<PAGE> 1
FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-29354 eff. 7-1-91)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from _______to________
Commission file number 0-16718
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1366564
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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 including Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
(NONE) (NONE)
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
(Partially Incorporated into Part IV)
(1) Form S-1 Registration Statement declared effective on August 6,
1987 (No. 33-13879).
(2) Form 10-K Annual Reports for fiscal years ended December 31,
1987, December 31, 1988, December 31, 1990, December 31, 1992
and December 31, 1993 respectively.
(3) Form 10-Q Quarterly Reports for periods ended June 30, 1989,
September 30, 1989 and March 31, 1993, respectively.
(4) Form 8-K dated September 27, 1993
(5) Form 8-K dated March 1, 1996
(6) Form 8-K dated December 5, 1997
This filing contains pages. Exhibits Index appears on page ____.
Financial Statements/Schedules Index appears on page ____.
<PAGE> 2
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 Seven Limited Partnership (the "Partnership")
is a Washington limited partnership consisting of two general partners (the
"General Partners") and approximately 2,916 limited partners as of December 31,
1997. Northland Communications Corporation, a Washington corporation, is the
Managing General Partner of the Partnership (referred to herein as "Northland"
or the "Managing General Partner"). 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 5 limited partnerships. Northland is also the parent company of
Northland Cable Properties, Inc. which was formed in February 1995 and is
principally involved in direct ownership of cable television systems. Northland
is a subsidiary of Northland Telecommunications Corporation ("NTC"). Other
subsidiaries of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and
principally involved in the direct ownership of cable television
systems. Sole shareholder of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally
involved in the production and development of local news, sports
and informational programming.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and
principally involved in the development and production of computer
software used in billing and financial record keeping for
Northland-affiliated cable systems. Sole shareholder of Cable
Ad-Concepts.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and
principally involved in the sale, development and production of
video commercial advertisements that are cablecast on Northland-
affiliated cable systems.
NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company for
the following entity:
STATESBORO MEDIA, INC. - formed in April 1995 and principally
involved in operating an AM radio station serving
the community of Statesboro, GA and surrounding areas.
The Partnership was formed on April 17, 1987 and began operations in
1987 with the acquisition of a cable television system serving two communities
in Texas and one system in Washington. Subsequently, in 1988, the Partnership
acquired another cable television system in Washington and sold a sub-system in
Texas. In 1993, the Partnership purchased a cable television system in Bayview,
Washington. In 1996, the Partnership purchased cable television systems serving
Vidalia, Georgia and Sandersville, Georgia. In 1997, The Partnership purchased
cable television systems serving Toccoa, Georgia and Royston, Georgia.
(Collectively, the cable television systems are referred to herein as the
"Systems".) As of December 31, 1997, the total number of basic subscribers
served by the Systems was 39,252, and the partnership's penetration rate (basic
subscribers as a percentage of homes passed) was approximately 65% as compared
to an industry average of approximately 66%, as reported by PAUL KAGAN AND
ASSOCIATES, INC.
The Partnership has 26 non-exclusive franchises to operate the Systems.
These franchises, which will expire at various dates through 2024, have been
granted by local and county authorities in the areas in which the Systems
operate. Annual franchise fees are paid to the granting governmental
authorities. These fees vary between 1% and 5%
<PAGE> 3
and are generally based on the respective gross revenues of the Systems in a
particular community. The franchises may be terminated for failure to comply
with their respective conditions.
The Partnership serves the communities and surrounding areas of Brenham
and Bay City, Texas, Camano Island and Sequim, Washington, as well as Vidalia,
Sandersville, Toccoa and Royston, Georgia. The following is a description of
these areas:
Brenham, TX: Brenham, Texas, with a population of approximately 12,000
is strategically located about midway between Houston and Austin. The population
has grown steadily over the last 15 years at a rate of two and one-half percent
per year. The city of Brenham serves as a hub for commerce, trade and services
to the surrounding counties of Burleson, Waller, Lee, Fayette, Austin, Colorado
and Grimes. Brenham's proximity to Houston makes it a gateway through which
international trade and commerce proceed to Austin, San Antonio and other
western cities. A main line of the Santa Fe Railway also services the city.
Certain information regarding the Brenham, TX system as of December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Basic Subscribers 4,307
Tier Subscribers 1,553
Premium Subscribers 1,765
Estimated Homes Passed 5,660
</TABLE>
Bay City, TX: The Bay City system serves the communities of Bay City,
Markham, Matagorda, Van Vleck and certain unincorporated areas of Matagorda
county in southeast Texas. The local economies of the communities included in
the Bay City system are based primarily in agriculture, chemical manufacturing
and petroleum processing. Rich, productive agricultural lands are located along
the banks of the Colorado River in the Bay City area.
Rice is the major crop.
There is an abundance of recreational and sporting activities in the Bay
City area, including freshwater and deep-sea fishing. The Gulf of Mexico,
Matagorda Beach, the Colorado River, bays and bayous combine to meet the
recreational needs of both tourists and residents. Certain information regarding
the Bay City, TX system as of December 31, 1997 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 5,627
Tier Subscribers 2,357
Premium Subscribers 1,870
Estimated Homes Passed 8,685
</TABLE>
Camano Island, WA: Camano Island is approximately 16 miles long and six
miles wide with a year-round population of over 6,000. Located in the Puget
Sound, north of Seattle and five miles west of Stanwood, Washington, the island
is connected to the mainland by a bridge which provides easy access to
neighboring communities. The Camano Island system also serves the communities of
Stanwood, WA and Bayview, WA.
Camano Island is currently experiencing growth at a rate of 200 to 250
new homes per year. The island is primarily residential with neighborhood
grocery stores, service stations, restaurants and other incidental services. The
neighboring mainland community of Stanwood provides the area with an education
system, additional shopping and medical services. Many employed residents of
Camano Island work in the neighboring cities of Everett (an industrial center),
Stanwood and Mount Vernon (mainly agricultural), while many have chosen Camano
Island as a retirement residence. Certain information regarding the Camano
Island, WA system as of December 31, 1997 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 7,117
Tier Subscribers 3,426
Premium Subscribers 3,200
Estimated Homes Passed 9,890
</TABLE>
Sequim, WA: Clallam County's population is approximately 53,400, with
approximately 17,300 residing in the city of Port Angeles, WA, the county seat.
Sequim is located approximately 15 miles east of Port Angeles. The county's work
force is concentrated in the lumber/wood products, logging, tourism,
aerospace/aviation, fishing and
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education industries. Some of the most productive forest land in the United
States is located on the Olympic Peninsula, and timber has been the traditional
mainstay of Clallam County's economy. A natural deep-water harbor and relative
proximity to the Far East have encouraged international trade development for
the county's products. The Olympic National Park, ferry access to Victoria,
British Columbia, Canada, sport fishing, and other scenic and recreational
attractions bring a steady stream of tourists through Clallam County. Certain
information regarding the Sequim, WA system as of December 31, 1997 is as
follows
<TABLE>
<S> <C>
Basic Subscribers 5,647
Tier Subscribers 3,026
Premium Subscribers 860
Estimated Homes Passed 7,180
</TABLE>
Vidalia, GA: Located approximately 15 miles south of Interstate 16, the
city of Vidalia is in Toombs County and lies midway between Savannah and Macon.
With a population of approximately 11,500, Vidalia is home of the Vidalia Sweet
Onion and provides services and support for the surrounding agricultural and
light manufacturing industries. Nearby Lyons, with a population of approximately
4,500 is the county seat of Toombs County. Certain information regarding the
Vidalia, GA system as of December 31, 1997 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 5,884
Tier Subscribers 884
Premium Subscribers 3,539
Estimated Homes Passed 12,585
</TABLE>
Sandersville, GA: Located midway between Augusta and Macon, Sandersville
is the county seat of Washington County. Major employers with operations in the
communities served by the Sandersville system include kaolin processors,
transportation, both trucking and rail and a variety of light manufacturers.
Certain information regarding the Sandersville, GA system as of December 31,
1997 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 3,373
Tier Subscribers 568
Premium Subscribers 2,466
Estimated Homes Passed 4,720
</TABLE>
Toccoa and Royston, GA: The City of Toccoa is located in northeastern
Georgia adjacent to the South Carolina at the headwaters of Lake Hartwell. It is
81 miles northeast of Atlanta and 65 miles southwest of Greenville, South
Carolina. Toccoa serves as the county seat of Stephens County and its economy is
driven by the textile industry as well as agricultural products such as poultry,
pulpwood and livestock.
Split between Hart and Franklin counties, Royston is located in northeastern
Georgia approximately 60 miles north of Athens. The economy of Royston is
primarily driven by manufacturing industries. Certain information regarding the
Toccoa and Royston, Georgia systems as of December 31, 1997 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 7,297
Premium Subscribers 3,291
Estimated Homes Passed 11,290
</TABLE>
The Partnership had 66 employees as of December 31, 1997. Management of
these systems is handled through offices located in the towns of Brenham and Bay
City, Texas, as well as Vidalia, Sandersville, Toccoa and Royston, Georgia. The
Sequim and Camano systems share the costs of offices maintained by affiliates of
the Partnership pursuant to the terms of operating management agreements.
Pursuant to the Agreement of Limited Partnership, the Partnership reimburses the
Managing General Partner for time spent by the Managing General Partner's
accounting staff on Partnership accounting and bookkeeping matters. (See Item
13(a) below.)
The Partnership's cable television business is not considered seasonal.
