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FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-29354, eff. 7-1-91)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the transition period from _______ to ________
Commission file number 0-18307
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
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(Exact name of registrant as specified in its charter)
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STATE OF WASHINGTON 91-1423516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
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(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (206) 621-1351
Securities registered pursuant to Section 12(b) of the Act:
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Title of each reviewed class Name of each exchange on which registered
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(NONE) (NONE)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
-------------------------------------
(Partially Incorporated into Part IV)
(1) Form S-1 Registration Statement declared effective on March 16, 1989
(No. 33-25892).
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(2) Form 10-K Annual Reports for fiscal years ended December 31, 1989,
December 31, 1990, December 31, 1992 and December 31, 1994, respectively.
(3) Form 10-Q Quarterly Report for period ended June 30, 1989 and March 31,
1995.
(4) Form 8-K dated November 11, 1994.
(5) Form 8-K date January 5, 1996.
This filing contains _______ pages. Exhibits Index appears on page ______.
Financial Statements/Schedules Index appears on page ______.
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Cautionary statement for purposes of the "Safe Harbor" provisions of the Private
Litigation Reform Act of 1995. Statements contained or incorporated by reference
in this document that are not based on historical fact are "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
Forward-looking statements may be identified by use of forward-looking
terminology such as "believe", "intends", "may", "will", "expect", "estimate",
"anticipate", "continue", or similar terms, variations of those terms or the
negative of those terms.
PART I
ITEM 1. BUSINESS
Northland Cable Properties Eight Limited Partnership (the "Partnership") is a
Washington limited partnership consisting of one general partner and
approximately 975 limited partners as of December 31, 1998. Northland
Communications Corporation, a Washington corporation, is the Managing General
Partner of the Partnership (referred to herein as "Northland" or the "Managing
General Partner").
Northland was formed in March 1981 and is principally involved in the
ownership and management of cable television systems. Northland currently
manages the operations and is the general partner for cable television systems
owned by 4 limited partnerships. Northland is also the parent company of
Northland Cable Properties, Inc. which was formed in February 1995 and is
principally involved in direct ownership of cable television systems and is the
sole member and manager of Northland Cable Ventures, LLC. Northland is a
subsidiary of Northland Telecommunications Corporation ("NTC"). Other
subsidiaries, direct and indirect, of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and principally
involved in the direct ownership of cable television systems. Sole shareholder
of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally involved in
the production and development of local news, sports and informational
programming.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and principally
involved in the development and production of computer software used in billing
and financial recordkeeping for Northland-affiliated cable systems. Sole
shareholder of Cable Ad-Concepts, Inc.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally involved in
the sale, development and production of video commercial advertisements that
are cablecast on Northland-affiliated cable systems.
NORTHLAND MEDIA, INC. - formed in April 1995 as a holding company. Sole
shareholder of the following two entities:
STATESBORO MEDIA, INC. - formed in April 1995 and principally involved in
operating an AM radio station serving the community of Statesboro, Georgia
and surrounding areas.
CORSICANA MEDIA, INC. - purchased in September 1998 from an affiliate and
principally involved in operating an AM radio station serving the community
of Corsicana, Texas and surrounding areas.
The Partnership was formed on September 21, 1988 and began operations in 1989
with the acquisition of a cable television system serving various communities
and contiguous areas surrounding the Santiam Valley, Oregon (the "Santiam
System"). In May 1989, the Partnership acquired the cable television systems
serving the communities and surrounding areas of LaConner, Washington (the
"LaConner System") and the cable television systems serving the community of and
contiguous areas surrounding Elko County and Carlin, Nevada (the "Elko System").
In April 1991, the Partnership sold the systems located in Elko County and
Carlin, Nevada. In November 1994, the Partnership purchased a cable television
system serving Aliceville, Alabama and several surrounding communities (the
"Aliceville System"). In June 1995, the Partnership sold the Santiam System. In
January 1996, the Partnership purchased a cable television system serving
Swainsboro, Georgia (the "Swainsboro System"). As of December 31, 1998, the
total number of basic subscribers served by the Systems was 12,158, and the
Partnership's penetration rate (basic subscribers as a percentage of homes
passed) was approximately 81%. The Partnership's properties are located in rural
areas which, to some extent, do
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not offer consistently acceptable off-air network signals. This factor, combined
with the existence of fewer entertainment alternatives than in large markets
contributes to a larger proportion of the population subscribing to cable
television (higher penetration).
The Partnership has 17 non-exclusive franchises to operate the Systems. These
franchises, which will expire at various dates through the year 2019 (with one
franchise extending to 2044), have been granted by local and county authorities
in the areas in which the Systems operate. Annual franchise fees are paid to the
granting authorities. These fees vary between 2% and 5% and are generally based
on the respective gross revenues of the Systems in a particular community. The
franchises may be terminated for failure to comply with their respective
conditions.
The Partnership serves the communities and surrounding areas of LaConner,
Washington, Aliceville, Alabama and Swainsboro, Georgia. The following is a
description of these areas:
LaConner, WA: The LaConner system serves communities within three counties in
northwestern Washington along Puget Sound. LaConner was predominately a fishing
and farming community when founded in the late 1800's and temporarily became a
major trading port. Today, LaConner has become a popular tourist area, with
surrounding landscapes of pastoral farms and tulip fields. Its main street,
featuring wooden decks and courtyards, runs along the Swinomish slough. The
Swinomish Indian Reservation is located on the outskirts of LaConner. Certain
information regarding the LaConner, WA System as of December 31, 1998 is as
follows:
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Basic Subscribers 2,135
Tier Subscribers 1,165
Premium Subscribers 511
Estimated Homes Passed 2,745
</TABLE>
Aliceville, AL: The Aliceville system serves the communities in west central
Alabama. The communities, located south and west of Tuscaloosa, include
Aliceville, Carrollton, Pickensville, Reform, Gordo, Millport, Kennedy, Eutaw
and Marion. Certain information regarding the Aliceville, AL system as of
December 31, 1998 is as follows:
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Basic Subscribers 6,877
Premium Subscribers 2,583
Estimated Homes Passed 8,420
</TABLE>
Swainsboro, GA: The Swainsboro system serves the incorporated community of
Swainsboro and nearby unincorporated areas of Emanuel County, Georgia.
Swainsboro is predominantly an agricultural community located in central
Georgia, as well as the county seat for Emanuel County. Certain information
regarding the Swainsboro, GA system as of December 31, 1998 is as follows:
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Basic Subscribers 3,146
Tier Subscribers 749
Premium Subscribers 1,894
Estimated Homes Passed 3,900
</TABLE>
The Partnership had 18 employees as of December 31, 1998. Management of these
systems is handled through offices located in the towns of LaConner, Washington,
Aliceville, Alabama and Swainsboro, Georgia. Pursuant to the Agreement of
Limited Partnership, the Partnership reimburses the General Partner for time
spent by the General Partner's accounting staff on Partnership accounting and
bookkeeping matters. (See Item 13(a) below.)
The Partnership's cable television business is not considered seasonal. The
business of the Partnership is not dependent upon a single customer or a few
customers, the loss of any one or more of which would have a material adverse
effect on its business. No customer accounts for 10% or more of revenues. No
material portion of the Partnership's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of any
governmental unit, except that franchise agreements may be terminated or
modified by the franchising authorities as noted above. During the last year,
the Partnership did not engage in any research and development activities.
Partnership revenues are derived primarily from monthly payments received
from cable television subscribers. Subscribers are divided into three
categories: basic subscribers, tier subscribers and premium subscribers. "Basic
subscribers" are households that subscribe to the basic level of service, which
generally provides access to the three major television networks (ABC, NBC and
CBS), a few independent local stations, PBS (the Public Broadcasting System) and
certain satellite programming services, such as ESPN,
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CNN or The Discovery Channel. "Tier subscribers" are households that subscribe
to an additional level of certain satellite programming services the content of
which varies from system to system. "Premium subscribers" are households that
subscribe to one or more "pay channels" in addition to the basic service. These
pay channels include such services as "Showtime", "Home Box Office", "Cinemax",
"Disney" or "The Movie Channel".
COMPETITION
Cable Television systems currently experience competition from several
sources.
BROADCAST TELEVISION
Cable television systems have traditionally competed with broadcast
television, which consists of television signals that the viewer is able to
receive directly on his television without charge using an "off-air" antenna.
The extent of such competition is dependent in part upon the quality and
quantity of signals available by such antenna reception as compared to the
services provided by the local cable system. Accordingly, it has generally been
less difficult for cable operators to obtain higher penetration rates in rural
areas where signals available off-air are limited, than in metropolitan areas
where numerous, high quality off-air signals are often available without the aid
of cable television systems.
OVERBUILDS
Cable television franchises are not exclusive, so that more than one cable
television system may be built in the same area (known as an "overbuild"), with
potential loss of revenues to the operator of the original cable television
system. Constructing and developing a cable television system is a capital
intensive process, and it is often difficult for a new cable system operator to
create a marketing edge over the existing system. Generally, an overbuilder
would be required to obtain franchises from the local governmental authorities,
although in some instances, the overbuilder could be the local government
itself. In any case, an overbuilder would be required to obtain programming
contracts from entertainment programmers and, in most cases, would have to build
a complete cable system, including headends, trunk lines and drops to individual
subscribers homes, throughout the franchise areas.
Federal cross-ownership restrictions historically limited entry by local
telephone companies into the cable television business. The 1996 Telecom Act
eliminated this cross-ownership restriction, making it possible for companies
with considerable resources to overbuild existing cable operators and enter the
business (for a more extensive discussion of The Act, see Regulation and
Legislation). Several telephone companies have begun seeking cable television
franchises from local governmental authorities and constructing cable television
systems. The Partnership cannot predict at this time the extent of telephone
company competition that will emerge in areas served by the Partnership's cable
television systems. The entry of telephone companies as direct competitors,
however, is likely to continue over the next several years and could adversely
affect the profitability and market value of the Partnership's systems. The
entry of electric utility companies into the cable television business, as now
authorized by the 1996 Telecom Act, could have a similar adverse effect.
DBS
High powered direct-to-home satellites have made possible the wide-scale
delivery of programming to individuals throughout the United States using small
roof-top or wall-mounted antennas. Several companies began offering direct
broadcast satellite ("DBS") service over the last few years and recently
announced mergers should strengthen the surviving companies. Companies offering
DBS service use video compression technology to increase channel capacity of
their systems to 100 or more channels and to provide packages of movies,
satellite networks and other program services which are competitive to those of
cable television systems. DBS faces technical and legal obstacles to offering
its customers popular local broadcast programming. At least one DBS provider,
however, is now attempting to do so, and the FCC and Congress are considering
proposals that would enhance the ability of DBS companies to provide popular
broadcast programming, including broadcast network programming. In addition to
emerging high-powered DBS competition, cable television systems face competition
from several low-powered providers, whose service requires use of much larger
home satellite dishes. The ability of DBS service providers to compete
successfully with the cable television industry will depend on, among other
factors, the availability of equipment at reasonable prices and the relative
attractiveness of the programming options offered by the cable television
industry and DBS competitors.
PRIVATE CABLE
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Additional competition is provided by private cable television systems,
known as Satellite Master Antenna Television ("SMATV"), serving multi-unit
dwellings such as condominiums, apartment complexes, and private residential
communities. These private cable systems may enter into exclusive agreements
with apartment owners and homeowners associations, which may preclude operators
of franchised systems from serving residents of such private complexes. Private
cable requirements, that do not cross public rights of way are free from the
federal, state and local regulatory requirements imposed on franchised cable
television operators.
MMDS
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service ("MMDS") systems,
commonly called wireless cable, which are licensed to serve specific areas. MMDS
uses low-power microwave frequencies to transmit television programming
over-the-air to paying subscribers. The MMDS industry is less capital intensive
than the cable television industry, and it is therefore more practical to
construct MMDS systems in areas of lower subscriber penetration.
