,467
=======
</TABLE>
Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted. This act dramatically changed federal telecommunications laws and the
future competitiveness of the industry. Many of the changes called for by the
1996 Act will not take effect until the Federal Communications Commission (FCC)
issues new regulations which, in some cases, may not be completed for a few
years. Because of this, the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Partnership's operations, follows.
Cable Programming Service Tier Regulation. FCC regulation of rates for cable
programming service tiers has been eliminated for small cable systems owned by
small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000) and having no more than $250 million in
annual revenue. The Partnership qualifies as a small cable company and all of
the Partnership's cable systems qualify as small cable systems. Basic tier rates
remain subject to regulations by the local franchising authority under most
circumstances until effective competition exists. The 1996 Act expands the
definition of effective competition to include the offering of video programming
services directly to subscribers in a franchised area served by a local
telephone exchange carrier, its affiliates or any multichannel video programming
distributor which uses the facilities of the local exchange carrier. The FCC has
not yet determined the penetration criteria that will trigger the presence of
effective competition under these circumstances.
Telephone Companies. The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act, or a radio-based multichannel
programming distributor not subject to any provisions of the 1996 Act, or
through nonfranchised "open video systems" offering nondiscriminatory capacity
to unaffiliated programmers, subject to select provisions of the 1996 Act.
Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
<PAGE> 42
-9-
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public, Educational and Governmental and leased
access channels.
Self-Insurance
The Partnership began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, the Partnership began making quarterly contributions into an
insurance fund maintained by an affiliate which covers all Northland entities
and defrays a portion of any loss should the Partnership be faced with a
significant uninsured loss. To the extent the Partnership's losses exceed the
fund's balance, the Partnership absorbs any such loss. If the Partnership were
to sustain a material uninsured loss, such reserves could be insufficient to
fully fund such a loss. The capital cost of replacing such equipment and
physical plant, could have a material adverse effect on the Partnership, its
financial condition, prospects and debt service ability.
Amounts paid to the affiliate, which maintains the fund for the Partnership and
its affiliates, are expensed as incurred and are included in the statements of
operations. To the extent a loss has been incurred related to risks that are
self-insured, the Partnership records an expense and an associated liability for
the amount of the loss, net of any amounts to be drawn from the fund. For 1999,
1998, and 1997, respectively, the Partnership was charged $20,197, $20,878 and
$14,324 by the fund. As of December 31, 1999, the fund had a balance of
$360,815.
9. ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS:
On January 2, 1998, the Partnership purchased cable television systems located
in and around the communities of Allendale, Bamberg, Barnwell and Bennettsville,
all in the state of South Carolina. The purchase price of these systems was
$20,500,000. The systems are operated from four headends and serve 11,200
subscribers.
The Partnership borrowed an additional $20,473,427 under an amended and restated
revolving credit and term loan agreement with its lender to finance the
acquisition of the South Carolina cable systems.
On April 30, 1999, the Partnership sold cable television systems serving
approximately 1,400 subscribers in and around the communities of Sandersville,
Heidelberg and Laurel, Mississippi. The system was sold at a sales price of
$1,900,000 of which the Partnership received $1,710,000. The remaining balance
of $190,000 will be held in escrow for one year from the date of sale. The
Partnership used net proceeds of $1,540,000 to pay down the existing bank debt.
<PAGE> 43
-10-
Pro Forma operating results of the Partnership for 1999 and 1998, assuming the
disposition described above had been completed as of the beginning of 1998
follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------------
1999 1998
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $ 14,813,800 $ 14,183,431
============ ============
Net loss $ (1,482,272) $ (1,271,034)
============ ============
Net loss per limited partnership unit (50) (43)
============ ============
</TABLE>
10. SUBSEQUENT EVENT:
The Partnership previously filed a Preliminary Proxy Statement with the
Securities and Exchange Commission related to the proposed sale of the cable
television and other assets of the Partnership to Northland Cable Properties,
Inc., a wholly owned subsidiary of the General Partner for an aggregate purchase
price of $76,000,000. In the first quarter of 2000, the General Partner made a
decision to terminate the proposal and withdraw the proxy statement. The General
Partner plans to formulate another liquidation proposal to the limited partners
in 2000. It is estimated that any sale of the Partnership would not occur until
the first quarter of 2001.
<PAGE> 1
EXHIBIT 10.45
AMENDMENT
THIS AMENDMENT (the "Amendment"), with respect to the Credit Agreement
referred to below is entered into as of the 20th day of July, 1999, by and
among NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP, a limited partnership
organized under the laws of the State of Washington (the "Borrower"), the
Lenders party to such Credit Agreement (collectively, the "Lenders"), and FIRST
UNION NATIONAL BANK, a national banking association, in its capacity as
Administrative Agent for the Lenders (the "Administrative Agent").