The business of the Partnership is not dependent upon a single customer or a few
customers, the loss of any one or more of which would have a material adverse
effect on its business. No customer accounts for 10% or more of revenues. No
material portion of the Partnership's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of
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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 service, the content of which varies from system to system.
"Premium subscribers" are households that subscribe to one or more "pay
channels" in addition to the basic service. These pay channels include such
services as Showtime, Home Box Office, Cinemax, Disney or The Movie Channel.
COMPETITION
Due to factors such as the non-exclusivity of the Partnership's
franchises, recent regulatory changes and Congressional action, the rapid pace
of technological developments, and the adverse publicity received by the cable
industry over recent years regarding the lack of competition, there is a
substantial likelihood that the Partnership's systems will be subject to a
greater degree of competition in the future.
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
satellite master antenna television services, DBS services, wireless cable
services, newspapers, movie theaters, live sporting events, online computer
services and home video products, including videotape cassette recorders. The
extent to which a cable communications system is competitive depends, in part,
upon the cable system's ability to provide, at a reasonable price to customers,
a greater variety of programming and other communications services than those
which are available off-air or through other alternative delivery sources and
upon superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises
granted on a non-exclusive basis. The 1992 Cable Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to operate cable television systems without a
franchise. It is possible that a franchising authority might grant a second
franchise to another company containing terms and conditions more favorable than
those afforded the Partnership.
<PAGE> 6
Well-financed businesses from outside the cable industry (such as the
public utilities and other companies that own the poles to which cable is
attached) may become competitors for franchises or providers of competing
services. Congress has repealed the prohibition against national television
networks owning cable systems, and telephone companies may now enter the cable
industry, as described below. Such new entrants may become competitors for
franchises or providers of competitive services. In general, a cable system's
financial performance will be adversely affected when a competing cable service
exists (referred to in the cable industry as an "overbuild").
In recent years, the FCC and the Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable television systems. These technologies include, among
others, DBS, whereby signals are transmitted by satellite to small receiving
dishes located on subscribers' homes. Programming is currently available to DBS
subscribers through conventional, medium- and high-powered satellites. Existing
DBS systems offer in excess of 120 channels of programming and pay-per-view
services and are expected to increase channel capacity to 150 or more channels,
enabling them to provide program service comparable to and in some instances,
superior to those of cable television systems. At least four well-financed
companies currently offer DBS services and have undertaken extensive marketing
efforts to promote their products. The FCC has implemented regulations under the
1992 Cable Act to enhance the ability of DBS systems to make available to home
satellite dish owners certain satellite delivered cable programming at
competitive costs. Programming offered by DBS systems has certain advantages
over cable systems with respect to number of channels offered, programming
capacity and digital quality, as well as disadvantages that include high upfront
and monthly costs and a lack of local programming, service and equipment
distribution. DBS systems will provide increasing competition to cable systems
as the cost of DBS reception equipment continues to decline. At least one DBS
provider is undertaking the technical and legislative steps necessary to enhance
its service by adding local broadcast signals which could further increase
competitive pressures from DBS systems.
Cable television systems also compete with wireless program distribution
services such as MMDS which uses low power microwave to transmit video
programming over the air to customers. Additionally, the FCC recently adopted
new regulations allocating frequencies in the 28 GHz band for a new multichannel
wireless video service similar to MMDS, known as Local Multipoint Distribution
Service ("LMDS"). LMDS is also suited for providing wireless data services,
including the possibility of Internet access. Wireless distribution services
generally provide many of the programming services provided by cable systems,
although current technology limits the number of channels which may be offered.
Moreover, because MMDS service generally requires unobstructed "line of sight"
transmission paths, the ability of MMDS systems to compete may be hampered in
some areas by physical terrain and foliage.
The 1996 Telecommunications Act eliminated the previous prohibition on
the provision of video programming by local exchange telephone companies
("LECs") in their telephone service areas. Various LECs currently are providing
and seeking to provide video programming services within their telephone service
areas through a variety of distribution methods, primarily through the
deployment of broadband wire facilities, wireless transmission and installation
of traditional cable systems alongside existing telephone equipment. Cable
television systems could be placed at a competitive disadvantage if the delivery
of video programming services by LECs becomes widespread, since LECs may not be
required, under certain circumstances, to obtain local franchises to deliver
such video services or to comply with the variety of obligations imposed upon
cable television systems under such franchises. Issues of cross subsidization by
LECs of video and telephony services also pose strategic disadvantages for cable
operators seeking to compete with LECs that provide video services. The Company
believes, however, that the small to medium markets in which it provides or
expects to provide cable services are unlikely to support competition in the
provision of video and telecommunications broadband services given the lower
population densities and higher costs per subscriber of installing plant. The
1996 Telecommunications Act's provisions promoting facilities-based broadband
competition are primarily targeted at larger systems and markets. The 1996
Telecommunications Act includes certain limited exceptions to the general
prohibition on buy outs and joint ventures between incumbent cable operators and
LECs for smaller non-urban cable systems and carriers meeting certain criteria.
See "Proposed Transaction - Regulation Overview."
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information useful
both to consumers and businesses. The FCC also permits commercial and
noncommercial FM stations to use their subcarrier frequencies to provide non-
broadcast services including data transmissions. The FCC has established an
over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. The expansion of fiber optic systems by LECs and other common
carriers, and electric utilities is providing facilities for the transmission
and distribution to homes and businesses of video services, including
interactive computer-based services like the Internet, data and other nonvideo
services.
The business of delivering and producing televised news, information and
entertainment are characterized by new market entrants, increasingly rapid
technological change and evolving industry standards. There can be no assurance
that the Partnership will be able to fund the capital expenditures necessary to
keep pace with technological developments or that the Partnership will
successfully predict the technical demand of its subscribers. The Partnership's
inability to provide enhanced services in a timely manner or to predict the
demands of the marketplace could have a material adverse effect on the
<PAGE> 7
Partnership, its financial condition, prospects and debt service ability.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environments are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry or on the operations of the
Partnership.
<PAGE> 8
REGULATION
The Partnership's business is subject to intensive regulation at the
federal and local levels, and to a lesser degree, at the state level. The FCC,
the principal federal regulatory agency with jurisdiction over cable television,
is responsible for implementing federal policies such as rate regulation, cable
system relations with other communications media, cross-ownership, signal
carriage, equal employment opportunity and technical performance. Provisions of
regulatory events that have impacted the Partnership's cable television system
operations, which are the principal business of the Partnership, are summarized
below.
INTRODUCTION
The operation of cable television systems is extensively regulated by
the FCC, some state governments and most local governments. The
Telecommunications Act of 1996 alters the regulatory structure governing the
nation's telecommunications providers. The Telecommunications Act of 1996 is
intended to remove barriers to competition in both the cable television market
and the local telephone market. It also reduces the scope of cable rate
regulation.
The 1996 Telecommunications Act requires the FCC to undertake a host of
implementing rulemakings, the final outcome of which cannot yet be determined.
Moreover, Congress and the FCC have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect the
Partnership's operations. This section briefly summarizes key laws and
regulations affecting the operation of the Partnership's systems and does not
purport to describe all present, proposed, or possible laws and regulations
affecting the Company or its systems.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry. Under that regime, all cable systems are subject to
rate regulation, unless they face "effective competition" in their local
franchise area. Federal law now defines "effective competition" on a
community-specific basis as requiring either low penetration (less than 30%) by
the incumbent cable
<PAGE> 9
operator, appreciable penetration (more than 15%) by competing multichannel
video providers ("MVPs"), or the presence of a competing MVP affiliated with a
local telephone company.
Although the FCC rules control, local government units (commonly
referred to as "local franchising authorities" or "LFAs") are primarily
responsible for administering the regulation of the lowest level of cable, the
basic service tier ("BST"), which typically contains local broadcast stations
and public, educational, and government access channels. Before an LFA begins
BST rate regulation, it must certify to the FCC that it will follow applicable
federal rules, and many LFAs have voluntarily declined to exercise this
authority. LFAs also have primary responsibility for regulating cable equipment
rates. Under federal law, charges for various types of cable equipment must be
unbundled from each other and from monthly charges for programming services. The
1996 Telecommunications Act allows operators to aggregate costs for broad
categories of equipment across geographic and functional lines.
The FCC itself directly administers rate regulation of an operator's
cable programming service tiers ("CPST"), which typically contain
satellite-delivered programming. Under the 1996 Telecommunications Act, the FCC
can regulate CPST rates only if an LFA first receives at least two rate
complaints from local subscribers and then files a formal complaint with the
FCC. When new CPST rate complaints are filed, the FCC now considers only whether
the incremental increase is justified and will not reduce the previously
established CPST rate.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carnage. The FCC has modified its rate
adjustment regulations to allow for annual rate increases and to minimize
previous problems associated with regulatory lag. Operators also have the
opportunity of bypassing this "benchmark" regulatory scheme in favor of
traditional "cost-of-service," regulation in cases where the latter methodology
appears favorable. Premium cable services offered on a per-channel or
per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. Federal law requires that the
BST be offered to all cable subscribers, but limits the ability of operators to
require purchase of any CPST before purchasing premium services offered on a
per-channel or per-program basis.
In an effort to ease the regulatory burden on small cable systems, the
FCC has created special rate rules applicable for systems with fewer than 15,000
subscribers owned by an operator with fewer than 400,000 subscribers. The
special rate rules allow for a simplified cost-of-service showing. All of the
Partnership's systems are eligible for these simplified cost-of-service rules,
and have calculated rates generally in accordance with those rules.