Cable television systems are also in competition in various degrees with
other communications and entertainment media, including motion pictures, home
video cassette recorders, internet data delivery and internet video delivery.
REGULATION AND LEGISLATION
The operation of cable television systems is extensively regulated by the
FCC, some state governments and most local governments. The Telecommunications
Act of 1996 ("1996 Telecom Act") alters the regulatory structure governing the
nation's telecommunications providers. It removes barriers to competition in
both the cable television market and the local telephone market. Among other
things, it also reduces the scope of cable rate regulation.
The 1996 Telecom Act requires the FCC to undertake a host of implementing
rulemakings, the final outcome of which cannot yet be determined. Moreover,
Congress and the FCC have frequently revisited the subject of cable regulation.
Future legislative and regulatory changes could adversely affect the
Partnership's operations, and there have been recent calls to maintain or even
tighten cable regulation in the absence of widespread effective competition.
This section briefly summarizes key laws and regulations affecting the operation
of the Partnership's cable systems and does not purport to describe all present,
proposed, or possible laws and regulations affecting the Partnership.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry. Under that regime, all cable systems are subject to
rate regulation, unless they face "effective competition" in their local
franchise area. Federal law now defines "effective competition" on a
community-specific basis as essentially requiring either low penetration (less
than 30%) by the incumbent cable operator, appreciable penetration (more than
15%) by competing multichannel video providers ("MVPs"), or the presence of a
competing MVP affiliated with a local telephone company.
Although the FCC rules control, local government units (commonly referred
to as local franchising authorities or "LFAs") are primarily responsible for
administering the regulation of the lowest level of cable - the basic service
tier ("BST"), which typically contains local broadcast stations and public,
educational, and government ("PEG") access channels. Before an LFA begins BST
rate regulation, it must certify to the FCC that it will follow applicable
federal rules, and many LFAs have voluntarily declined to exercise this
authority. LFAs also have primary responsibility for regulating cable equipment
rates. Under federal law, charges for various types of cable equipment must be
unbundled from each other and from monthly charges for programming services.
The FCC itself directly administers rate regulation of any cable
programming service tiers ("CPST"), which typically contain satellite-delivered
programming. Under the 1996 Telecom Act, the FCC can regulate CPST rates only if
an LFA first receives at least two rate complaints from local subscribers and
then files a formal complaint with the FCC. When new CPST rate complaints are
filed, the FCC now considers only whether the incremental increase is justified
and will not reduce the previously established CPST rate.
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Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carriage. The FCC has modified its rate
adjustment regulations to allow for annual rate increases and to minimize
previous problems associated with regulatory lag. Operators also have the
opportunity of bypassing this "benchmark" regulatory scheme in favor of
traditional "cost-of-service" regulation in cases where the latter methodology
appears favorable. Premium cable services offered on a per-channel or
per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. Federal law requires that the
BST be offered to all cable subscribers, but limits the ability of operators to
require purchase of any CPST before purchasing premium services offered on a
per-channel or per-program basis.
SMALL OPERATORS
The FCC and Congress have provided various forms of rate relief for
smaller cable systems owned by smaller operators. If requisite eligibility
criteria are satisfied, a cable operator may be allowed to rely on a vastly
simplified cost-of-service rate justification and/or may be allowed to avoid
regulation of CPST rates entirely. Under FCC regulations, cable systems serving
15,000 or fewer subscribers, which are owned by or affiliated with a cable
company serving in the aggregate no more than 400,000 subscribers, can submit a
simplified cost-of-service filing under which the regulated rate (including
equipment charges) will be presumed reasonable if it equates to no more than
$1.24 per channel. Eligibility for this relief continues if the small cable
system is subsequently acquired by a larger cable operator, but is lost when and
if the individual system serves in excess of 15,000 subscribers. The 1996
Telecom Act immediately deregulated the CPST rates of cable systems serving
communities with fewer than 50,000 subscribers, which are owned by or affiliated
with entities serving, in the aggregate, no more than one percent of the
nation's cable customers (approximately 617,000) and having no more than $250
million in annual revenues. The Partnership's systems currently qualify for such
regulatory relief.
The 1996 Telecom Act sunsets FCC regulation of CPST rates for all systems
(regardless of size) on March 31, 1999. Certain critics of the cable television
industry, however, have called for a delay in the regulatory sunset and some
have even urged more rigorous rate regulation, including limits on operators
passing through to their customers increased programming costs and bundling
together multiple programming services. The 1996 Telecom Act also relaxes
existing uniform rate requirements by specifying that uniform rate requirements
do not apply where the operator faces "effective competition", and by exempting
bulk discounts to multiple dwelling units, although complaints about predatory
pricing still may be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of public rights-of-way when cable operators provide
telecommunications service. The favorable pole attachment rates afforded cable
operators under federal law can be gradually increased by utility companies
owning the poles (beginning in 2001) if the operator provides telecommunications
service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Telecom Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. The Eighth Circuit Court
of Appeals vacated certain aspects of the FCC's initial interconnection order,
but that decision was reversed by the U.S. Supreme court in January 1999.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Telecom Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers ("LECs"), including the Bell
Operating Companies can now compete with cable operators both inside and outside
their telephone service areas. Because of their resources, LECs could be
formidable competitors to traditional cable operators, and certain LECs have
begun offering cable service.
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Under the 1996 Telecom Act, an LEC (electric utility or other entity)
providing video programming to subscribers through wired facilities will be
regulated as a traditional cable operator (subject to local franchising and
federal regulatory requirements), unless the LEC elects to provide its
programming via an "open video system" ("OVS"). To qualify for OVS status, the
LEC must reserve two-thirds of the system's activated channels for unaffiliated
entities. The Fifth Circuit Court of Appeals recently reversed certain of the
FCC's OVS rules, including the FCC's preemption of local franchising.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures between
cable operators and LECs in the same market. The 1996 Telecom Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption". The 1996 Telecom Act also provides the FCC with
the limited authority to grant waivers of the buyout prohibition (subject to LFA
approval).
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The 1996 Telecom Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Again, because of their resources, electric utilities could be formidable
competitors to traditional cable systems.
ADDITIONAL OWNERSHIP RESTRICTIONS
The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable
cross-ownership (including broadcast network/cable restrictions), but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Telecom Act leaves in
place existing restrictions on cable cross-ownership with SMATV and MMDS
facilities, but lifts those restrictions where the cable operator is subject to
effective competition. The FCC permits cable operators to own and operate SMATV
systems within their franchise area, provided that such operation is consistent
with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable system
from devoting more than 40% of its activated channel capacity to the carriage of
affiliated national program services. A companion rule establishing a nationwide
ownership cap on any cable operator equal to 30% of all domestic cable
subscribers has been stayed pending further judicial review, although the FCC
recently expressed an interest in reviewing and reimposing this limit.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements that
allow local commercial television broadcast stations to elect once every three
years between (a)requiring a cable system to carry the station ("must carry") or
(b)negotiating for payments of granting permission to the cable operator to
carry the station ("retransmission consent"). Less popular stations typically
elect "must carry", and more popular stations typically elect "retransmission
consent". Must carry requests can dilute the appeal of a cable system's
programming offerings and retransmission consent demands may require substantial
payments or other concessions. Either option has a potentially adverse affect on
the Partnership's business. The burden associated with "must carry" may increase
substantially if broadcasters proceed with planned conversion to digital
transmission and the FCC determines that cable systems must carry all analog and
digital broadcasters in their entirety. A rulemaking is now pending at the FCC
regarding the imposition of dual digital and analog must carry.
ACCESS CHANNELS
LFAs can include franchise provisions requiring cable operators to set
aside certain channels for public, educational and governmental access
programming. Federal law also requires cable systems to designate a portion of
their channel capacity (up to 15% in some cases) for commercial leased access by
unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of the
designated channel capacity, but use of commercial leased access channels has
been relatively limited to date.
ACCESS TO PROGRAMMING
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To spur development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes video
programmers affiliated with cable companies from favoring cable operators over
competitors and requires such programmers to sell their programming to other
multichannel video distributors. This provision limits the ability of vertically
integrated cable programmers to offer exclusive programming arrangements to
cable companies. There recently has been increased interest in further
restricting the marketing practices of cable programmers, including subjecting
programmers who are not affiliated with cable operators to all of the existing
program access requirements. In addition, some cable critics have argued that
vertically integrated, non-satellite programming (such as certain regional
sports networks) which is now exempt from the ban on exclusive programming,
should be subjected to this prohibition.
INSIDE WIRING
The FCC determined that an incumbent cable operator can be required by the
owner of a multiple dwelling unit ("MDU") complex to remove, abandon or sell the
"home run" wiring it initially provided. In addition, the FCC is reviewing the
enforceability of contracts to provide exclusive video service within a MDU
complex. The FCC has proposed abrogating all such contracts held by incumbent
cable operators, but allowing such contracts when held by new entrants. These
changes, and others now being considered by the FCC, would, if implemented, make
it easier for an MDU complex owner to terminate service from an incumbent cable
operator in favor of a new entrant and leave the already competitive MDU sector
even more challenging for incumbent operators. In a separate proceeding, the FCC
has preempted restrictions on the deployment of private antennas, including
satellite dishes, on rental property within the exclusive use of a tenant (such
as balconies and patios).
OTHER FCC REGULATIONS
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as equal employment opportunity, subscriber
privacy, programming practices (including, among other things, syndicated
program exclusivity, network program nonduplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, children's programming advertisements and closed captioning),
registration of frequency usage, lockbox availability, antenna structure
notification, tower marking and lighting, consumer protection and customer
service standards, technical standards, consumer electronics equipment
compatibility and Emergency Alert Systems. The FCC recently stated that cable
customers must be allowed to purchase cable converters from third party vendors,
and established a multi-year phase-in during which signal security functions
(which remain in the operator's exclusive control) would be unbundled from basic
converter functions (which could then be satisfied by third party vendors).
Details regarding this phase-in are still under FCC review. The FCC has the
authority to enforce its regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities used in connection with cable
operations.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenues to a
federal copyright royalty pool (that varies depending on the size of the system
and the number of distant broadcast television signals carried), cable operators
can obtain blanket permission to retransmit copyrighted material contained in
television broadcast signals. The possible modification or elimination of this
compulsory copyright license is the subject of continuing legislative review and
could adversely affect the Partnership's ability to obtain desired broadcast
programming. In addition, the cable industry pays music licensing fees to BMI
and is negotiating a similar arrangement with ASCAP. Copyright clearances for
nonbroadcast programming services are arranged through private negotiations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in order to cross public rights-of-way. Federal law now prohibits franchise
authorities from granting exclusive franchises or from unreasonably refusing to
award additional franchises. Cable franchises generally are granted for fixed
terms and in many cases include monetary penalties for non-compliance and may be
terminable if the franchisee fails to comply with material provisions.
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The terms and conditions of franchises vary materially from jurisdiction
to jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states subject
cable television systems to the jurisdiction of centralized state governmental
agencies, some of which impose regulation of a character similar to that of a
public utility. Although LFAs have considerable discretion in establishing
franchise terms, there are certain federal limitations. For example, LFAs cannot
insist on franchise fees exceeding 5% of the system's gross revenues, cannot
dictate the particular technology used by the system, and cannot specify video
programming that must be carried on the system other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchises against arbitrary denials of renewal. Even if a franchise is renewed,
the franchise authority may seek to impose new and more onerous requirements
such as significant upgrades in facilities and services or increased franchise
fees as a condition of renewal. Similarly, if a franchise authority's consent is
required for the purchase or sale of a cable system or franchise, such authority
may attempt to impose more burdensome or onerous franchise requirements in
connection with a request for consent. Historically, franchises have been
renewed for cable operators that have provided satisfactory services and have
complied with the terms of their franchises.