STATEMENT OF PURPOSE
The Borrower, the Lenders, the Administrative Agent and First Union
Capital Markets Corp., as Arranger, are parties to a certain Amended and
Restated Credit Agreement dated as of December 31, 1997, (as previously
modified, as amended hereby and as may from time to time be further amended,
restated or otherwise modified, the "Credit Agreement"), pursuant to which the
Lenders have agreed to make, and have made, certain Loans to the Borrower.
In order to avoid potential Events of Default the Borrower has requested
that the Lenders amend certain covenants under the Credit Agreement as more
fully described herein. The Administrative Agent and Lenders are willing to
agree to the requested amendments, but only upon the terms and conditions of
this Amendment.
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms used and not defined herein
shall have the meanings given thereto in the Credit Agreement.
2. Amendments.
(a) Section 3.3 is hereby amended by deleting such section in its
entirety and inserting in lieu thereof the following:
"SECTION 3.3. Repayment of Term Loan. The Borrower shall repay the
aggregate outstanding principle amount of the Term Loan in full, together
will accrued interest thereon and any other outstanding amounts due with
respect to the Term Loan Facility, on the Term Loan Maturity Date."
(b) Section 9.1 entitled "Maximum Leverage Ratio" is hereby amended by
deleting the compliance periods and corresponding ratios for such Section in
their entirety and inserting the following in lieu thereof:
<PAGE> 2
<TABLE>
Period Ratio
------ ------------
<S> <C>
Closing Date - 09/29/98 5.50 to 1.00
09/30/98 and thereafter 5.25 to 1.00
</TABLE>
(c) Section 9.3 entitled "Fixed Charge Ratio" is hereby amended by
deleting such Section in its entirety and inserting the following in lieu
thereof:
"SECTION 9.3. [Reserved.]"
(d) Section 9.4 entitled "Maximum Capital Expenditures" is hereby
amended by deleting such section in its entirety and inserting the following in
lieu thereof:
"SECTION 9.4. [Reserved.]"
3. Representations and Warranties. The Borrower hereby confirms to the
Administrative Agent and Lenders that upon the effectiveness of this Amendment,
each representation and warranty made by the Borrower and its Subsidiaries
under the Loan Documents shall be true and correct as of the date hereof and
that no Default or Event of Default shall have occurred and be continuing. The
Borrower hereby represents and warrants that as of the date hereof there are no
claims or offsets against or defenses or counterclaims to its or its
Subsidiaries' obligations under the Credit Agreement or any other Loan Document.
4. Limited Amendment. Except as expressly waived and amended herein,
the Credit Agreement and each other Loan Document shall continue to be, and
shall remain, in full force and effect. This Amendment shall not be deemed (a)
to be a waiver of, or consent to, or a modification or amendment of, any other
term or condition of the Credit Agreement or (b) to prejudice any other right
or rights which the Administrative Agent or Lenders may now have or may have in
the future under or in connection with the Credit Agreement or the Loan
Documents or any of the instruments or agreements referred to therein, as the
same may be amended, restated or otherwise modified from time to time.
5. Costs and Expenses. The Borrower agrees to pay or reimburse the
Administrative Agent for all of the reasonable fees and disbursements of
counsel thereto incurred in connection with the preparation, negotiation and
execution of this Amendment.
6. Effectiveness. This Amendment shall become effective upon receipt
by the Administrative Agent of (a) this Amendment duly executed and delivered
by the Borrower and the Required Lenders under the Credit Agreement and (b) an
amendment fee equal to $25,000, $15,000 of which fee shall be for the account
of the Administrative Agent and $10,000 of which fee shall be distributed
thereby to Bank of Montreal, Chicago Branch, for its account.
7. Counterparts. This Amendment may be executed by one or more of the
parties hereto in any number of separate counterparts and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument.
2
<PAGE> 3
8. Governing Law. This Amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of North Carolina,
without reference to the conflicts or choice of law principles thereof.
[SIGNATURE PAGES FOLLOW]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered under seal by their respective duly authorized officers
as of the date first above written.
NORTHLAND CABLE PROPERTIES SIX
LIMITED PARTNERSHIP, as Borrower
[CORPORATE SEAL]
By: Its Managing General Partner,
Northland Communications Corporation
By: /s/ GARY S. JONES
-------------------------------------
Name: Gary S. Jones
------------------------------
Title: Vice President
------------------------------
[SIGNATURE PAGES CONTINUE]
<PAGE> 5
FIRST UNION NATIONAL BANK,
as Administrative Agent and Lender
By: /s/ MARK K. MISENHEIMER
-------------------------------
Name: Mark K. Misenheimer
-------------------------
Title: Director
------------------------
[SIGNATURE PAGES CONTINUE]
<PAGE> 6
BANK OF MONTREAL, CHICAGO BRANCH,
as Lender
By: /s/ KAREN KLAPPER
-------------------------------
Name: Karen Klapper
-------------------------
Title: Director
------------------------
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