The 1996 Telecommunications Act provides additional relief for small
cable operators. For franchising units with less than 50,000 subscribers and
owned by an operator with less than one percent of the nation's cable
subscribers (i.e., approximately 600,000 subscribers) that is not affiliated
with any entities with aggregate annual gross revenue exceeding $250 million,
CPST rate regulation is automatically eliminated. The Partnership and all of its
systems qualify for this CPST deregulation.
The 1996 Cable Act sunsets FCC regulation of CPST rates for all systems
(regardless of size) on March 31, 1999. It also relaxes existing uniform rate
requirements by specifying that uniform rate requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing still may
be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Cable Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The extent to which state and local governments may
impose requirements in such situations recently has been, and will continue to
be, the subject of litigation. The outcome of that litigation, and its effect on
the Partnership, cannot be predicted. The favorable pole attachment rates
afforded cable operators under federal law can be gradually increased by utility
companies owning the poles (beginning on February 8, 2001) if the operator
provides telecommunications service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Cable Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. Certain aspects of the
FCC's initial interconnection order were rejected by the Eighth Circuit Court of
Appeals on July 18, 1997, on the ground that the states, not the FCC, have
statutory authority to set the prices that incumbent local exchange carriers may
charge for interconnection. The United States Supreme Court has granted
certiorari to hear an appeal of the Eighth Circuit Court of Appeals ruling.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Cable Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers ("LECs"), including the Bell
Operating Companies, can now compete with cable operators both inside and
outside their telephone service areas. Because of their resources, LECs could be
formidable competitors to traditional cable operators, and certain LECs have
begun offering cable service.
Under the 1996 Cable Act, a LEC providing video programming to
subscribers generally will be regulated as a traditional cable operator (subject
to local franchising and federal regulatory requirements), unless the LEC elects
to provide its programming via an "open video system" ("OVS"). To qualify for
OVS status, the LEC must reserve two-thirds of the system's activated channels
for unaffiliated entities.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator
<PAGE> 10
buyouts of co-located LEC systems, and joint ventures between cable operators
and LECs in the same market. The 1996 Telecommunications Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption." The 1996 Telecommunications Act also provides
the FCC with the limited authority to grant waivers of the buyout prohibition
(subject to LFA approval).
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The 1996 Cable Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Because of their resources, electric utilities could be formidable competitors
to traditional cable systems, and a few electric utilities have announced plans
to offer video programming. Recent technological advances have increased the
likelihood that electric utilities may become competitive with the Partnership.
ADDITIONAL OWNERSHIP RESTRICTIONS
The 1996 Cable Act eliminates statutory restrictions on broadcast/cable
cross-ownership (including broadcast network/cable restrictions), but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Cable Act also
eliminates the three year holding period required under the 1992 Cable Act's
"anti-trafficking" provision. The 1996 Cable Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
("SMATV") and MMDS facilities, but lifts those restrictions where the cable
operator is subject to effective competition. FCC regulations permit cable
operators to own and operate SMATV systems within their franchise area, provided
that such operation is consistent with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national program services. A companion rule establishing
a nationwide ownership cap on any cable operator equal to 30% of all domestic
cable subscribers has been stayed pending further judicial review.
There are no federal restrictions on non-U.S. entities having an
ownership interest in cable television systems or the FCC licenses commonly
employed by such systems.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act conveyed to a commercial broadcaster the right
generally to elect every three years either to require: (i) that the local cable
operator carry its signals ("must carry"); or (ii) that such operator obtain the
broadcaster's retransmission consent before doing so. The Company has been able
to reach agreements with all of the broadcasters who elected retransmission
consent and has not been required by broadcasters to remove any broadcast
stations from the cable television channel line-ups. To date, compliance with
the "retransmission consent" and "must carry" provisions of the 1992 Cable Act
has not had a material effect on the Partnership, although this result may
change in the future depending on such factors as market conditions, the
introduction of digital broadcasts, channel capacity and similar matters when
such arrangements are renegotiated.
CHANNEL SET-ASIDES
LFAs can include franchise provisions, requiring cable operators to set
aside certain channels for public, educational and governmental access
programming. Federal law also requires cable systems to designate a portion of
their channel capacity (up to 15% in some cases) for commercial leased access by
unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but use of commercial leased access channels has
been relatively limited. The FCC recently modified its leased access rules,
making leased access somewhat more favorable to potential users. The changes,
however, were not as dramatic as leased access users had hoped, and should not
significantly infringe on the Partnership's control over the channel line-up of
its various cable television operating systems. The revised maximum rate formula
has been challenged by one leased access applicant in an appeal to the D.C.
Circuit Court.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition
to incumbent cable operators, the 1992 Cable Act imposed restrictions on
dealings between cable operators and cable programmers. The 1992 Cable Act
precludes video programmers affiliated with cable companies from favoring cable
operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors. This provision limits the
ability of vertically integrated cable programmers to offer exclusive
programming arrangements to cable companies.
OTHER FCC REGULATIONS
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as equal employment opportunity, subscriber
privacy, programming practices (including, among other things, syndicated
program exclusivity, network program non-duplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, and children's programming advertisements), registration of
cable systems and facilities licensing, maintenance of various records and
public inspection files, frequency usage, lockbox availability, antenna
structure notification, tower marking and lighting, consumer protection and
customer service standards, technical standards, and consumer electronics
equipment compatibility. The FCC recently adopted rules relating to the
ownership of cable wiring located inside multiple dwelling unit complexes. The
FCC has concluded that such wiring can, in certain cases, be unilaterally
acquired by the complex owner, making it easier for complex owners to terminate
service from the incumbent cable operator in favor of a new entrant. The FCC
recently imposed new Emergency Alert System requirements on cable operators
which will be phased in over several years. The FCC recently adopted "closed
captioning" rules that the Partnership does not expect to have an adverse effect
on its operations. The FCC has the authority to enforce its regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the revocation
of FCC licenses needed to operate certain transmission facilities used in
connection with cable operations.
PENDING PROCEEDING
The FCC has initiated a rulemaking proceeding involving whether cable
customers must be allowed to purchase cable converters from third party vendors.
If the FCC concludes that such distribution is required, and does not make
appropriate allowances for signal piracy concerns, it may become more difficult
for cable operators to combat theft of service.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenue to a
federal copyright royalty pool (which varies depending on the size of the system
and the number of distant broadcast television signals carried), cable operators
can obtain blanket permission to retransmit copyrighted material on broadcast
signals. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect the Partnership's ability to obtain desired broadcast programming. In
addition, the cable industry pays music licensing fees to BMI and is negotiating
a similar arrangement with ASCAP. Copyright clearances for non-broadcast
programming services are arranged through private negotiations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in exchange for the use of public rights-of-way. Federal law now prohibits
franchise authorities from granting exclusive franchises or from unreasonably
refusing to award additional franchises. Cable franchises generally are granted
for fixed terms and in many cases include monetary penalties for non-compliance
and may be terminable if the franchisee fails to comply with material
provisions.
The terms and conditions of franchises vary materially from jurisdiction
to jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. Although LFAs have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, LFAs cannot require the payment of franchise
fees exceeding 5% of the system's gross revenue, cannot dictate the particular
technology used by the system, and cannot specify video programming, other than
identifying broad categories of programming, that must be carried on the
systems.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchise
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for consent. Historically,
franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of their franchises. However, there
can be no assurance that renewal will be granted or that renewals will be made
on similar terms and conditions.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of state governmental agencies.
SUMMARY
The foregoing does not purport to be a summary of all present and
proposed federal, state and local regulations and legislation relating to the
cable television industry. Other existing federal legislation and regulations,
copyright licensing and, in many jurisdictions, state and local franchise
requirements are currently the subject of a variety of judicial proceedings,
legislative hearings and administrative and legislative proposals which could
change, in varying degrees, the manner in which cable television systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable television industry or the Partnership can be predicted at this time.
<PAGE> 11
The Partnership expects to adapt its business to adjust to the changes
that may be required under any scenario of regulation. At this time, the
Partnership cannot assess the effects, if any, that present regulation may have
on the Partnership's operations and potential appreciation of its Systems. There
can be no assurance, however, that the final form of regulation will not have a
material adverse impact on partnership operations.
ITEM 2. PROPERTIES
The Partnership's cable television systems are located in and around
Brenham and Bay City, Texas; Camano Island, Sequim, Stanwood, and Bayview,
Washington, and Vidalia, Sandersville, Toccoa and Royston, Georgia. The
principal physical properties of the Systems consist of system components
(including antennas, coaxial cable, electronic amplification and distribution
equipment), motor vehicles, miscellaneous hardware, spare parts and real
property, including office buildings and headend sites and buildings. The
Partnership's cable plant passed approximately 60,010 homes as of December 31,
1997. Management believes that the Partnership's plant passes all areas which
are currently economically feasible to service. Future line extensions depend
upon the density of homes in the area as well as available capital resources for
the construction of new plant. (See Part II. Item 7.
Liquidity and Capital Resources.)
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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.