INTERNET SERVICE
Although there is no significant federal regulation of cable system delivery of
Internet services at the current time and the FCC recently issued a report to
Congress finding no immediate need to impose such regulation, this situation may
change as cable systems expand their broadband delivery of Internet services. In
particular, proposals have been advanced at the FCC that would require cable
operators to provide access to unaffiliated Internet service providers and
online service providers. Certain Internet service providers also are attempting
to use existing commercial leased access provisions to gain the imposition of
mandatory Internet access requirements as part of cable franchise renewals or
transfer approvals.
SUMMARY
The foregoing does not purport to be a summary of all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal legislation and regulations,
copyright licensing and, in many jurisdictions, state and local franchise
requirements are currently the subject of a variety of judicial proceedings,
legislative hearings and administrative and legislative proposals which could
change, in varying degrees, the manner in which cable television systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable television industry or the Partnership can be predicted at this time.
The Partnership expects to adapt its business to adjust to the changes that
may be required under any scenario of regulation. At this time, the Partnership
cannot assess the effects, if any, that present regulation may have on the
Partnership's operations and potential appreciation of its Systems. There can be
no assurance that the final form of regulation will not have a material adverse
impact on Partnership operations.
ITEM 2. PROPERTIES
The Partnership's cable television systems are located in and around
LaConner, Washington, Aliceville, Alabama and Swainsboro, Georgia. The principal
physical properties of the Systems consist of system components (including
antennas, coaxial cable, electronic amplification and distribution equipment),
motor vehicles, miscellaneous hardware, spare parts and real property, including
office buildings and headend sites and buildings. The Partnership's cable plant
passed approximately 15,000 homes as of December 31, 1998. Management believes
that the Partnership's plant passes all areas which are currently economically
feasible to service. Future line extensions depend upon the density of homes in
the area as well as available capital resources for the construction of new
plant. (See Part II. Item 7. Liquidity and Capital Resources.)
10
<PAGE> 11
On January 5, 1996, the Partnership acquired substantially all operating
assets and franchise rights of the cable television system serving approximately
3,100 subscribers, in and around Swainsboro, Georgia. The purchase price was
$6,056,326 of which $5,751,326 was paid at the closing date. In April 1996, the
Partnership paid to the seller the remainder of $305,000, net of purchase price
adjustments.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) There is no established public trading market for the Partnership's units
of limited partnership interest.
(b) The approximate number of equity holders as of December 31, 1998, is as
follows:
<TABLE>
<S> <C>
Limited 975
Partners:
General 1
Partners:
</TABLE>
(c) During 1998, 1997, 1996 and 1995, the Partnership made no cash
distributions.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Revenue ............... $ 4,876,464 $ 4,665,100 $ 4,499,588 $ 3,529,252 $ 2,030,906
Operating income (loss) 310,189 304,133 374,200 46,771 (307,224)
Gain (loss) on sale of
assets .............. 0 0 0 (11,627) (23,378)
Gain on sale of system 0 0 0 3,391,978 0
Net income (loss) ..... (634,150) (682,930) (705,502) 2,669,199 (705,411)
Net income (loss) per
limited partner unit
(weighted average) .. (33) (35) (37) 138 (36)
Cumulative tax losses
per limited partner
unit ................ (520) (520) (470) (398) (520)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ........... $13,197,193 $13,826,582 $15,093,913 $9,682,978 $12,532,350
Notes payable .......... 10,625,000 10,925,000 11,375,000 5,618,000 11,209,977
Total liabilities ...... 11,759,371 11,754,610 12,339,011 6,222,574 11,728,645
General partner's
deficit .............. (65,840) (59,498) (52,669) (45,614) (72,306)
Limited partner's
capital .............. 1,503,662 2,131,470 2,807,571 3,506,018 876,011
Distribution per
limited partner unit . 0 0 0 0 0
Cumulative distributions
per limited partner
unit ............... 0 0 0 0 0
</TABLE>
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1998 AND 1997
Total revenue reached $4,876,464 for the year ended December 31, 1998,
representing an increase of approximately 5% over 1997. This increase is
primarily attributable to rate increases during 1998. Of the 1998 revenue,
$3,687,185 (76%) is derived from subscriptions to basic services, $442,162 (9%)
from subscriptions to premium services, $168,569 (3%) from subscriptions to tier
services, $113,380 (2%) from installation charges, $47,444 (1%) from service
maintenance revenue, and $417,724 (9%) from other sources.
The following table displays historical average rate information for various
services offered by the Partnership's systems (amounts per subscriber per
month):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Basic Rate .. $ 24.65 $ 23.65 $ 22.85 $ 20.75 $ 19.80
Tier Rate ... 7.40 7.20 6.20 4.60 3.50
HBO Rate .... 10.50 11.00 9.70 11.25 11.35
Cinemax Rate 8.00 8.00 7.80 9.00 9.10
Showtime Rate 7.00 6.00 9.30 -- 10.45
Disney Rate . 8.60 8.50 8.20 9.00 9.40
Encore Rate . 1.50 -- -- -- --
Starz ....... 7.00 -- -- -- --
Service
Contract
Rate .... 2.10 2.15 2.15 2.45 2.65
</TABLE>
Operating expenses totaled $513,323 for the year ended December 31, 1998,
representing an increase of approximately 2% over 1997. Increases in salary and
benefit costs contributed to the overall increase in operating expenses. Salary
and benefit costs are the major component of operating expenses. Employee wages
are reviewed annually and, in most cases, increased based on cost of living
adjustments and other factors. Therefore, Management expects operating expenses
to increase in the future.
General and administrative expenses totaled $1,130,734 for the year ended
December 31, 1998, representing a decrease of approximately 1% from 1997. This
decrease is due to reduced copyright fees, insurance, audit fees and utilities.
Programming expenses totaled $1,220,395 for the year ended December 31, 1998,
representing an increase of approximately 8% over 1997. This increase is due to
increased costs charged by various program suppliers. As programming costs are
based on the number of subscribers served, future subscriber increases will
cause the trend of programming expense increases to continue. In addition, rate
increases from program suppliers, as well as new fees due to the launch of
additional channels, will contribute to the trend of increased programming
costs.
Depreciation and amortization expense increased from $1,577,434 in 1997 to
$1,701,823 in 1998 (approximately 8%). This is primarily due to depreciation and
amortization on plant, equipment and intangible assets placed into service
during 1998.
Interest expense decreased from $965,873 in 1997 to $908,651 in 1998
(approximately 6%). The Partnership's average bank debt balance decreased from
approximately $11,150,000 in 1997 to $10,775,000 in 1998, due to principal
payments made in 1998. In addition, the Partnership's effective interest rate
decreased from 8.38% in 1997 to 8.22% in 1998.
In 1998, the Partnership generated a net loss of $634,150. The operating
losses incurred by the Partnership historically are a result of significant
non-cash charges to income for depreciation and amortization. Prior to the
deduction for these non-cash items, the Partnership has generated positive
operating income in each year in the three year period ending December 31, 1998.
Management anticipates that this trend will continue, and that the Partnership
will continue to generate net operating losses after depreciation and
amortization until a majority of the Partnership's assets are fully depreciated.
1997 AND 1996
13
<PAGE> 14
Total revenue reached $4,665,100 for the year ended December 31, 1997,
representing an increase of approximately 4% over 1996. This increase was
primarily attributable to rate increases during 1997. Of the 1997 revenue,
$3,528,474 (76%) is derived from subscriptions to basic services, $435,642 (9%)
from subscriptions to premium services, $139,221 (3%) from subscriptions to tier
services, $124,966 (3%) from installation charges, $36,843 (1%) from service
maintenance revenue, and $399,954 (8%) from other sources.
Operating expenses totaled $505,658 for the year ended December 31, 1997,
representing an increase of approximately 3% over 1996. Increases in salary and
benefit costs contributed to the overall increase in operating expenses. Salary
and benefit costs are the major component of operating expenses. Employee wages
are reviewed annually and, in most cases, increased based on cost of living
adjustments and other factors. Therefore, Management expects operating expenses
to increase in the future.
General and administrative expenses totaled $1,143,911 for the year ended
December 31, 1997, representing an increase of approximately 5% over 1996. This
increase is due to increased copyright fees, insurance and utilities as well as
revenue related expenses, such as management fees.
Programming expenses totaled $1,133,964 for the year ended December 31, 1997,
representing an increase of approximately 13% over 1996. This increase is due to
increased costs charged by various program suppliers and increased salary and
commission expense resulting from additional advertising employees in the
Swainsboro, GA system. As programming costs are based on the number of
subscribers served, future subscriber increases will cause the trend of
programming expense increases to continue. In addition, rate increases from
program suppliers, as well as new fees due to the launch of additional channels,
will contribute to the trend of increased programming costs.
Depreciation and amortization expense increased from $1,542,789 in 1996 to
$1,577,434 in 1997 (approximately 2%). This is primarily due to depreciation and
amortization on plant, equipment and intangible assets acquired during 1997.
Interest expense decreased from $1,048,491 in 1996 to $965,873 in 1997
(approximately 8%). The Partnership's average bank debt balance decreased from
approximately $11,525,000 in 1996 to $11,150,000 in 1997, due to principal
payments made in 1997. In addition, the Partnership's effective interest rate
decreased from 8.87% in 1996 to 8.38% in 1997.
In 1997, the Partnership generated a net loss of $682,930. The operating
losses incurred by the Partnership historically are a result of significant
non-cash charges to income for depreciation and amortization. Prior to the
deduction for these non-cash items, the Partnership has generated positive
operating income in each year in the three year period ending December 31, 1997.
Management anticipates that this trend will continue, and that the Partnership
will continue to generate net operating losses after depreciation and
amortization until a majority of the Partnership's assets are fully depreciated.
EFFECTS OF REGULATION
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Act"). The 1992 Act and subsequent
revisions and rulemakings substantially re-regulated the cable television
industry. The regulatory aspects of the 1992 Act included giving the local
franchising authorities and the FCC the ability to regulate rates for basic
services, equipment charges and additional CPST's when certain conditions were
met. All of the Partnership's cable systems were potentially subject to rate
regulation. The most significant impact of rate regulation was the inability to
raise rates for regulated services as costs of operation rose during an FCC
imposed rate freeze from April 5, 1993 to May 15, 1994.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act")
became law. The 1996 Act eliminates all rate regulation on CPST's of small cable
systems, defined by the 1996 Act as systems serving fewer than 50,000
subscribers owned by operators serving fewer than 1% of all subscribers in the
United States (approximately 600,000 subscribers). All of the Partnership's
cable systems qualify as small cable systems. Many of the changes called for by
the 1996 Act will not take effect until the FCC issues new regulations, a
process that could take from several months to a few years depending on the
complexity of the required changes and the statutory time limits. Because of
this, the full impact of the 1996 Act on the Partnership's operations cannot be
determined at this time.
14
<PAGE> 15
As of the date of this filing, no local franchising authorities have elected
to certify and no formal requests for rate justifications have been received
from franchise authorities. Based on Management's analysis, the basic service
tier rates charged by these systems are within the maximum rates allowed under
FCC rate regulations.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Partnership's primary source of liquidity was cash flow from
operations. The Partnership generates cash on a monthly basis through the
monthly billing of subscribers for cable services. Losses from uncollectible
accounts have not been material. During 1998, cash generated from monthly
billings was sufficient to meet the Partnership's needs for working capital,
capital expenditures and debt service. Management estimates for 1999 that cash
generated from monthly subscriber billings is expected to be sufficient to meet
the Partnership's working capital needs, as well as meeting the debt service
obligations of its bank loan as amended.
As of the date of this filing, the Partnership's term loan balance was
$10,565,182. Certain fixed rate agreements in effect as of September 30, 1998
expired during the fourth quarter of 1998, and the Partnership entered into new
fixed rate agreements. Currently, the interest rates on the credit facility are
as follows: $7,700,000 fixed at 8.24% under the terms of a swap agreement with
the Partnership's lender, expiring December 31, 2000; and $2,475,000 at LIBOR
based rate of 7.57781% expiring July 13, 1999 and $390,182 at LIBOR based rate
of 7.56% expiring June 30, 1999. The above rates include a margin paid to the
lender based on overall leverage and may increase or decrease as the
Partnership's overall leverage fluctuates.
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Partnership enters into interest rate swap
agreements with major banks or financial institutions (typically its bank) in
which the Partnership pays a fixed rate and receives a floating rate with the
interest payments being calculated on a notional amount. Gains or losses
associated with changes in fair values of these swaps and the underlying
notional principal amounts are deferred and recognized against interest expense
over the term of the agreements in the Partnership's statements of operations.
The Partnership is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but does not expect
any counterparties to fail to meet their obligations, as the Partnership
currently deals only with its bank. The notional amounts of these interest rate
swaps is $7,700,000 at December 31, 1998. These notional amounts do not
represent amounts exchanged by the parties and, thus, are not a measure of
exposure to the Partnership through its use of derivatives. The exposure in a
derivative contract is the net difference between what each party is required to
pay based on the contractual terms against the notional amount of the contract,
which in the Partnership's case are interest rates. The use of derivatives does
not have a significant effect on the Partnership's result of operations or its
financial position.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
1999 2000 2001 2002 TOTAL
------- ------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Liabilities
Debt Maturity 475,000 650,000 850,000 8,650,000 10,625,000
Debt Interest Payments 839,137 793,603 735,169 664,545 3,032,454
Average Interest Rate 8.06% 8.06% 8.06% 8.06% 8.06%
Interest Rate Swaps
Variable to Fixed
Notional Amount 400,000 7,300,000 7,700,000
Average Pay Rate* 5.74% 5.74% 5.74%
Average Receive Rate* 5.28% 5.28% 5.28%
*plus an applicable margin, currently 2.5%
</TABLE>
It is the Partnership's policy to renegotiate swap agreements on or near
expiration.
Under the terms of the loan agreement, the Partnership has agreed to
restrictive covenants which require the maintenance of certain ratios, including
a Funded Debt to Cash Flow Ratio of 6.00 to 1 and a Cash flow to Debt Service
Ratio of 1.25 to 1, a limitation on the maximum amount of capital expenditures
of $700,000, among other covenants. The General Partner submits quarterly
debt compliance reports to the Partnership's creditor under this agreement. At
December 31, 1998, the Partnership was in compliance with the terms of the loan
agreement.
ECONOMIC CONDITIONS
Historically, the effects of inflation have been considered in determining
to what extent rates will be increased for various services provided. It is
expected that the future rate of inflation will continue to be a significant
variable in determining rates charged for services provided, subject to the
provisions of the 1996 Act. Because of the deregulatory nature of the 1996 Act,
the Partnership does not expect the future rate of inflation to have a material
adverse impact on operations.
CAPITAL EXPENDITURES
During 1998, the Partnership incurred approximately $670,000 in capital
expenditures. These expenditures included the continued system upgrade to 400
MHz in the LaConner, WA system; a vehicle replacement, the continued fiber
interconnect of two systems, new headend equipment, channel additions and line
extensions in the Aliceville, AL system; and a vehicle replacement, system
mapping, channel additions and line extensions in the Swainsboro, GA system.
Management estimates that the Partnership will spend approximately $600,000
on capital expenditures in 1999. These expenditures include a continuing system
upgrade to 400 MHz for the LaConner, WA system; a vehicle replacement, the
extension of the fiber backbone to eliminate a headend and quality assurance
projects in the Aliceville, AL system; and the construction of a fiber backbone
which will lead to a future system upgrade to 450 MHz, an advertising equipment
upgrade and various line extensions in the Swainsboro, GA system.
YEAR 2000 ISSUES
The efficient operation of the Partnership's business is dependent in part on
its computer software programs and operating systems (collectively, Programs and
Systems). These Programs and Systems are used in several key areas of the
Partnership's business, including subscriber billing and collections and
financial reporting. Management has evaluated the Programs and Systems utilized
in the conduct of the Partnership's business for the purpose of identifying year
2000 compliance problems. Failure to remedy these issues could impact the
ability of the Partnership to timely bill its subscribers for service provided
and properly report its financial condition and results of operations which
could have a material impact on its liquidity and capital resources.
15
<PAGE> 16
The Programs and Systems utilized in subscriber billing and collections has
been modified to address year 2000 compliance issues. These modifications were
substantially complete at the end of 1998. Management has completed the process
of replacing Programs and Systems related to financial reporting which resolve
year 2000 compliance issues. The aggregate cost to the Partnership to address
year 2000 compliance issues is not expected to be material to its results of
operations, liquidity and capital resources.
Management is currently focusing its efforts on the impact of the year 2000
compliance issue on service delivery and has established an internal team to
address this issue. The internal team is identifying and testing all date
sensitive equipment involved in delivering service to its customers. In
addition, management will assess its options regarding repair or replacement of
affected equipment during this testing. The aggregate cost to the Partnership
to address year 2000 compliance issues is not expected to be material to its
results of operations, liquidity and capital resources.
The provision of cable television services is significantly dependent on the
Partnership's ability to adequately receive programming signals via satellite
distribution or off air reception from various programmers and broadcasters. The
Partnership has inquired of certain significant programming vendors with respect
to their year 2000 issues and how they might impact the operations of the
Partnership. As of the date of this filing no significant programming vendor has
communicated a year 2000 issue that would affect materially the operations of
the Partnership. However, if significant programming vendors identify year 2000
issues in the future and are unable to resolve such issues in a timely manner,
it could result in a material financial risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended
December 31, 1998, 1997 and 1996 are included as a part of this filing (see Item
14(a)(1) below).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<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.
Certain information regarding the officers and directors of Northland and
relating to the Partnership is set forth below.
JOHN S. WHETZELL (AGE 57). Mr. Whetzell is the founder of Northland
Communications Corporation and has been President since its inception and a
Director since March 1982. Mr. Whetzell became Chairman of the Board of
Directors in December 1984. He also serves as President and Chairman of the
Board of Northland Telecommunications Corporation and each of its subsidiaries.
He has been involved with the cable television industry for over 23 years.
Between March 1979 and February 1982 he was in charge of the Ernst & Whinney
national cable television consulting services. Mr. Whetzell first became
involved in the cable television industry when he served as the Chief Economist
of the Cable Television Bureau of the Federal Communications Commission (FCC)
from May 1974 to February 1979. He provided economic studies to support the
deregulation of cable television both in federal and state arenas. He
participated in the formulation of accounting standards for the industry and
assisted the FCC in negotiating and developing the pole attachment rate formula
for cable television. His undergraduate degree is in economics from George
Washington University, and he has an MBA degree from New York University.
JOHN E. IVERSON (AGE 62). Mr. Iverson is the Assistant Secretary of Northland
Communications Corporation and has served on the Board of Directors since
December 1984. He also serves on the Board of Directors of Northland
Telecommunications Corporation and each of its subsidiaries. He is currently a
member in the law firm of Ryan, Swanson & Cleveland P.L.L.C., Northland's
general counsel. He is a member of the Washington State Bar Association and
American Bar Association and has been practicing law for more than 35 years. Mr.
Iverson is the past president and a Trustee of the Pacific Northwest Ballet
Association. Mr. Iverson has a Juris Doctor degree from the University of
Washington.
RICHARD I. CLARK (AGE 41). Mr. Clark has served as Vice President of
Northland since March 1982. He has served on the Board of Directors of both
Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. He also serves as Vice President and Director of
all subsidiaries of Northland Telecommunications Corporation. Mr. Clark was
elected Treasurer in April 1987, prior to which he served as Secretary from
March 1982. Mr. Clark was an original incorporator of Northland and is
responsible for the administration and investor relations activities of
Northland, including financial planning and corporate development. From July
1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the area of
providing cable television consultation services and has been involved with the
cable television industry for nearly 19 years. He has directed cable television
feasibility studies and on-site market surveys. Mr. Clark has assisted in the
design and maintenance of financial and budget computer programs, and he has
prepared documents for major cable television companies in franchising and
budgeting projects through the application of these programs. In 1979, Mr. Clark
graduated cum laude from Pacific Lutheran University with a Bachelor of Arts
degree in accounting.
JAMES E. HANLON (AGE 65). Since June 1985, Mr. Hanlon has been a Divisional
Vice President for Northland and is currently responsible for the management of
systems serving subscribers in Texas, Alabama and parts of Mississippi. Prior to
his association with Northland, he served as Chief Executive of M.C.T.
Communications, a cable television company, from 1981 to June 1985. His
responsibilities included supervision of the franchise, construction and
operation of a cable television system located near Tyler, Texas. From 1979 to
1981, Mr. Hanlon was President of the CATV Division of Buford Television, Inc.,
and from 1973 to 1979, he served as President and General Manager of Suffolk
Cablevision in Suffolk County, New York. Mr. Hanlon has also served as Vice
President and Corporate Controller of Viacom International, Inc. and Division
Controller of New York Yankees, Inc. Mr. Hanlon has a Bachelor of Science degree
in Business Administration from St. Johns University.
JAMES A. PENNEY (AGE 44). Mr. Penney is Vice President and General Counsel
for Northland Telecommunications Corporation and each of its subsidiaries and
has served in this role since September 1985. He was elected Secretary in April
1987. Mr. Penney is responsible for advising all Northland systems with regard
to legal and regulatory matters, and also is involved in the acquisition and
financing of new cable systems. From 1983 until 1985 he was associated with the
law firm of Ryan, Swanson &
17
<PAGE> 18
Cleveland P.L.L.C., Northland's general counsel. Mr. Penney holds a Bachelor of
Arts Degree from the University of Florida and a Juris Doctor from The College
of William and Mary, where he was a member of The William and Mary Law Review.
GARY S. JONES (AGE 41). Mr Jones is Vice President for Northland. Mr. Jones
joined Northland in March 1986 as Controller and has been Vice President of
Northland Telecommunications Corporation and each of its subsidiaries since
October 1986. Mr. Jones is responsible for cash management, financial reporting
and banking relations for Northland and is involved in the acquisition and
financing of new cable systems. Prior to joining Northland, Mr. Jones was
employed as a Certified Public Accountant with Laventhol & Horwath from 1980 to
1986. Mr. Jones received his Bachelor of Arts degree in Business Administration
with a major in accounting from the University of Washington in 1979.
RICHARD J. DYSTE (AGE 53). Mr. Dyste has served as Vice President- Technical
Services of Northland Telecommunications Corporation and each of its
subsidiaries since April 1987. Mr. Dyste is responsible for planning and
advising all Northland cable systems with regard to technical performance as
well as system upgrades and rebuilds. He is a past president and current member
of the Mount Rainier Chapter of the Society of Cable Television Engineers, Inc.
Mr. Dyste joined Northland in 1986 as an engineer and served as Operations
Consultant to Northland Communications Corporation from August 1986 until April
1987. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is
a graduate of Washington Technology Institute.
H. LEE JOHNSON (AGE 55). Mr. Johnson has served as Divisional Vice President
for Northland's Statesboro, Georgia regional office since March 1994. He is
responsible for the management of systems serving subscribers in Georgia,
Mississippi, North Carolina and South Carolina. Prior to his association with
Northland he served as Regional Manager for Warner Communications, managing four
cable systems in Georgia from 1968 to 1973. Mr. Johnson has also served as
President of Sunbelt Finance Corporation and was employed as a System Manager
for Statesboro CATV when Northland purchased the system in 1986. Mr. Johnson has
been involved in the cable television industry for over 29 years and is a
current member of the Society of Cable Television Engineers. He is a graduate of
Swainsboro Technical Institute and has attended numerous training seminars,
including courses sponsored by Jerrold Electronics, Scientific Atlanta, The
Society of Cable Television Engineers and CATA.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation was
paid to the General Partner and affiliates during 1998 as indicated in Note 3 to
the Notes to Financial Statements--December 31, 1998 (see Items 14(a)(1) and
13(a) below).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ----------------- ---------------------------- ----------------- ------------
<S> <C> <C> <C>
General Partner's Northland Communications (See Note A) (See Note A)
Interest Corporation
1201 Third Avenue
Suite 3600
Seattle, Washington 98101
</TABLE>
Note A: Northland has a 1% interest in the Partnership, which increases to a
20% interest in the Partnership at such time as the limited partners have
received 100% of their aggregate cash contributions plus a preferred return. The
natural person who exercises voting and/or investment control over these
interests is John S. Whetzell.