<PAGE> 12
(b) The approximate number of equity holders as of December 31,
1997, is as follows:
<TABLE>
<S> <C>
Limited Partners: 2,916
General Partners: 2
</TABLE>
(c) During 1997, the Partnership did not make cash distributions to
the limited partners or to the Managing General Partner. The limited partners
have received in the aggregate in the form of cash distributions $3,108,554 on
total initial contributions of $24,893,000 as of December 31, 1997. As of
December 31, 1997, the Partnership had repurchased $65,000 in limited
partnership units ($500 per unit). Future distributions depend upon results of
operations, leverage ratios, and compliance with financial covenants required by
the Partnership's lender.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenue $ 13,573,985 $ 11,310,000 $ 8,526,053 $ 7,757,306 $ 6,768,601
Operating income (loss) 250,623 (87,913) 40,080 (91,965) (713,339)
Loss on disposal of
assets (14,486) (10,146) (17,626) 0 (43,013)
Net loss (2,421,083) (2,215,885) (1,205,316) (1,265,325) (2,014,094)
Net loss per limited
partner unit
(weighted average) (48) (44) (24) (25) (40)
Cumulative tax losses
per limited partner
unit (402) (402) (405) (415) (425)
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 36,349,084 $ 28,151,750 $ 14,520,969 $ 17,549,748 $ 20,172,231
Notes payable 41,543,600 31,200,000 16,056,381 17,537,318 18,465,537
Total liabilities 43,784,182 33,129,765 17,149,665 18,461,214 19,316,433
General partners'
deficit (286,460) (262,249) (238,836) (221,764) (204,092)
Limited partners'
(deficit)capital (7,112,638) (4,715,766) (2,389,860) (689,702) 1,059,890
Distributions per
limited partner unit 0 3 10 10 10
Cumulative distribu-
tions per limited
partner unit 63 63 60 50 40
</TABLE>
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 AND 1996
Total revenue reached $13,573,985 for the year ended December 31, 1997,
representing an increase of approximately 20% over 1996. This is mainly due to
the acquisition of the Vidalia, GA system in March 1996, the Sandersville, GA
system in September 1996 and rate increases placed into effect August 1997. Of
the 1997 revenue, $9,619,864 (71%) is derived from subscriptions to basic
service, $1,205,147 (9%) from subscriptions to premium services, $1,074,192 (8%)
from subscriptions to tier services, $320,070 (2%) from installation charges,
$339,728 (2%) from service maintenance revenue and $1,014,984 (8%) from other
sources.
The following table displays historical average rate information for
various services offered by the Partnership's systems (amounts per subscriber
per month):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Basic Rate $ 23.75 $ 22.45 $ 21.80 $ 20.90 $ 19.90
Tier Rate 8.15 7.30 6.85 5.75 5.75
HBO Rate 10.15 10.05 10.65 10.25 10.25
Cinemax Rate 8.70 8.50 8.15 8.15 8.15
Showtime Rate 8.50 8.00 10.20 9.40 9.70
Movie Channel Rate 7.50 7.40 9.25 8.95 8.95
Disney Rate 7.50 7.20 7.50 7.50 8.30
Service Contract
Rate 2.60 3.05 2.85 2.80 3.00
</TABLE>
Operating expenses totaled $1,286,933 for the year ended December 31,
1997, representing an increase of approximately 20% over 1996. The increase is
primarily attributable to a full period inclusion of the Vidalia and
Sandersville systems as well as increased salary and benefit costs. Salary and
benefit costs are the major component of operating expenses. Employee wages are
reviewed annually, and in most cases, increased based on cost of living
adjustments and other factors. Therefore, management expects the trend of
increases in operating expenses to continue.
General and administrative expenses totaled $3,284,191 for the year
ended December 31, 1997, representing an increase of approximately 20% over
1996. This is mainly due to the acquisition of the Vidalia and Sandersville
systems, increases in salary and benefit costs, and increases in revenue based
expenses, such as franchise fees and management fees. Significant administrative
expenses are based on Partnership revenues (franchise fees, copyright fees and
management fees). Therefore, as the Partnership's revenues increase, the trend
of increased administrative expenses is expected to continue.
Programming expenses totaled $3,437,344 for the year ended December 31,
1997, representing an increase of approximately 25% over 1996. This is due to
the acquisition of the Vidalia and Sandersville systems, increases in costs
charged by various program suppliers, as well as the addition of new channels.
Programming expenses mainly consist of payments made to suppliers of various
cable programming services. As these costs are based on the number of
subscribers served, future subscriber increases will cause the trend of
programming expense increases to continue. Moreover, rate increases from program
suppliers, as well as fees due to the launch of additional channels, will
contribute to the trend of increased programming costs.
Depreciation and amortization expense increased 10% over the prior year
due to the acquisition of the Vidalia and Sandersville systems. In addition,
certain assets became fully depreciated during the year and were offset by fixed
asset purchases.
<PAGE> 14
Interest expense for the year ended December 31, 1997 increased
approximately 25% as compared to 1996. The Partnership's average bank debt
balance increased from approximately $23,628,190 during 1996 to $36,371,800
during 1997 mainly due to borrowings to finance the Toccoa and Royston
acquisitions. The Partnership's effective interest rate during 1997 was
approximately 8.75% as compared to a rate of approximately 8.32% during 1996.
The operating losses incurred by the Partnership are historically a
result of significant non-cash charges to income for depreciation and
amortization. Prior to the deduction for these non-cash items, the Partnership
has generated positive operating income, which has increased in each year in the
three year period ending December 31, 1997. Management anticipates that this
trend will continue, and that the Partnership will continue to generate net
operating losses after depreciation and amortization until a majority of the
Partnership's assets are fully depreciated.
1996 AND 1995
Total revenue reached $11,310,000 for the year ended December 31, 1996,
representing an increase of approximately 33% over 1995. This is mainly due to
the acquisition of the Vidalia and Sandersville systems during 1996 and rate
increases placed into effect August 1996. Of the 1996 revenue, $8,096,959 (72%)
is derived from subscriptions to basic service, $1,020,948 (9%) from
subscriptions to premium services, $774,441 (6%) from subscriptions to tier
services, $288,040 (3%) from installation charges, $287,585 (3%) from service
maintenance revenue and $842,026 (7%) from other sources.
Operating expenses totaled $1,068,153 for the year ended December 31,
1996, representing an increase of approximately 31% over 1995. The increase is
primarily attributable to the acquisition of the Vidalia and Sandersville
systems as well as increased salary and benefit costs. Salary and benefit costs
are the major component of operating expenses. Employee wages are reviewed
annually, and in most cases, increased based on cost of living adjustments and
other factors. Therefore, management expects the trend of increases in operating
expenses to continue.
General and administrative expenses totaled $2,733,645 for the year
ended December 31, 1996, representing an increase of approximately 34% over
1995. This is mainly due to the acquisition of the Vidalia and Sandersville
systems, increases in salary and benefit costs, and increases in revenue based
expenses, such as franchise fees and management fees. Significant administrative
expenses are based on Partnership revenues (franchise fees, copyright fees and
management fees). Therefore, as the Partnership's revenues increase, the trend
of increased administrative expenses is expected to continue.
Programming expenses totaled $2,748,609 for the year ended December 31,
1996, representing an increase of approximately 41% over 1995. This is due to
the acquisition of the Vidalia and Sandersville systems, increases in costs
charged by various program suppliers, as well as the addition of new channels.
Programming expenses mainly consist of payments made to suppliers of various
cable programming services. As these costs are based on the number of
subscribers served, future subscriber increases will cause the trend of
programming expense increases to continue. Moreover, rate increases from program
suppliers, as well as fees due to the launch of additional channels, will
contribute to the trend of increased programming costs.
Depreciation and amortization expense increased 32% over the prior year
due to the acquisition of the Vidalia and Sandersville systems. In addition,
certain assets became fully depreciated during the year and were offset by fixed
asset purchases.
Interest expense for the year ended December 31, 1996 increased
approximately 73% as compared to 1995. The Partnership's average bank debt
balance increased from approximately $16,794,605 during 1995 to $23,628,190
during 1996 mainly due to borrowings to finance the Vidalia and Sandersville
acquisitions. The Partnership's effective interest rate during 1996 was
approximately 8.32% as compared to a rate of approximately 7.35% during 1995.
EFFECTS OF REGULATION
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Act"). The 1992 Act and
subsequent revisions and rulemakings substantially re-regulated the cable
television industry. The regulatory aspects of the 1992 Act included giving the
local franchising authorities and the FCC the ability to regulate rates for
basic services, equipment charges and additional CPST's when certain conditions
<PAGE> 15
were met. All of the Partnership's cable systems were potentially subject to
rate regulation. The most significant impact of rate regulation was the
inability to raise rates for regulated services as costs of operation rose
during an FCC imposed rate freeze from April 5, 1993 to May 15, 1994.
On February 8, 1996, the Communications Act of 1996 (the "1996 Act")
became law. The 1996 Act will eliminate all rate regulation on CPST's of small
cable systems, defined by the 1996 Act as systems serving fewer 50,000
subscribers owned by operators serving fewer than 1% of all subscribers in the
United States (approximately 600,000 subscribers). All of the Partnership's
cable systems qualify as small cable systems. Many of the changes called for by
the 1996 Act will not take effect until the FCC issues new regulations, a
process that could take from several months to a few years depending on the
complexity of the required changes and the statutory time limits. Because of
this, the full impact of the 1996 Act on the Partnership's operations cannot be
determined at this time.
As of the date of this filing, the Partnership has received notification
that local franchising authorities with jurisdiction over approximately 28% of
total subscribers have elected to certify and no formal requests for rate
justifications have been received from franchise authorities. Based on
Management's analysis, the basic service tier rates charged by these systems are
within the maximum rates allowed under FCC rate regulations.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Partnership's primary source of liquidity was cash flow
from operations and credit available under the bank loan facility. The
Partnership generates cash on a monthly basis through the monthly billing of
subscribers for cable services. Losses from uncollectible accounts have not been
material. During 1997, cash generated from monthly billings was sufficient to
meet the Partnership's needs for working capital, capital expenditures
(excluding acquisitions) and debt service. Management's projections for 1998
indicate that the cash generated from monthly subscriber billings is sufficient
to meet the Partnership's working capital needs, as well as the debt service
obligations of its bank loan.