(b) CHANGES IN CONTROL. Northland has pledged its ownership interest as
Managing General Partner of the Partnership to the Partnership's lender as
collateral pursuant to the terms of the revolving credit and term loan agreement
between the Partnership and its lender.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Managing General Partner
receives a management fee equal to 5% of the gross revenues of the Partnership,
not including revenues from any sale or refinancing of the Partnership's System.
The
18
<PAGE> 19
Managing General Partner also receives reimbursement of normal operating and
general and administrative expenses incurred on behalf of the Partnership.
The Partnership has an operating management agreement with Northland Cable
Properties Seven Limited Partnership ("NCP-Seven"), an affiliated partnership
organized and managed by Northland. Under the terms of this agreement, the
partnership serves as the exclusive managing agent for one of NCP-Seven's cable
systems and is reimbursed for certain operating and administrative costs.
During 1994, NCP-Seven began serving as the executive managing agent for one
of the Partnership's cable television systems and is reimbursed for certain
operating and administrative expenses.
Northland Cable Services Corporation ("NCSC"), an affiliate of Northland,
provides software installation and billing services to the Partnership's Systems
for which it is compensated.
Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides the
production and development of video commercial advertisements and advertising
sales support for which it is compensated.
Northland Cable News, Inc.("NCN"), an affiliate of Northland, provides
programming to certain of the Partnership's systems.
Northland Investment Corporation ("NIC"), also an affiliate of Northland,
acted as managing underwriter for the sale of the Partnership's limited
partnership units. The Partnership paid NIC commissions, due diligence fees and
other costs then distributed the remaining balance to selected broker-dealers
which it had retained to sell the limited partnership units. NIC was dissolved
as of December 31, 1996.
See Note 3 of the Notes to Financial Statements--December 31, 1998 for
disclosures regarding transactions with the General Partner and affiliates.
The following schedule summarizes these transactions:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Partnership management fees .. $ 243,823 $ 233,249 $ 224,979
Operating expense
reimbursements ............. 270,368 275,758 257,499
Software installation and
billing service fees to NCSC 41,275 35,791 57,299
Reimbursements (to)/from
Affiliates ................. (39,028) (47,598) (45,881)
Local Advertising Services ... 18,218 27,936 22,092
Local Programming Services ... 49,365 22,247 --
Amounts due to (from) General
Partner
and affiliates at year end .. 81,682 34,201 265,478
</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 Partner and its affiliates. Certain conflicts may arise due to the
allocation of management time, services and functions between the Partnership
and existing and future partnerships as well as other business ventures. The
General Partner has sought to minimize these conflicts by allocating costs
between systems on a reasonable basis. Each limited partner may have access to
the books and non-confidential records of the Partnership. A review of the books
will allow a limited partner to assess the reasonableness of these allocations.
The Agreement of Limited Partnership provides that any limited partner owning
10% or more of the Partnership units may call a special meeting of the Limited
Partners, by giving written notice to the General Partner specifying in general
terms the subjects to be considered. In the event of a dispute between the
General Partner and Limited Partners which cannot be otherwise resolved, the
Agreement of Limited Partnership provides steps for the removal of a General
Partner by the Limited Partners.
19
<PAGE> 20
(b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and Assistant
Secretary of the Managing General Partner, is a member of the law firm of Ryan,
Swanson & Cleveland P.L.L.C., which has rendered and is expected to continue to
render legal services to the Managing General Partner and the Partnership.
(c)INDEBTEDNESS OF MANAGEMENT. None.
20
<PAGE> 21
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>
(1) FINANCIAL STATEMENTS:
Report of Independent Public Accountants.............................. ____
Balance Sheets--December 31, 1998 and 1997............................ ____
Statements of Operations for the years ended December 31, ____
1998, 1997 and 1996...................................................
Statements of Changes in Partners' Capital (Deficit) for
the years ended December 31, 1998, 1997 and 1996..................... ____
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996...................................... ____
Notes to Financial Statements--December 31, 1998...................... ____
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS:
---------
<S> <C>
4.1 Amended and Restated Agreement of Limited Partnership(1)
4.2 Amendment to Agreement of Limited Partnership dated December 20, 1990(4)
10.1 Agreement of Purchase and Sale with Santiam Cable Vision, Inc.(1)
10.2 Agreement for Sale of Assets between Valley Cable T.V., Inc. and Northland
Telecommunications Corporation(1)
10.3 Form of Services and Licensing Agreement with Cable Television Billing, Inc.(1)
10.4 Management Agreement with Northland Communications Corporation(1)
10.5 First, Second and Third Amendment to Agreement of Purchase and Sale with Santiam
Cable Vision, Inc.(1)
10.6 Operating Management Agreement with Northland Cable Properties Seven Limited
Partnership(1)
10.7 Assignment and Transfer Agreement with Northland Telecommunications Corporation
for the purchase of the LaConner System(2)
10.8 Gates Franchise(1)
10.9 Stayton Franchise(1)
10.10 Mill City Franchise(1)
10.11 Detroit Franchise(1)
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBITS:
---------
<S> <C>
10.12 Idanha Franchise(1)
10.13 Lyons Franchise(1)
10.14 Marion County Franchise(1)
10.15 Turner Franchise(1)
10.19 Amendment dated August 4, 1989 to Revolving Credit and Term Loan Agreement with
Security Pacific Bank of Washington, N.A.(3)
10.20 Revolving Credit and Term Loan Agreement with National Westminster
Bank USA dated as of December 20, 1990(4)
10.21 Note in the principal amount of up to $7,000,000 to the order of National Westminster Bank
USA(4)
10.22 Borrower Assignment with National Westminster Bank USA(4)
10.23 Borrower Security Agreement with National Westminster Bank USA(4)
10.24 Agreement of Purchase and Sale with TCI Cablevision of Nevada, Inc.(4)
10.25 First Amendment dated May 28, 1992 to Revolving Credit and Term Loan Agreement with National
Westminster Bank USA.(5)
10.26 Franchise Agreement with the City of Turner, OR effective March 21, 1991(5)
10.27 Franchise Agreement with the City of Lyons, OR effective April 8, 1991(5)
10.28 Franchise Agreement with the City of Idanha, OR effective November 3, 1992(5)
10.29 Agreement of Purchase with Alabama Television Cable Company(6)
10.30 Credit Agreement between Northland Cable Properties Eight Limited Partnership and U.S. Bank
of Washington, National Association and West One Bank, Washington dated November 10, 1994(6)
10.31 Franchise Agreement with City of Aliceville, AL - Assignment and Assumption Agreement dated
July 26, 1994.(7)
10.32 Franchise Agreement with City of Carrollton, AL - Assignment and Assumption Agreement dated
August 16, 1994.(7)
10.33 Franchise Agreement with City of Eutaw, AL - Assignment and Assumption Agreement dated July
26, 1994.(7)
10.34 Franchise Agreement with City of Gordo, AL - Assignment and Assumption Agreement dated August
1, 1994.(7)
10.35 Franchise Agreement with Greene County, AL - Assignment and Assumption Agreement dated
November 10, 1994.(7)
10.36 Franchise Agreement with Town of Kennedy, AL - Assignment and Assumption Agreement dated
August 15, 1994.(7)
10.37 Franchise Agreement with Lamar County, AL - Assignment and Assumption Agreement dated August
8, 1994.(7)
10.38 Franchise Agreement with City of Marion, AL - Assignment and Assumption Agreement dated
August 1, 1994.(7)
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBITS:
---------
<S> <C>
10.39 Franchise Agreement with Town of Millport, AL - Assignment and Assumption Agreement dated
August 18, 1994.(7)
10.40 Franchise Agreement with Pickens County, AL - Assignment and Assumption Agreement dated July
26, 1994.(7)
10.41 Franchise Agreement with Town of Pickensville, AL - Assignment and
Assumption Agreement dated August 2, 1994.(7)
10.42 Franchise Agreement with City of Reform, AL - Assignment and Assumption Agreement dated
August 1, 1994.(7)
10.43 Asset Purchase and Sale Agreement between SCS Communications and Security, Inc. and Northland
Cable Properties Eight Limited Partnership dated April 14, 1995.(8)
10.44 Asset Purchase Agreement between Northland Cable Properties Eight Limited Partnership and TCI
Cablevision of Georgia, Inc. dated November 17, 1995.(9)
10.45 First Amendment to Amended and Restated Credit Agreement between Northland Cable Properties
Eight Limited Partnership and U.S. Bank National Association
</TABLE>
- ------------
(1) Incorporated by reference from the Partnership's Form S-1 Registration
Statement declared effective on March 16, 1989 (No. 33-25892).
(2) Incorporated by reference from the Partnership's Form 10-Q Quarterly Report
for the period ended June 30, 1989.
(3) Incorporated by reference from the Partnership's Form 10-K Annual Report for
the year ended December 31, 1989.
(4) Incorporated by reference from the Partnership's Form 10-K Annual Report for
the year ended December 31, 1990
(5) Incorporated by reference from the Partnership's Form 10-K Annual Report for
the year ended December 31, 1992.
(6) Incorporated by reference from the Partnership's Form 8-K dated November 11,
1994.
(7) Incorporated by reference from the Partnership's Form 10-K Annual Report for
the year ended December 31, 1994.
(8) Incorporated by reference from the Partnership's Form 10-Q Quarterly Report
for the period ended March 31, 1995.
(9) Incorporated by reference from the Partnership's Form 8-K dated January 5,
1996.
(b) REPORTS ON FORM 8-K. No Partnership reports on Form 8-K have been filed
during the fourth quarter of the fiscal year ended December 31, 1998.
23
<PAGE> 24
SIGNATURES
Purchase to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CABLE PROPERTIES EIGHT
LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION
(Managing General Partner)
Date: March 30, 1999 By: /s/ JOHN S. WHETZELL
-------------- ------------------------------------
John S. Whetzell, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
SIGNATURES CAPACITIES DATE
---------- ---------- ----
/s/ JOHN S. WHETZELL Chief executive officer of registrant; chief executive officer March 30, 1999
- ----------------------------- and chairman of the board of directors of Northland
John S. Whetzell Communications Corporation
/s/ RICHARD I. CLARK Director of Northland Communications March 30, 1999
- ----------------------------- Corporation
Richard I. Clark
/s/ JOHN E. IVERSON Director of Northland Communications March 30, 1999
- ----------------------------- Corporation
John E. Iverson
/s/ GARY S. JONES Principal financial officer and principal accounting March 30, 1999
- ----------------------------- officer of registrant; vice president, principal financial
Gary S. Jones officer and principal accounting officer of Northland
Communications Corporation
</TABLE>
24
<PAGE> 25
NORTHLAND CABLE PROPERTIES EIGHT
LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Eight Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Eight Limited Partnership (a Washington limited partnership) as of December 31,
1998 and 1997, and the related statements of operations, changes in partners'
capital (deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties
Eight Limited Partnership as of December 31, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Seattle, Washington,
February 15, 1999
<PAGE> 27
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------ ------------
<S> <C> <C>
CASH ........................................................ $ 800,110 $ 463,021
ACCOUNTS RECEIVABLE ......................................... 108,011 101,772
DUE FROM AFFILIATES ......................................... 26,295 --
PREPAID EXPENSES ............................................ 60,971 62,453
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost ....................... 11,454,452 10,825,112
Less- Accumulated depreciation ........................ (4,641,375) (3,552,644)
------------ ------------
6,813,077 7,272,468
Franchise agreements (net of accumulated
amortization of $2,145,760 in 1998 and
$1,730,425 in 1997) ...................................
5,059,222 5,474,557
Loan fees and other intangibles (net of
accumulated amortization of $504,157 in
1998 and $417,609 in 1997) ............................
209,050 327,893
Goodwill (net of accumulated amortization of
$37,952 in 1998 and $33,991 in 1997) ..................
120,457 124,418
------------ ------------
Total investment in cable television
properties ................................... 12,201,806 13,199,336
------------ ------------
Total assets .................................... $ 13,197,193 $ 13,826,582
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
1998 1997
------------ ------------
LIABILITIES:
Accounts payable and accrued expenses .................... $ 778,917 $ 625,573
Due to General Partner and affiliates .................... 107,977 34,201
Deposits ................................................. 10,002 12,200
Subscriber prepayments ................................... 237,475 157,636
Term loan ................................................ 10,625,000 10,925,000
------------ ------------
Total liabilities ............................... 11,759,371 11,754,610
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' CAPITAL (DEFICIT):
General Partner-
Contributed capital ................................... 1,000 1,000
Accumulated deficit ................................... (66,840) (60,498)
------------ ------------
(65,840) (59,498)
------------ ------------
Limited partners-
Contributed capital, net -
19,087 units ....................................... 8,120,820 8,120,820
Accumulated deficit ................................... (6,617,158) (5,989,350)
------------ ------------
1,503,662 2,131,470
------------ ------------
Total liabilities and partners'
capital (deficit) ............................ $ 13,197,193 $ 13,826,582
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 28
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE ............................................ $ 4,876,464 $ 4,665,100 $ 4,499,588
----------- ----------- -----------
EXPENSES:
Operating (including $30,156, $52,697 and $49,082
paid to affiliates in 1998, 1997 and 1996,
respectively) ................................ 513,323 505,658 488,660
General and administrative (including $496,332,
$489,975 and $479,614 paid to affiliates in
1998, 1997 and 1996, respectively) ........... 1,130,734 1,143,911 1,093,088
Programming (including $2,066, $40,219 and
$32,622, net, paid to affiliates in 1998, 1997
and 1996, respectively) ...................... 1,220,395 1,133,964 1,000,851
Depreciation and Amortization ................... (1,701,823) (1,577,434) (1,542,789)
----------- ----------- -----------
4,566,275 4,360,967 4,125,338
----------- ----------- -----------
Operating income ....................... 310,189 304,133 374,200
OTHER INCOME (EXPENSE):
Interest income and other ....................... 15,817 21,328 9,850
Interest expense ................................ (908,651) (965,873) (1,048,491)
Other expense ................................... (51,505) (42,518) (41,061)
----------- ----------- -----------
Net loss ............................... $ (634,150) $ (682,930) $ (705,502)
=========== =========== ===========
ALLOCATION OF NET LOSS:
General Partner ................................. $ (6,342) $ (6,829) $ (7,055)
=========== =========== ===========
Limited partners ................................ $ (627,808) $ (676,101) $ (698,447)
=========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT .............. $ (33) $ (35) $ (37)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 29
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1995 $ (45,614) $ 3,506,018 $ 3,460,404
Net loss .............. (7,055) (698,447) (705,502)
----------- ----------- -----------
BALANCE, December 31, 1996 (52,669) 2,807,571 2,754,902
Net loss .............. (6,829) (676,101) (682,930)
----------- ----------- -----------
BALANCE, December 31, 1997 (59,498) 2,131,470 2,071,972
Net loss .............. (6,342) (627,808) (634,150)
----------- ----------- -----------
BALANCE, December 31, 1998 $ (65,840) $ 1,503,662 $ 1,437,822
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 30
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................... $ (634,150) $ (682,930) $ (705,502)
Adjustments to reconcile net loss to net cash provided by operating activities-
Depreciation and amortization expense ...................................... 1,701,823 1,577,434 1,542,789
Amortization of loan fees .................................................. 51,505 42,518 41,061
(Increase) decrease in operating assets:
Accounts receivable ..................................................... (6,239) 3,605 (14,576)
Due from affiliates ..................................................... (26,295) -- --
Prepaid expenses ........................................................ 1,482 138 (13,615)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses ................................... 153,344 45,751 171,732
Due to General Partner and affiliates ................................... 73,776 (231,277) 195,545
Deposits ................................................................ (2,198) (5,600) (3,950)
Subscriber prepayments .................................................. 79,839 56,725 (3,890)
----------- ----------- -----------
Net cash provided by operating activities ............................ 1,392,887 806,364 1,209,594
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable system ................................................... -- -- (6,083,676)
Purchase of property and equipment, net ....................................... (672,390) (738,043) (319,942)
Increase in intangibles ....................................................... (27,153) -- --
----------- ----------- -----------
Net cash used in investing activities ................................ (699,543) (738,043) (6,403,618)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable .................................................... -- -- 6,057,000
Principal payments on note payable ............................................ (300,000) (450,000) (300,000)
Loan fees ..................................................................... (56,255) -- (98,993)
----------- ----------- -----------
Net cash (used in) provided by financing activities .................. (356,255) (450,000) 5,658,007
----------- ----------- -----------
INCREASE (DECREASE) IN CASH ...................................................... 337,089 (381,679) 463,983
CASH, beginning of year .......................................................... 463,021 844,700 380,717
----------- ----------- -----------
CASH, end of year ................................................................ $ 800,110 $ 463,021 $ 844,700
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ........................................ $ 1,066,353 $ 986,979 $ 857,217
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 31
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Eight Limited Partnership (the Partnership), a
Washington limited partnership, was formed on September 21, 1988, and began
operations on March 8, 1989. The Partnership was formed to acquire, develop and
operate cable television systems. Currently, the Partnership owns systems
serving the city of La Conner, Washington and certain surrounding areas;
Aliceville, Alabama and certain surrounding areas; and Swainsboro, Georgia and
certain surrounding areas. The Partnership has 17 nonexclusive franchises to
operate these cable systems for periods which will expire at various dates
through 2019, with one franchise extending to 2044.
Northland Communications Corporation (the General Partner or Northland) is the
General Partner of the Partnership. Certain affiliates of the Partnership also
own and operate other cable television systems. In addition, Northland manages
cable television systems for other limited partnerships for which it is General
Partner.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' capital (deficit). No limited partner is
obligated to make any additional contribution to partnership capital.
Northland contributed $1,000 to acquire its 1% interest in the Partnership.
Pursuant to the Partnership Agreement, brokerage fees of $1,004,693 paid to an
affiliate of the General Partner and other offering costs of $156,451 paid to
the General Partner were recorded as a reduction of limited partners' capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred.
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
<TABLE>
<S> <C>
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold improvements 5-20 years
</TABLE>
<PAGE> 32
-2-
The Partnership periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized.
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocated the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to noncompetition agreements, franchise agreements and
other intangibles; then the excess is allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, loan fees and other intangibles, and
goodwill are being amortized using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Franchise agreements 8-40 years
Loan fees and other intangibles 1-5 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 $153,797,
$154,578, and $163,656 in 1998, 1997 and 1996, respectively.
Derivatives
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. As discussed in Note 6, the Partnership enters
into interest rate swap agreements with major banks or financial institutions
(typically its bank) in which the Partnership pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
Gains or losses associated with changes in fair values of these swaps and the
underlying notional principal amounts are deferred and recognized against
interest expense over the term of the agreements in the Partnership's statements
of operations.
The Partnership is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments, but does not expect
any counterparties to fail to meet their obligations, as the Partnership
currently deals only with its bank. The notional amounts of these interest rate
swaps is $7,700,000 at December 31, 1998. These notional amounts do not
represent amounts exchanged by the parties and, thus, are not a measure of
exposure to the Partnership through its use of derivatives. The exposure in a
derivative contract is the net difference between what each party is required to
pay based on the contractual terms against the notional amount of the contract,
which in the Partnership's case are interest rates. The use of derivatives does
not have a significant effect on the Partnership's result of operations or its
financial position.
<PAGE> 33
-3-
Reclassifications
Certain reclassifications have been made to conform prior year amounts to the
current year's presentation.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 130 - In 1998, the
Partnership adopted SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes rules for the reporting of comprehensive income and its
components. Comprehensive income (loss) consists of net income (loss), foreign
currency translation adjustments and unrealized gains on investment securities
available-for-sale. As of December 31, 1998, the Partnership had no
comprehensive income to report, therefore the adoption of SFAS No. 130 had no
impact on equity.
Statement of Position 98-5 - In April 1998, the AICPA released Statement of
Position 98-5, "Reporting on Start-Up Activities" (SOP 98-5). The new standard
requires that all entities expense costs of start-up activities as those costs
are incurred. SOP 98-5 defines "start-up costs" as those costs directly related
to pre-operating, pre-opening, and organization activities. This standard must
be adopted in fiscal years beginning after December 15, 1998.
The Partnership previously capitalized pre-opening costs and amortized such
costs over a five-year period. As of December 31, 1998, all pre-opening costs
have been amortized. As a result, the adoption of SOP 98-5 will not have an
effect on the Partnership's financial position or results of operations.
Statement of Financial Accounting Standards No. 133 - In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the statement of
operations, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
The Partnership has not yet quantified the impacts of adopting SFAS No. 133 on
the financial statements and has not determined the timing of or method of
adoption of SFAS No. 133. However, the statement could increase volatility in
earnings and other comprehensive income.
<PAGE> 34
-4-
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner receives a fee for managing the Partnership equal to 5% of
the gross revenues of the Partnership, excluding revenues from the sale of cable
television systems or franchises. The amount of management fees charged by the
General Partner was $243,823, $233,249 and $224,979 for 1998, 1997 and 1996,
respectively.
Income Allocation
As defined in the limited partnership agreement, the General Partner is
allocated 1% and the limited partners are allocated 99% of partnership net
income, net losses, deductions and credits from operations until such time as
the limited partners receive aggregate cash distributions equal to their
aggregate capital contributions, plus the limited partners' preferred return.
Thereafter, the General Partner will be allocated 20% and the limited partners
will be allocated 80% of partnership net income, net losses, deductions and
credits from operations. Cash distributions from operations will be allocated in
accordance with the net income and net loss percentages then in effect. Prior to
the General Partner receiving cash distributions from operations for any year,
the limited partners must receive cash distributions in an amount equal to the
lesser of i) 50% of the limited partners' allocable share of net income for such
year or ii) the federal income tax payable on the limited partners' allocable
share of net income on the then highest marginal federal income tax rate
applicable to such net income.
The limited partners' total initial contributions to capital were $9,568,500
($500 per limited partnership unit). As of December 31, 1998, the Partnership
has repurchased $12,500 of limited partnership units (50 units at $250 per
unit).
Reimbursements
The General Partner provides or causes to be provided certain centralized
services to the Partnership and other affiliated entities. The General Partner
is entitled to reimbursement from the Partnership for various expenses incurred
by it or its affiliates on behalf of the Partnership allocable to its management
of the Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and
licenses, headquarters supplies and expenses, pay television expenses, equipment
and vehicle charges, operating salaries and expenses, administrative salaries
and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by affiliates
in rendering the services. The costs of certain services are charged directly to
the Partnership, based upon the personnel time spent by the employees rendering
the service. The cost of other services is allocated to the Partnership and
affiliates
<PAGE> 35
-5-
based upon relative size and revenue. Management believes that the methods used
to allocate services to the Partnership are reasonable. Amounts charged to the
Partnership by the General Partner for these services were $270,368, $275,758
and $257,499 for the years ended December 31, 1998, 1997 and 1996, respectively.