On December 1, 1997, the Partnership amended its term loan agreement
increasing its overall credit limit to $45,000,000 to finance the acquisition of
the Toccoa and Royston systems. Terms of the credit agreement provide for a
$37,000,000 term loan payable in graduating quarterly installments beginning
March 31, 1998, and a $8,000,000 revolving credit facility converting to a term
loan on December 1, 2000 with graduating quarterly installments of principal.
Both facilities mature June 30, 2006.
At December 31, 1997, the Partnership's term loan balance was
$41,350,000. As of the date of this filing, interest rates on the credit
facility were as follows: $21,000,000 fixed at 8.885% under the terms of a
self-amortizing interest rate swap agreement with the Partnership's lender
expiring December 29, 2000; $10,000,000 at Libor based rate of 8.625% expiring
June 11, 1998; $6,000,000 at Libor based rate of 8.5625% expiring June 11, 1998;
$4,100,000 at Libor based rate of 8.5625% expiring June 11, 1998. The balance of
$250,000 bears interest at the prime rate plus 1.50% (currently 10.00%). The
above rates include a margin paid to the lender based on overall leverage and
may increase or decrease as the Partnership's overall leverage fluctuates.
At December 31, 1997 ,the Partnership was required under the terms of
its credit agreement to maintain certain financial ratios including a Total Debt
to Annualized Cash Flow Ratio of 5.75 to 1 and an Annualized Cash Flow to Pro
Forma Debt Service Ratio of 1.20 to 1. The Partnership was in compliance with
its required covenants at December 31, 1997.
CAPITAL EXPENDITURES
<PAGE> 16
During 1997, the Partnership incurred approximately $1,500,000 in
capital expenditures. These expenditures included the construction of a new
office building and trapping of the tier service in the Vidalia, GA system; the
purchase of advertising equipment and the launch of a new tier in the
Sandersville, GA system; the start of a fiber backbone in the Camano, WA system;
the continuation of an upgrade of the distribution plant to 450 Mhz in the
Sequim, WA system; as well as line extensions and vehicle replacements in
various systems.
Management estimates that the Partnership will spend approximately
$2,100,000 on capital expenditures during 1998. These expenditures include
distribution plant upgrades, line extensions, channel additions, commercial
insertion equipment and vehicle replacements in various systems.
YEAR 2000 ISSUES
The efficient operation of the Partnership's business is
dependent in part on its computer software programs and operating systems
(collectively, Programs and Systems). These Program and Systems are used in
several key areas of the Partnership's business, including subscriber billing
and collections and financial reporting. The Managing General Partner has
evaluated the Programs and Systems utilized in the conduct of the Partnership's
business for the purpose of identifying year 2000 compliance problems. Failure
to remedy these issues could impact the ability of the Partnership to timely
bill its subscribers for service provided and properly report its financial
condition and results of operations which could have a material impact on its
liquidity and capital resources.
The Programs and Systems utilized in subscriber billing and
collections have been modified to address year 2000 compliance issues. These
modifications are currently in the process of being installed in the
Partnership's various billing sites. The Partnership expects this implementation
to be completed by the end of 1998. The Managing General Partner is currently in
the process of replacing Programs and Systems related to financial reporting
which will resolve year 2000 compliance issues and is expected to be completed
by the end of 1998. The aggregate cost to the Partnership to address year 2000
compliance issues is not expected to be material to its results of operations,
liquidity and capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended
December 31, 1997, 1996 and 1995 are included as a part of this filing (see Item
14(a)(1) below).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The Managing General
Partner of the Partnership is Northland Communications Corporation, a Washington
corporation; 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 56). Mr. Whetzell is the founder of Northland
Communications Corporation and has been President since its inception and a
Director since March 1982. Mr. Whetzell became Chairman of the Board of
Directors in December 1984. He also serves as President and Chairman of the
Board of Northland Telecommunications Corporation and each of its subsidiaries.
He has been involved with the cable television industry for over 23 years and
currently serves as a director on the board of the Cable Telecommunications
Association, a national cable television association. Between March 1979 and
February 1982 he was in charge of the Ernst & Whinney national cable television
consulting services. Mr. Whetzell first became involved in the cable television
industry when he served as the Chief Economist of the Cable Television Bureau of
the Federal Communications Commission (FCC) from May 1974 to February 1979. He
provided economic studies to support the deregulation of cable television both
in federal and state arenas. He participated in the formulation of accounting
standards for the industry and assisted the FCC in negotiating and developing
the pole attachment rate formula for cable television. His undergraduate degree
is in economics from George Washington University, and he has an MBA degree from
New York University.
JOHN E. IVERSON (AGE 61). Mr. Iverson is the Assistant Secretary of
Northland Communications Corporation and has served on the Board of Directors
since December 1984. He also serves on the Board of Directors of Northland
Telecommunications Corporation and each of its subsidiaries. He is currently a
partner in the law firm of Ryan, Swanson & Cleveland, Northland's general
counsel. He is a member of the Washington State Bar Association and American Bar
Association and has been practicing law for more than 35 years. Mr. Iverson is
the past president and a Trustee of the Pacific Northwest Ballet Association.
Mr. Iverson has a Juris Doctor degree from the University of Washington.
RICHARD I. CLARK (AGE 40). Mr. Clark has served as Vice President of
Northland since March 1982. He has served on the Board of Directors of both
Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. He also serves as Vice President and Director of
all subsidiaries of Northland Telecommunications Corporation. Mr. Clark was
elected Treasurer in April 1987, prior to which he served as Secretary from
March 1982. Mr. Clark was an original incorporator of Northland and is
responsible for the administration and investor relations activities of
Northland, including financial planning and corporate development. From 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
<PAGE> 18
maintenance of financial and budget computer programs, and he has prepared
documents for major cable television companies in franchising and budgeting
projects through the application of these programs. In 1979, Mr. Clark graduated
cum laude from Pacific Lutheran University with a Bachelor of Arts degree in
accounting.
JAMES E. HANLON (AGE 64). Since June 1985, Mr. Hanlon has been a
Divisional Vice President for Northland's Tyler, Texas regional office and is
currently responsible for the management of systems serving subscribers in
Texas, Alabama and Mississippi. Prior to his association with Northland, he
served as Chief Executive of M.C.T. Communications, a cable television company,
from 1981 to June 1985. His responsibilities included supervision of the
franchise, construction and operation of a cable television system located near
Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of the CATV Division
of Buford Television, Inc., and from 1973 to 1979, he served as President and
General Manager of Suffolk Cablevision in Suffolk County, New York. Mr. Hanlon
has also served as Vice President and Corporate Controller of International,
Inc. and Division Controller of New York Yankees, Inc. Mr. Hanlon has a Bachelor
of Science degree in Business Administration from St. Johns University.
JAMES A. PENNEY (AGE 43). Mr. Penney is Vice President and General
Counsel for Northland Telecommunications Corporation and each of its
subsidiaries and has served in this role since September 1985. He was elected
Secretary in April 1987. Mr. Penney is responsible for advising all Northland
systems with regard to legal and regulatory matters, and also is involved in the
acquisition and financing of new cable systems. From 1983 until 1985 he was
associated with the law firm of Ryan, Swanson & Cleveland, Northland's general
counsel. Mr. Penney holds a Bachelor of Arts Degree from the University of
Florida and a Juris Doctor from The College of William and Mary, where he was a
member of The William and Mary Law Review.
GARY S. JONES (AGE 40). Mr. Jones is Vice President for Northland. Mr.
Jones joined Northland in March 1986 as Controller and has been Vice President
of Northland Telecommunications Corporation and each of its subsidiaries since
October 1986. Mr. Jones is responsible for cash management, financial reporting
and banking relations for Northland and is involved in the acquisition and
financing of new cable systems. Prior to joining Northland, Mr. Jones was
employed as a Certified Public Accountant with Laventhol & Horwath from 1980 to
1986. Mr. Jones received his Bachelor of Arts degree in Business Administration
with a major in accounting from the University of Washington in 1979.
RICHARD J. DYSTE (AGE 52). Mr. Dyste has served as Vice
President-Technical Services of Northland Telecommunications Corporation and
each of its subsidiaries since April 1987. Mr. Dyste is responsible for planning
and advising all Northland cable systems with regard to technical performance as
well as system upgrades and rebuilds. He is a past president and current member
of the Mount Rainier Chapter of the Society of Cable Television Engineers, Inc.
Mr. Dyste joined Northland in 1986 as an engineer and served as Operations
Consultant to Northland Communications Corporation from August 1986 until April
1987. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is
a graduate of Washington Technology Institute.
H. LEE JOHNSON (AGE 54). Mr. Johnson has served as Divisional Vice
President for Northland's Statesboro, Georgia regional office since March 1994.
He is responsible for the management of systems serving subscribers in Georgia,
Mississippi, North Carolina and South Carolina. Prior to his association with
Northland he served as Regional Manager for Warner Communications, managing four
cable systems in Georgia from 1968 to 1973. Mr. Johnson has
<PAGE> 19
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.
Certain information regarding the officers and directors of FN
Equities Joint Venture is set forth below:
MILES Z. GORDON (AGE 50). 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 47). 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 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 42). 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 General Partner during 1997 as indicated in Note 3 to the Notes
to Financial Statements--December 31, 1997 (see Items 14(a)(1) and 13(a) below).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
------------------ ----------------------- ----------------- ---------------
<S> <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>
<PAGE> 20
Note A: Northland has a 1% interest in the Partnership, which
increases to 20% interest in the Partnership at such time as the limited
partners have received 100% of their aggregate cash contributions plus a
preferred return. The natural person who exercises voting and/or investment
control over these interests is John S. Whetzell.
Note B: FN Equities Joint Venture has no interest (0%) in the
Partnership until such time as the limited partners have received 100% of their
aggregate cash contributions plus a preferred return, 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 Partnership's term loan agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Managing General
Partner receives a management fee equal to 5% of the gross revenues of the
Partnership, not including revenues from any sale or refinancing of the
Partnership's Systems. The Managing General Partner also receives reimbursement
of normal operating and general and administrative expenses incurred on behalf
of the Partnership.
The Partnership has entered into operating management agreements with
affiliates managed by the Managing 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, programming and administrative expenses.
The Partnership has also entered into an operating and management
agreement with NCTV, an affiliate of Northland. Under the terms of this
agreement, the Partnership serves as the exclusive managing agent for one of
NCTV's cable systems, and is reimbursed for certain operating, administrative
and programming costs.
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 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, 1997 for
disclosures regarding transactions with the General Partners and affiliates.
The following schedule summarizes these transactions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Partnership management fees $670,026 $561,780 $421,821
Operating expense reimbursements 722,821 591,262 503,181
Software installation and
billing service fees to NCSC 62,514 96,267 44,606
Programming fees to NCN 199,541 115,432 172,698
Reimbursements to CAC for
services 80,806 57,597 41,668
Reimbursements to affiliates
(net) 87,446 101,549 51,780
</TABLE>
<PAGE> 21
<TABLE>
Amounts due to General Partner
<S> <C> <C> <C>
and affiliates at year end 58,533 94,264 82,363
</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 partner of the law
firm of Ryan, Swanson & Cleveland, which has rendered and is expected to
continue to render legal services to the Managing General Partner and the
Partnership.
(c) INDEBTEDNESS OF MANAGEMENT. None.
<PAGE> 22
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, 1997 and 1996.......................____
Statements of Operations for the years
ended December 31, 1997, 1996 and 1995...........................____
Statements of Changes in Partners' Capital
(Deficit) for the years ended December 31,
1997, 1996 and 1995..............................................____
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995...........................____
Notes to Financial Statements--December 31,
1997.............................................................____
</TABLE>
<TABLE>
<CAPTION>
(2) EXHIBITS:
<S> <C>
4.1 Forms of Amended and Restated Certificate of Agreement of
Limited Partnership(1)
10.1 Brenham Franchise (2)
10.1 Amendment to Brenham Franchise (4)
10.3 Washington County Franchise (2)
10.4 Island County Franchise (Amended) (2)
10.5 Bay City Franchise (2)
10.6 Sweeney Franchise (2)
10.7 West Columbia Franchise (2)
10.8 Wharton Franchise (2)
10.9 Tenneco Development Corp. Franchise (3)
10.10 Sequim Franchise (1)
10.11 Clallam County Franchise (1)
10.12 Credit Agreement with National Westminster Bank USA (1)
10.13 First, Second and Third Amendments to Credit Agreement with
National Westminster Bank USA (3)
</TABLE>
<PAGE> 23
<TABLE>
<S> <C>
10.14 Amended and Restated Management Agreement with Northland
Communications Corporation (3)
10.15 Operating Management Agreement with Northland Cable Television,
Inc. (3)
10.16 Assignment and Transfer Agreement with Northland
Telecommunications Corporation dated May 24, 1989 (4)
10.17 Agreement of Purchase and Sale with Sagebrush Cable Limited
Partnership (5)
10.18 Fourth, Fifth, Sixth and Seventh Amendments to Credit Agreement
with National Westminster Bank USA (6)
10.19 Franchise Agreement with the City of Sequim, WA
effective as of May 6, 1992 (7)
10.20 Franchise Agreement with Clallam County, WA
effective as of May 29, 1992 (7)
10.21 Eighth Amendment to Credit Agreement with National
Westminster Bank USA dated as of May 28, 1992 (7)
10.22 Asset Purchase Agreement between Northland Cable
Properties Seven Limited Partnership (Buyer) and
Country Cable, Inc.
(Seller) (8)
10.23 Amendment to Asset Purchase Agreement between Northland Cable
Properties Seven Limited Partnership and Country Cable, Inc.
dated September 14, 1993 (9)
10.24 Commercial Loan Agreement between Seattle-First National Bank
and Northland Cable Properties Seven Limited Partnership dated
September 24, 1993 (9)
10.25 Franchise Agreement with Island County, WA dated
October 4, 1993 (10)
10.26 Franchise Agreement with Skagit County - Assignment and
Assumption Agreement dated September 27, 1993 (10)
10.27 Franchise Agreement with Whatcom County - Assignment and
Assumption Agreement dated September 27, 1993 (10)
10.28 Amendment to Commercial Loan Agreement dated March 15, 1994 (10)
10.29 Operating and Management Agreement with Northland Cable
Television, Inc. dated November 1, 1994 (11)
10.30 Asset Purchase Agreement between Northland Cable Properties
Seven Limited Partnership and Southland Cablevision, Inc. (12)
10.31 Asset Purchase Agreement between Northland Cable
Properties Seven Limited Partnership and TCI
Cablevision of Georgia, Inc.
(12)
10.32 Commercial Loan Agreement between Northland Cable
Properties Seven Limited Partnership and Seattle
First National Bank dated February 29, 1996 (12)
10.33 Asset purchase agreement between Northland Cable Properties
Seven Limited
Partnership and Robin Media Group, Inc. (13)
10.34 Commercial Loan Agreement between Northland Cable Properties
Seven
Limited Partnership and Seattle First National Bank dated
December 1, 1997. (13)
</TABLE>
<PAGE> 24
------------
(1) Incorporated by reference from the Partnership's Form
S-1 Registration Statement declared effective on August
6, 1987
(2) Incorporated by reference from the partnership's Form
10-K Annual Report for the fiscal year ended December
31, 1987.
(3) Incorporated by reference from the partnership's Form
10-K Annual Report for the year ended December 31, 1988.
(4) Incorporated by reference from the partnership's Form
10-Q Quarterly Report for the period ended June 30,
1989.
(5) Incorporated by reference from the partnership's Form
10-Q Quarterly Report for the period ended September 30,
1989.
(6) Incorporated by reference from the partnership's Form
10-K Annual Report for the fiscal year ended December
31, 1990.
(7) Incorporated by reference from the partnership's Form
10-K Annual Report for the fiscal year ended December
31, 1992.
(8) Incorporated by reference from the partnership's Form
10-Q Quarterly Report for the period ended March 31,
1993
(9) Incorporated by reference from the partnership's Form
8-K dated September 27, 1993 10Incorporated by reference
from the partnership's Form 10-K Annual Report for the
fiscal year ended December 31, 1993.
(11) Incorporated by reference from the partnership's Form
10-K Annual Report for the fiscal year ended December
31, 1993.
(12) Incorporated by reference from the partnership's Form
8-K dated March 1, 1996.
(13) Incorporated by reference from the partnership's Form
8-K dated December 5, 1997.
(b) REPORTS ON FORM 8-K. Form 8-K dated December 5, 1997, was filed
December 19, 1997 reporting the acquisition of the Toccoa and
Royston systems.