In 1998, 1997 and 1996, the Partnership was charged software installation
charges and maintenance fees for billing system support provided by an
affiliate, amounting to $41,275, $35,791 and $57,299, respectively.
The Partnership has entered into operating management agreements with certain
affiliates managed by the General Partner. Under the terms of these agreements,
the Partnership or an affiliate serves as the executive managing agent for
certain cable television systems and is reimbursed for certain operating and
administrative expenses. The Partnership paid $39,028, $47,598 and $45,881 under
the terms of these agreements during 1998, 1997 and 1996, respectively.
Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner was formed to
assist in the development of local advertising markets and the management and
training of local sales staff. CAC billed the Partnership $18,218, $27,936 and
$22,092 in 1998, 1997 and 1996, respectively, for these services.
In 1997, the Partnership began paying monthly program license fees to Northland
Cable News, Inc. (NCN), an affiliate of the General Partner, for the rights to
distribute programming developed and produced by NCN. Total license fees charged
by NCN were $49,365 and $22,247 during 1998 and 1997, respectively.
Due to General Partner and Affiliates
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Management fees .................... $ 41,962 $ --
Reimbursable operating costs ....... 54,323 31,532
Other amounts due to affiliates, net 11,692 2,669
-------- --------
$107,977 $ 34,201
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings ..... $ 205,171 $ 205,171
Distribution plant ..... 10,585,052 9,593,328
Other equipment ........ 573,132 517,130
Construction in progress 91,097 509,483
----------- -----------
$11,454,452 $10,825,112
=========== ===========
</TABLE>
<PAGE> 36
-6-
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
-------- ---------
<S> <C> <C>
Accounts payable ...... $338,505 $ 79,291
Interest .............. 45,833 203,535
Programmer license fees 130,695 111,345
Franchise fees ........ 48,351 46,939
Pole rental ........... 50,985 48,941
Other ................. 164,548 135,522
-------- --------
$778,917 $625,573
======== ========
</TABLE>
6. TERM LOAN:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Term loan, amended and restated on March 30, 1998, collateralized by a first
lien position on all present and future assets of the Partnership. Interest
rates vary based on certain financial covenants; currently 8.22% (weighted
average). Graduated principal payments plus interest are due quarterly until
maturity on December 31, 2002.
$10,625,000 $10,925,000
=========== ===========
</TABLE>
Annual maturities of notes payable after December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 475,000
2000 650,000
2001 850,000
2002 8,650,000
-----------
$10,625,000
===========
</TABLE>
Under the terms of the loan agreement, the Partnership has agreed to restrictive
covenants which require the maintenance of certain ratios, including a Funded
Debt to Cash Flow Ratio of 6.00 to 1 and a Cash Flow to Debt Service Ratio of
1.25 to 1, and a limitation on the maximum amount of capital expenditures of
$700,000, among other restrictions. The General Partner submits quarterly debt
compliance reports to the Partnership's creditor under this agreement. As of
December 31, 1998, the Partnership was in compliance with the terms of the loan
agreement.
The Partnership has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates. At December 31, 1998, the Partnership had
outstanding an interest rate swap agreement with its bank, having a notional
principal amount of $7,700,000. This agreement effectively changes the
Partnership's interest rate exposure to a fixed rate of 5.74%, plus an
applicable margin based on certain financial covenants (the margin at December
31, 1998 was 2.50%). The maturity date of the swap is December 31, 2000.
<PAGE> 37
-7-
At December 31, 1998, the Partnership would have been required to pay the
counterparty approximately $95,613 to settle this agreement based on fair value
estimates received from the financial institution.
7. INCOME TAXES:
Income taxes have not been recorded in the accompanying financial statements
because they are obligations of the partners. The federal and state income tax
returns of the Partnership are prepared and filed by the General Partner.
The tax returns, the qualification of the Partnership as such for tax purposes
and the amount of distributable partnership income or loss are subject to
examination by federal and state taxing authorities. If such examinations result
in changes with respect to the Partnership's qualification or in changes with
respect to the income or loss, the tax liability of the partners would likely be
changed accordingly.
Taxable loss to the limited partners was approximately $0, $(959,672) and
$(1,370,756) in 1998, 1997 and 1996, respectively, and is different from that
reported in the statements of operations due to the difference in depreciation
expense allowed for tax purposes and the amount recognized under generally
accepted accounting principles. There were no other significant differences
between taxable loss and the net loss reported in the statements of operations.
In general, under current federal income tax laws, a partner's allocated share
of tax losses from a partnership is allowed as a deduction on his individual
income tax return only to the extent of the partner's adjusted basis in his
partnership interest at the end of the tax year. No losses will be allocated to
limited partners with negative basis.
In addition, current tax law does not allow a taxpayer to use losses from a
business activity in which he does not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset other
income such as salary, active business income, dividends, interest, royalties
and capital gains. However, such losses can be used to offset income from other
passive activities. In addition, disallowed losses can be carried forward
indefinitely to offset future income from passive activities. Disallowed losses
can be used in full when the taxpayer recognizes gain or loss upon the
disposition of his entire interest in the passive activity.
<PAGE> 38
-8-
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $111,412, $118,129 and $117,515 in 1998, 1997
and 1996, respectively. Minimum lease payments through the end of the lease
terms are as follows:
<TABLE>
<S> <C>
1999 $ 3,300
2000 3,300
2001 3,300
2002 3,300
2003 3,100
Thereafter 39,700
-------
$56,000
=======
</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) or more than $250 million in annual revenue.
The Partnership qualifies as a small cable company and all of the Partnership's
cable systems qualify as small cable systems. Basic tier rates remain subject to
regulations by the local franchising authority under most circumstances until
effective competition exists. The 1996 Act expands the definition of effective
competition to include the offering of video programming services directly to
subscribers in a franchised area served by a local telephone exchange carrier,
its affiliates or any multichannel video programming distributor which uses the
facilities of the local exchange carrier. The FCC has not yet determined the
penetration criteria that will trigger the presence of effective competition
under these circumstances.
Telephone Companies. The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act; as a radio-based multichannel
programming distributor not subject to any provisions of the 1996 Act; or
through nonfranchised "open video systems" offering nondiscriminatory capacity
to unaffiliated programmers, subject to select provisions of the 1996 Act.
Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
<PAGE> 39
-9-
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross-ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public, Educational and Governmental and leased
access channels.
Self-Insurance
The Partnership began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, the Partnership began making quarterly contributions into an
insurance fund maintained by an affiliate which covers all Northland entities
and would defray a portion of any loss should the Partnership be faced with a
significant uninsured loss. To the extent the Partnership's losses exceed the
fund's balance, the Partnership would absorb any such loss. If the Partnership
were to sustain a material uninsured loss, such reserves could be insufficient
to fully fund such a loss. The capital cost of replacing such equipment and
physical plant, could have a material adverse effect on the Partnership, its
financial condition, prospects and debt service ability.
Amounts paid to the affiliate, which maintains the fund for the Partnership and
its affiliates, are expensed as incurred and are included in the statements of
operations. To the extent a loss has been incurred related to risks that are
self-insured, the Partnership records an expense and an associated liability for
the amount of the loss, net of any amounts to be drawn from the fund. For 1998
and 1997, respectively, the Partnership was charged $7,370 and $7,346 by the
fund. As of December 31, 1998, the fund had a balance of $249,617.
<PAGE> 1
EXHIBIT 10.45
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
This first amendment to amended and restated credit agreement
("Amendment"), dated as of March 30, 1998, is made and entered into between
U.S. BANK NATIONAL ASSOCIATION, a national banking association, as successor,
by merger, to U.S. Bank of Washington, National Association ("U.S. Bank"), as
agent for Lenders (in such capacity, "Agent"), and NORTHLAND CABLE PROPERTIES
EIGHT PARTNERSHIP, a Washington limited partnership ("NCP Eight"). Words and
phrases with initial capital letters shall have the meanings given to them in
Article I of this Amendment.
RECITALS:
A. On or about January 4, 1996, NCP Eight and U.S. Bank, as
Lender and Agent, entered into that certain amended and restated credit
agreement (together with all supplements, exhibits, modifications and
amendments thereto, the "Credit Agreement"), whereby Lenders extended to NCP
Eight additional credit on the terms and conditions set forth in the Credit
Agreement.
B. NCP Eight and Lenders have agreed to modify the Incremental
Rate, the repayment terms and maturity date of the Note, the definition of
"Cash Flow," and certain other provisions of the Credit Agreement. The purpose
of this Amendment is to set forth the terms and conditions of Lenders' and NCP
Eight's agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions set forth herein, the parties agree as follows:
ARTICLE I. DEFINITIONS, ETC.
1.1 Defined Terms. As used herein, capitalized terms shall have
the meanings given to them in the Credit Agreement, except as otherwise
defined herein or as the context otherwise requires.
1.2 Modified or Additional Defined Terms. Section 1.1 of the
Credit Agreement is hereby amended to modify (if presently defined in Section
1.1 of the Credit Agreement) or add (if not presently defined in Section 1.1
of the Credit Agreement) the following defined terms:
"Cash Flow" means, for the relevant period, NCP Eight's earnings
before charges against income consisting of (a) depreciation of real and
personal property; (b) amortization or write-off of goodwill and other
intangibles; (c) payment of Partner Distributions and of interest on
Indebtedness; and (d) any deferred Management Fee and Deferred Operating
Expenses (net of payments made during the relevant period with respect to any
prior period's deferred Management Fee or Deferred Operating Expenses). Cash
Flow will be computed using generally accepted accounting principles,
consistently applied, and will exclude any gain or loss on the sale of assets.
"Deferred Operating Expense" means any deferred operating expense
of NCP Eight that is payable to an Affiliate.
<PAGE> 2
"Excess Cash Flow" means, for the relevant period, the amount by
which Cash Flow exceeds the sum of, without duplication, (a) Debt Service, (b)
capital expenditures not funded with additional contributions of equity,
Subordinated Debt, or Funded Debt, (c) any deferred Management Fee, (d) Partner
Distributions, and (e) Deferred Operating ]Expenses.
"LIBOR Rate" means, for any Interest Period, the rate per annum
(computed on the basis of a 360-day year and the actual number of days elapsed)
established by Agent as its LIBOR Rate based on Agent's determination,
considering such factors as Agent deems relevant, of the rate of interest at
which U.S. dollar deposits would be offered to U.S. Bank National Association in
the London interbank market at approximately 11:00 a.m. London time on the date
which is two Business Days prior to the first day of the applicable Interest
Period for delivery on the first day of such Interest Period for the number of
months therein; provided, however, that the LIBOR Rate shall be adjusted to take
into account the maximum reserves required to be maintained for Eurocurrency
liabilities by banks during each such Interest Period as specified in Regulation
D of the Board of Governors of the Federal Reserve System, as in effect from
time to time, or any successor regulation.
"Partner Distributions" means NCP Eight's distributions to its
partners in an amount necessary to cover the incremental increase in taxes of
each of the partners due to the pass through of NCP Eight's net income under
Subchapter K of the Internal Revenue Code of 1986, assuming that such partners
are taxed at the highest marginal tax rate for federal income taxes.
"U.S. Bank" means U.S. Bank National Association, a national
banking association, as successor in interest to U. S. Bank of Washington,
National Association, and its successors and assigns.
1.3 Collateral. The definition of "Collateral" in Section 1.1 of
the Credit Agreement is hereby amended to correctly refer to the defined terms
of the documents evidencing NCP Eight's grant of security interests to Lenders
as the "Security Agreement" and the "Amendment to Security Agreement."
1.4 LIBOR Rate-Based Interest Rate. The Credit Agreement is
hereby amended by deleting the definition of "IBOR Rate" in its entirety and by
modifying each of the other defined terms that include the abbreviation "IBOR,"
such that any reference to "IBOR Rate Loan" means "LIBOR Rate Loan."