<PAGE> 25
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CABLE PROPERTIES SEVEN 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, principal
- ---------------------------- ------------------
John S. Whetzell financial officer, and principal
accounting officer of registrant;
chief executive officer, principal
financial officer and chairman of
the board of directors of Northland
Communications Corporation
/s/ Richard I. Clark Director of Northland Communications
- ---------------------------- ------------------
Richard I. Clark Corporation
/s/ John E. Iverson Director of Northland Communications
- ---------------------------- ------------------
John E. Iverson Corporation
/s/ Gary S. Jones Vice President and principal accounting
- ---------------------------- ------------------
Gary S. Jones officer of Northland Communications
Corporation
</TABLE>
<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 SEVEN LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION
(Managing General Partner)
By 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, principal
- ---------------------------- ------------------
John S. Whetzell financial officer, and principal
accounting officer of registrant;
chief executive officer, principal
financial officer and chairman of
the board of directors of Northland
Communications Corporation
/s/ Richard I. Clark Director of Northland Communications
- ---------------------------- ------------------
Richard I. Clark Corporation
/s/ John E. Iverson Director of Northland Communications
- ---------------------------- ------------------
John E. Iverson Corporation
/s/ Gary S. Jones Vice President and principal accounting
- ---------------------------- ------------------
Gary S. Jones officer of Northland Communications
Corporation
</TABLE>
<PAGE> 27
EXHIBITS INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
<S> <C> <C>
27.0 Financial Data Schedule
</TABLE>
<PAGE> 28
NORTHLAND CABLE PROPERTIES SEVEN LIMITED
PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Seven Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Seven Limited Partnership (a Washington limited partnership) as of December 31,
1997 and 1996, and the related statements of operations, changes in partners'
capital (deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties
Seven Limited Partnership as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN, LLP
------------------------------
Seattle, Washington,
February 13, 1998
<PAGE> 30
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH $ 586,000 $ 648,440
ACCOUNTS RECEIVABLE 794,000 401,225
DUE FROM AFFILIATES 46,380 120,084
PREPAID EXPENSES 83,906 117,533
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 27,199,514 22,438,833
Less- Accumulated depreciation (13,322,455) (11,344,523)
------------ ------------
13,877,059 11,094,310
Franchise agreements (net of accumulated
amortization of $20,358,047 in 1997 and
$17,391,664 in 1996)
19,024,959 14,272,012
Organization costs (net of accumulated
amortization of $1,563,176 in 1997 and
$1,513,205 in 1996)
240,191 179,701
Loan fees and other intangibles (net of
accumulated amortization of $4,734,571 in
1997 and $4,500,411 in 1996)
1,521,497 1,137,778
Goodwill (net of accumulated amortization of
$47,837 in 1997 and $42,263 in 1996)
175,092 180,667
------------ ------------
Total investment in cable television
properties 34,838,798 26,864,468
------------ ------------
Total assets $ 36,349,084 $ 28,151,750
============ ============
LIABILITIES AND PARTNERS' DEFICIT
1997 1996
------------ ------------
LIABILITIES:
Accounts payable and accrued expenses $ 1,419,226 $ 1,278,423
Due to General Partner and affiliates 104,933 214,348
Deposits 30,241 36,511
Subscriber prepayments 650,182 400,483
Notes payable 41,543,600 31,200,000
------------ ------------
Total liabilities 43,748,182 33,129,765
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' DEFICIT:
General partners-
Contributed capital (25,367) (25,367)
Accumulated deficit (261,093) (236,882)
------------ ------------
(286,460) (262,249)
------------ ------------
Limited partners-
Contributed capital, net -
49,656 units 18,735,576 18,735,576
Accumulated deficit (25,848,214) (23,451,342)
------------ ------------
(7,112,638) (4,715,766)
------------ ------------
Total liabilities and partners'
deficit $ 36,349,084 $ 28,151,750
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 31
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
REVENUE $13,573,985 $11,310,000 $ 8,526,053
----------- ----------- -----------
<S> <C> <C> <C>
EXPENSES:
Operating (including $25,164, $(4,499)
and $90,110, net, paid to (received
from) affiliates in 1997, 1996 and 1995,
respectively) 1,286,933 1,068,153 814,106
General and administrative (including
$1,204,259, $1,080,940 and $927,255, net,
paid to affiliates in 1997, 1996 and 1995,
respectively) 3,284,191 2,733,645 2,035,931
Programming (including $299,980, $218,206 and
$187,872, net, paid to affiliates in 1997,
1996 and 1995, respectively)
3,437,344 2,748,609 1,952,044
Depreciation and amortization 5,314,894 4,847,506 3,683,892
----------- ----------- -----------
13,323,362 11,397,913 8,485,973
----------- ----------- -----------
Operating income (loss) 250,623 (87,913) 40,080
OTHER INCOME (EXPENSE):
Other income 13,851 - -
Interest income 4,894 19,560 7,394
Interest expense (2,675,965) (2,137,386) (1,235,164)
Loss on disposal of assets (14,486) (10,146) (17,626)
----------- ----------- -----------
Net loss $(2,421,083) $(2,215,885) $(1,205,316)
=========== =========== ===========
ALLOCATION OF NET LOSS:
General partners $ (24,211) $ (22,159) $ (12,053)
=========== =========== ===========
Limited partners $(2,396,872) $(2,193,726) $(1,193,263)
=========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (48) $ (44) $ (24)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 32
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------- ----------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1994 $(221,764) $ (689,702) $ (911,466)
Cash distributions ($10 per limited partnership
unit) (5,019) (496,895) (501,914)
Repurchase of limited partnership units - (10,000) (10,000)
Net loss (12,053) (1,193,263) (1,205,316)
--------- ----------- -----------
BALANCE, December 31, 1995 (238,836) (2,389,860) (2,628,696)
Cash distributions ($2.50 per limited partnership
unit) (1,254) (124,180) (125,434)
Repurchase of limited partnership units - (8,000) (8,000)
Net loss (22,159) (2,193,726) (2,215,885)
--------- ----------- -----------
BALANCE, December 31, 1996 (262,249) (4,715,766) (4,978,015)
Net loss (24,211) (2,396,872) (2,421,083)
--------- ----------- -----------
BALANCE, December 31, 1997 $(286,460) $(7,112,638) $(7,399,098)
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 33
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,421,083) $ (2,215,885) $(1,205,316)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization expense 5,314,894 4,847,506 3,683,892
Loss on disposal of assets 14,486 10,146 17,626
(Increase) decrease in operating assets:
Accounts receivable (392,775) (173,976) (31,744)
Prepaid expenses 33,627 (56,392) (12,565)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 140,803 545,327 164,493
Due to General Partner and affiliates (35,711) 11,901 41,976
Deposits (6,270) (5,282) (11,492)
Subscriber prepayments 249,699 164,451 (25,589)
------------ ------------ -----------
Net cash provided by operating activities 2,897,670 3,127,796 2,621,281
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable system (11,360,000) (15,834,960) -
Purchase of property and equipment (1,462,011) (1,153,862) (577,646)
Purchase of other intangibles (194,936) (177,349) -
Proceeds from sale of fixed assets 9,150 - -
------------ ------------ -----------
Net cash used in investing activities (13,007,797) (17,166,171) (577,646)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 12,063,600 15,943,619 -
Principal payments on notes payable (1,720,000) (800,000) (1,480,937)
Loan fees and other (295,913) (633,107) (4,098)
Distributions to partners - (125,434) (501,914)
Repurchase of limited partnership units - (8,000) (10,000)
------------ ------------ -----------
Net cash provided by (used in) financing activities 10,047,687 14,377,078 (1,996,949)
------------ ------------ -----------
(DECREASE) INCREASE IN CASH (62,440) 338,703 46,686
CASH, beginning of year 648,440 309,737 263,051
------------ ------------ -----------
CASH, end of year $ 586,000 $ 648,440 $ 309,737
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 2,737,844 $ 2,086,230 $ 1,142,324
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 34
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Seven Limited Partnership (the Partnership), a
Washington limited partnership, was formed on April 17, 1987. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on September 1, 1987, by acquiring a cable
television system in Brenham, Texas. Additional acquisitions include systems
serving seven cities and three unincorporated counties in southeast Texas; a
system serving Camano Island, Washington; two systems serving certain
unincorporated portions of Clallam County, Washington; a system serving certain
portions of Skagit and Whatcom counties, Washington; two systems serving four
cities in or around Vidalia, Georgia; and a system serving two cities in or
around Sandersville, Georgia. In December 1997, the Partnership acquired cable
television systems serving several communities in and around Toccoa and Royston,
Georgia. The Partnership has 26 nonexclusive franchises to operate the cable
systems for periods which will expire at various dates through 2024.
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.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' capital (deficit). No limited partner is
obligated to make any additional contribution to partnership capital.
The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to partnership capital.
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate of
the Administrative General Partner and other offering costs are recorded as a
reduction of limited partners' capital. The Administrative General Partner
received a fee for providing certain administrative services to the Partnership.
<PAGE> 35
-2-
Organization Costs
Organization costs originally included reimbursements of approximately $35,000
to the General Partner for costs incurred on the Partnership's behalf and fees
of $1,618,045 as compensation for selecting and arranging the purchase of the
cable television systems.
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 future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized.
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocates the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to noncompetition agreements and other intangibles and
franchise agreements; then, any excess was allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, organization costs, loan fees and other
intangibles and goodwill are being amortized using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Franchise agreements 9-25 years
Organization costs 5 years
Loan fees and other intangibles 1-9 years
Goodwill 40 years
</TABLE>
Revenue Recognition
Cable television service revenue is recognized in the month service is provided
to customers. Advance payments on cable services to be rendered are recorded as
subscriber prepayments. Revenues resulting from the sale of local spot
advertising are recognized when the related advertisements or commercials appear
before the public. Local spot advertising revenues earned were $532,801,
$483,649 and $370,493, respectively, in 1997, 1996 and 1995.
<PAGE> 36
-3-
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. The Partnership deals only
with highly rated counterparties, and usually only 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.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to conform prior years' financial
statements with the current year presentation.
3. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner receives a fee for managing the Partnership equal to 5% of
the gross revenues of the Partnership, excluding revenues from the sale of cable
television systems or franchises. The amount of management fees charged by the
General Partner was $670,026, $561,780 and $421,821 for 1997, 1996 and 1995,
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 as defined in the limited partnership agreement. Thereafter, the
general partners receive 25% and the limited partners are allocated 75% of
partnership income and losses. Cash distributions from operations will be
allocated in accordance with the
<PAGE> 37
-4-
net income and net loss percentages then in effect. Prior to the General
Partner's receiving cash distributions from operations for any year, the limited
partners must receive cash distributions in an amount equal to the lesser of i)
50% of the limited partners' allocable share of net income for such year or ii)
the federal income tax payable on the limited partners' allocable share of net
income using the then highest marginal federal income tax rate applicable to
such net income. Any distributions other than from cash flow, such as from the
sale or refinancing of a system or upon dissolution of the Partnership, will be
determined according to contractual stipulations in the Partnership Agreement.
The limited partners' total initial contributions to capital were $24,893,000
($500 per partnership unit). As of December 31, 1997, $3,108,554 ($52.50 per
partnership unit) had been distributed to the limited partners and the
Partnership has repurchased $65,000 of limited partnership units ($500 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 $722,821, $591,262 and $503,181 for 1997, 1996
and 1995, respectively.
In 1997, 1996 and 1995, the Partnership was charged software installation
charges and maintenance fees for billing system support provided by an
affiliate, amounting to $62,514, $96,267 and $44,606, 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, programming
and administrative expenses. The Partnership received $87,446, $101,549 and
$51,780, net, under the terms of these agreements during 1997, 1996 and 1995,
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 charged by NCN
during 1997, 1996 and 1995 were $199,541, $115,432 and $172,698, 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 $80,806, $57,597 and $41,668 in 1997,
1996 and 1995, respectively, for these services.
<PAGE> 38
-5-
Due from/to General Partner and Affiliates
The receivable from the General Partner and affiliates consists of the
following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Management fees $ 5,250 $ -
Reimbursable operating costs 37,507 66,613
Other 3,623 53,471
-------- --------
$46,380 $120,084
======== ========
</TABLE>
The payable to the General Partner and affiliates consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Management fees $ - $107,335
Reimbursable operating costs 100,197 63,533
Other 4,736 43,480
-------- --------
$104,933 $214,348
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land and buildings $ 685,788 $ 399,746
Distribution plant 24,810,149 20,610,596
Other equipment 1,683,833 1,387,748
Leasehold improvements 19,744 14,389
Construction in progress - 26,354
----------- -----------
27,199,514 22,438,833
=========== ===========
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Programmer license fees $ 517,208 $ 347,367
Accrued franchise fees 271,829 211,939
Other 630,189 719,117
---------- ----------
$1,419,226 $1,278,423
========== ==========
</TABLE>
<PAGE> 39
-6-
6. NOTES PAYABLE:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revolving credit and term loan, collateralized by a first lien position on all
present and future assets of the Partnership. Interest rates vary based on
certain financial covenants; currently 8.75% (weighted average). Graduated
principal payments plus interest are due quarterly until maturity on June 30,
2006. The revolving credit facility allows for borrowings not to exceed
$8,000,000 until it converts to a term loan on December 1, 2000. At December
31, 1997, the Partnership had $3,650,000 available on its revolving credit
facility. $41,350,000 $31,200,000
Term loan, secured by parcel of land purchased with proceeds. Interest accrues
at 9.25%. Principal and interest payments are due quarterly until maturity on
January 14, 2003. 193,600 -
----------- -----------
$41,543,600 $31,200,000
=========== ===========
</TABLE>
Annual maturities of the notes payable after December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998 $ 504,632
1999 1,256,699
2000 2,007,350
2001 3,258,064
2002 4,608,847
Thereafter 29,908,008
-----------
$41,543,600
===========
</TABLE>
Under the term loan agreement, the Partnership has agreed to restrictive
covenants which require the maintenance of certain ratios, including an
Annualized Cash Flow to Pro Forma Debt Service Ratio of 1.20 to 1 and a Total
Debt to Annualized Cash Flow Ratio of 5.75 to 1, among other restrictions. The
General Partner submits quarterly debt compliance reports to the Partnership's
creditor under this agreement.
<PAGE> 40
-7-
The Partnership has entered into interest rate swap agreements to reduce the
impact of changes in interest rates. Interest rate swap transactions generally
involve the exchange of fixed and floating interest payment obligations without
the exchange of underlying principal amounts. At December 31, 1997, the
Partnership had outstanding one interest rate swap agreement with its bank,
having a notional principal amount of $21,000,000. This agreement effectively
changes the Partnership's interest rate exposure to a fixed rate of 6.26%, plus
an applicable margin based on certain financial covenants (the margin at
December 31, 1997 was 2.625%).
At December 31, 1997, the Partnership would have been required to pay
approximately $177,403 to settle this agreement based on fair value estimate
received from financial institutions.
7. INCOME TAXES:
Income taxes have not been recorded in the accompanying financial statements
because they are obligations of the partners. The federal and state income tax
returns of the Partnership are prepared and filed by the General Partner.
The tax returns, the qualification of the Partnership as such for tax purposes,
and the amount of distributable partnership income or loss are subject to
examination by federal and state taxing authorities. If such examinations result
in changes with respect to the Partnership's qualification or in changes with
respect to the income or loss, the tax liability of the partners would likely be
changed accordingly.
Taxable income to the limited partners was approximately $0, $124,180 and
$497,000 for the three years in the period ended December 31, 1997, and is
different from that reported in the statement of operations principally due to
the difference in depreciation expense allowed for tax purposes and that amount
recognized under generally accepted accounting principles. There were no other
significant differences between taxable income and the net loss 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 deductions
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.
<PAGE> 41
-8-
In addition, the current tax law does not allow a taxpayer to use losses from a
business activity in which he does not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset other
income such as salary, active business income, dividends, interest, royalties
and capital gains. However, such losses can be used to offset other income from
passive activities. Disallowed losses can be carried forward indefinitely to
offset future income from passive activities. Disallowed losses can be used in
full when the taxpayer recognizes gain or loss upon the disposition of his
entire interest in the passive activity.
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 amounts to $244,278, $175,429 and $145,062 in 1997, 1996
and 1995, respectively. Minimum lease payments through the end of the lease
terms are as follows:
<TABLE>
<S> <C>
1998 $ 46,480
1999 24,320
2000 19,134
2001 9,704
2002 8,204
Thereafter 26,595
--------
$134,437
========
</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). 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.
<PAGE> 42
-9-
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.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public Educational and Governmental and leased
access channels.
Self-Insurance
The Partnership began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, the Partnership began making quarterly contributions into an
insurance fund maintained by an affiliate which covers all Northland entities
and would defray a portion of any loss should the Partnership be faced with a
significant uninsured loss. To the extent the Partnership's losses exceed the
fund's balance, the Partnership would absorb any such loss. If the Partnership
were to sustain a material uninsured loss, such reserves could be insufficient
to fully fund such a loss. The resulting reduction in cash flow caused by
interrupted service, together with the capital cost of replacing such equipment
and physical plant, could have a material adverse effect on the Partnership, its
financial condition, prospects and debt service ability.
Amounts paid to the affiliate, which maintains the fund for the Partnership and
its affiliates, are expensed as incurred and are included in the statements of
operations. To the extent a loss has been incurred related to risks that are
self-insured, the Partnership records an expense and an associated liability for
the amount of the loss, net of any amounts to be drawn from the fund. For 1997,
the Partnership made payments of $19,321 to the fund. As of December 31, 1997,
the fund had a balance of $129,700.
9. CABLE TELEVISION ACQUISITIONS:
On March 1, 1996, the Partnership acquired substantially all of the operating
assets and franchise rights of two cable systems serving approximately 6,500
basic subscribers in or around the communities of Vidalia, Higgston, Lyons,
Santa Claus and certain unincorporated areas of Montgomery County and Toombs
County, all in the state of Georgia (the Vidalia system). The purchase price of
the first system, owned by the Southland Cablevision, Inc. (Southland) and
representing approximately 2,700 basic subscribers, was $3,710,000. Of this
total, Southland received $3,410,000 at the closing date with the balance of
$300,000, net of certain purchase price adjustments, paid during September 1996.
The purchase price of the second system, owned by TCI Cablevision of Georgia,
Inc. and representing approximately 3,800 basic subscribers was $6,537,179. Of
this total, $6,210,804 was paid on the closing date with the balance of
$326,375, net of certain purchase price adjustments, paid during May 1996.
<PAGE> 43
-10-
On September 13, 1996, the Partnership acquired substantially all of the
operating assets and franchise rights of the cable television systems serving
approximately 3,300 basic subscribers in or around the communities of
Sandersville, Tennille and nearby unincorporated areas of Washington County, all
in the state of Georgia (the Sandersville system), for a total purchase price of
$5,608,367. The system was owned by TCI Cablevision of Georgia, Inc. Of the
total purchase price, $5,328,497 was paid on the closing date. The balance of
$279,870 was deposited into an escrow account, and was paid once agreement was
reached regarding certain purchase price adjustments.
On December 5, 1997, the Partnership acquired substantially all operating assets
and franchise rights of the cable television systems serving approximately 7,420
basic subscribers in or around the communities of Toccoa, Royston and certain
unincorporated areas of Stephens, Franklin and Hart counties, all in the state
of Georgia from Robin Media Group, Inc. The systems were acquired at a purchase
price of $11,360,000 adjusted at closing for the proration of certain revenues
and expenses. Of the total $11,360,000 purchase price the Seller received
$11,305,000 on December 5, 1997. Under the terms of the purchase agreement the
remaining balance of $55,000 will be held in escrow for a period of six months
to be offset by any remaining post-closing adjustments.
Pro forma operating results of the Partnership for December 31, 1997 and 1996,
assuming the acquisitions of the Vidalia, Sandersville, Toccoa and Royston
systems had been made at the beginning of 1996, follow:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $16,063,153 $14,778,631
=========== ===========
Net loss $(3,456,028) $(4,757,351)
=========== ===========
Net loss per limited partnership
unit $ (70) $ (95)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 586,000
<SECURITIES> 0
<RECEIVABLES> 794,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 27,199,514
<DEPRECIATION> 13,322,455
<TOTAL-ASSETS> 36,349,084
<CURRENT-LIABILITIES> 43,748,182
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (7,399,098)
<TOTAL-LIABILITY-AND-EQUITY> 36,349,084
<SALES> 13,573,985
<TOTAL-REVENUES> 13,573,985
<CGS> 0
<TOTAL-COSTS> 13,323,362
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,675,965
<INCOME-PRETAX> (2,421,183)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,421,083)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