1.5 Incorporation of Recitals and Exhibits. The foregoing
recitals are incorporated in this Amendment by reference. All references to
"Exhibits" contained herein are references to exhibits attached hereto, the
terms and conditions of which are made a part hereof for all purposes.
1.6 Amendment. The Credit Agreement and the other Loan Documents
are hereby amended as set forth herein. Except as specifically provided herein,
all the terms and conditions of the Credit Agreement and each of the other Loan
Documents shall remain in full force and effect throughout the term of the Loan,
and any extensions or renewals thereof.
ARTICLE II. MODIFICATION OF LOAN
2.1 Interest Rate Modifications. Sections 3.4.1, 3.4.2, and 3.4.3
of the Credit Agreement are hereby amended in their entirety to read as follows:
2
<PAGE> 3
3.4.1 Prime Rate. Upon giving notice not later than 10 a.m.,
local time, of the date of borrowing, conversion, or renewal, NCP Eight shall
receive a Prime Rate Loan bearing interest on the outstanding principal amount
thereof at a rate equal to the Prime Rate plus 1.00 percent per annum or such
Incremental Rate as authorized by Section 3.4.3 below.
3.4.2 LIBOR Rate. Upon two Business Days' notice NCP Eight shall
have the right to select LIBOR Rate Loans in amounts not less than $500,000
initially, and in multiples of $100,000 thereafter, for an Interest Period.
LIBOR Rate Loans shall bear interest at the LIBOR Rate, plus 3.00 percent per
annum, or such Incremental Rate as authorized by Section 3.4.3 below. Agent's
LIBOR Rate is established as of approximately 8 a.m. and 10 a.m. each Business
Day, and LIBOR Rate quotes may be obtained from the Agent between 8 a.m. and
noon. Quotes based on rates set at 8 a.m. must be accepted by 10 a.m.
Quotes set at 10 a.m. must be accepted by 12:00 noon.
3.4.3 Changes in Incremental Rates. The Incremental Rates shall
be changed with certain reductions or increases in the ratio of Funded Debt to
Annualized Cash Flow for any Quarter; provided that there is then no Default or
Event of Default. Changes shall be effective on the first day of the Quarter
following the Quarter in which the requisite ratio was achieved and shall remain
in effect so long as the required ratio is maintained.
<TABLE>
<CAPTION>
Ratio of Funded Debt to Prime LIBOR
Annualized Cash Flow Incremental Incremental
(rounded to nearest hundredth) Rate Rate
------------------------------ ---- ----
<S> <C> <C>
More than 5.5:1 1.00% 3.00%
5.0:l to 5.5:1 0.50% 2.50%
less than 5.0:1 0.25% 2.00%
</TABLE>
If NCP Eight fails to comply with the required Funded Debt to
Annualized Cash Flow ratio set forth in this Section 3.4.3, the
Incremental Rate shall increase to the percentage rate applicable
to the Corresponding ratio, effective as of the first day of each
Quarter in which such ratio increases.
2.2 Repayment. Section 3.5 of the Credit Agreement is hereby
amended in its entirety to read as follows:
3.5 Repayment. Interest on the Note shall be paid Quarterly,
commencing March 31, 1996, except with respect to LIBOR Rate Loans for which
interest shall be paid either on the 90th day after the borrowing, renewal, or
conversion date with respect to such LIBOR Rate Loan, or at the end of each
Interest Period, whichever is sooner. For example, if an Interest Period expires
more than 90 days after the borrowing, renewal, or conversion date with respect
to such LIBOR Rate Loan, interest shall be paid on the 90th day and at the
expiration of the Interest Period. The principal balance of the Loan outstanding
at the expiration of the Commitment Period shall be paid Quarterly, with the
first payment due on June 30, 1998, and the entire balance due and payable on
December 31, 2002, notwithstanding anything to the contrary in Section 3.1
hereof. The Quarterly payments shall be in the amounts set forth below:
3
<PAGE> 4
<TABLE>
<CAPTION>
For Any Quarter Amount of
Ending during or On: Payment
-------------------- ---------
<S> <C>
June 30, 1998 through Dec. 31, 1998 $100,000
March 31, 1999 $100,000
June 30, 1999 through Sept. 30, 1999 $125,000
December 31, 1999 $125,000
March 31, 2000 through Dec. 31, 2000 $162,500
March 31, 2001 through Dec. 31, 2001 $212,500
March 31, 2002 through Sept. 30, 2002 $230,000
December 31, 2002 Balance
</TABLE>
2.3 Replacement Note. The Loan shall be evidenced by a promissory
note in the form attached to this Amendment as Exhibit A ("Replacement Note').
The Replacement Note shall be a 'Note" for all purposes of the Credit Agreement
and the other Loan Documents and shall be in substitution for, but not in
payment of, that certain revolving note dated January 4, 1996, in the principal
amount of $11,925,000. The revolving note shall be marked "replaced" and
retained by Agent until the loan shall have been paid in full.
2.4 Loan Extension Fee. Concurrently with the execution of this
Amendment, NCP Eight shall pay Agent a nonrefundable loan fee in the amount of
$54,625.
ARTICLE III. MODIFICATION OF COVENANTS
3.1 Interest Rate Protection. Section 6.16 of the Credit
Agreement is hereby amended to provide that NCP Eight shall maintain interest
rate protection arrangements on terms required under Section 6.16 of the Credit
Agreement for a period of not less than two years from the date of this
Amendment.
3.2 Distributions. Section 7.1 of the Credit Agreement is hereby
amended in its entirety to read as follows:
7.1 Distributions. Declare or pay any cash distributions or
return any capital to any partner of NCP Eight or authorize or make any
distribution, payment, or delivery of property or cash to any partner, or
redeem, retire, purchase, or otherwise acquire, directly or indirectly, for
consideration, any interest now or hereafter outstanding or set aside any funds
for any of the foregoing purposes, except so long as there exists no Default or
Event of Default, and no such payment or distributions shall create or be likely
to create a Default or Event of Default, NCP Eight may make the following
distributions- (a) a management fee to its General Partner not to exceed 5
percent of NCP Eight's annual gross revenue (the "Management Fee"), (b) Partner
Distributions, and (c) distributions to partners not to exceed, during any
fiscal year, the amount of Excess Cash Flow payments made to Lenders during such
fiscal year.
3.3 Cash Flow Maintenance. Section 7. 11 of the Credit Agreement
is hereby amended in its entirety to read as follows:
4
<PAGE> 5
7.11 Cash Flow Maintenance.
7.11.1 Cash Flow to Debt Service. As of the end of any Quarter
during the term of the loan commencing March 31, 1998, permit the ratio of (a)
the sum of (i) such Quarter's Cash Flow plus (ii) NCP Eight's cash on hand (up
to a maximum of $250,000) on the last day of the immediately preceding Quarter
to (b) such Quarter's Debt Service to be less than 1.25: 1.
7.11.2 Cash Flow Coverage. As of the end of any fiscal year of
NCP Eight during the term of the Loan, commencing December 31, 1998, permit the
ratio of (a) the sum of (i) such fiscal year's Cash Flow plus (ii) NCP Eight's
cash on hand (up to a maximum of $250,000) on the last day of the immediately
preceding fiscal year end to (b) the sum of (i) Debt Service, (ii) capital
expenditures not funded by additional contributions of equity, Subordinated
Debt, or Funded Debt, (iii) Partner Distributions paid in cash, and (iv) other
distributions to partners paid in cash during such fiscal year to be less than
1.0:1.
7.11.3 Funded Debt to Cash Flow. As of the end of any Quarter
during the term of the Loan, permit the ratio of Funded Debt to Annualized Cash
Flow to exceed the following ratios:
<TABLE>
<CAPTION>
For Any Quarter Ending Funded Debt to Annualized
During or On: Cash Flow Ratio
<S> <C>
March 31, 1998, through December 31, 1998 6.00:1.0
March 31, 1999, through December 3 1, 1999 5.50:1.0
March 31, 2000, through December 31, 2000 5.00:1.0
March 31, 2001, through December 31, 2001 4.50:1.0
March 31, 2001, and thereafter 4.00:1.0
</TABLE>
3.4 Capital Expenditure. Section 7.12 of the Credit Agreement is
hereby amended in its entirety to read as follows:
7.12 Capital Expenditures. Permit the total amount of capital
expenditures to exceed $700,000 in the calendar year 1998, or in any of the
calendar years thereafter. Unused capital expenditures under this Section 7.12
in any one year may be carried over to the next consecutive year, but not
thereafter.
3.5 Funded Debt to Equivalent Subscriber Ratio. Section 7.13.2 of
the Credit Agreement is hereby amended in its entirety to read as follows:
7.13.2 Funded Debt to Equivalent Subscriber Ratio. On any of the
dates set forth below, permit Funded Debt, per Equivalent Subscriber, to exceed
the following amounts:
5
<PAGE> 6
<TABLE>
<CAPTION>
As of: Funded Debt Per
------ Equivalent Subscriber
---------------------
<S> <C>
December 31, 1998 $900
December 31, 1999 $850
December 31, 2000 $800
December 31, 2001, and thereafter $700
</TABLE>
3.6 Deferral of Payments. Section 7.16 of the Credit Agreement is
hereby amended in its entirety to read as follows:
7.16 Deferred Operating Expense. Pay any Deferred Operating
Expense (a) when a Default or Event of Default has occurred or when payment of
the Deferred Operating Expense will create or is likely to create a Default or
Event of Default, or (b) on any day that is later than 12 months after the
operating expense was deferred.
ARTICLE IV. WAIVER OF DEFAULTS
4.1 Waiver. NCP Eight acknowledges that it failed to comply with
the financial covenants set forth in Sections 7.11.3 and 7.12 of the Credit
Agreement as of December 31, 1997. U.S. Bank waives its rights and remedies
related to NCP Eight's violations of Sections 7.11.3 and 7.12 of the Credit
Agreement as of December 31, 1997. U.S. Bank's waiver of NCP Eight's Default is
expressly limited to those Defaults as of December 31, 1997, and is not
applicable to any other covenant, financial or otherwise, contained in the
Credit Agreement or in any other Loan Document.
4.2 Release. As a condition of Lenders' waiver set forth in
Section 4.1 of this Amendment, NCP Eight hereby expressly covenants, promises,
and agrees that it shall not now or hereafter institute, maintain, or assert,
either directly or indirectly, any claim or demand, or right or cause of action,
known or unknown, that has accrued or that could have been made or brought at
any time up to and including the date of this Amendment against Agent or Lenders
or any of their respective successors, affiliates, officers, directors,
employees, or agents, past or present, arising out of or claiming to arise out
of any past or present relationship, whether contractual or otherwise, between
Agent and/or Lenders and NCP Eight. This release may be treated as a full and
complete defense to, and may be used for the basis for an injunction against,
any action, suit, arbitration, or other procedure or testimony that may be
instituted by NCP Eight.
ARTICLE V. CONDITIONS PRECEDENT
The modifications to the Credit Agreement and the other Loan
Documents set forth in this Amendment shall not be effective unless and until
the following conditions have been fulfilled to Agent's satisfaction:
(a) Agent shall have received this Amendment and the Replacement
Note, duly executed and delivered by the parties thereto.
6
<PAGE> 7
(b) Agent shall have received, duly executed and delivered by NCP
Eight, a certificate in form and substance satisfactory to Agent, confirming
that NCP Eight's authorizing resolutions delivered to Agent have not been
revoked and that NCP Eight's limited partnership agreement has not been amended
or altered since NCP Eight delivered a copy of the agreement to Agent.
(c) On or before May 29, 1998, Agent shall have received, with
respect to the newly constructed headend facility along Highway 17 near Reform,
Pickens County, Alabama (the "New Headend Site") ' an executed fixture filing
perfecting Lenders' security interest in Collateral at the New Headend Site and
a form UCC-3 change statement covering personal property Collateral at the New
Headend Site.
(d) NCP Eight shall have paid to lender all fees and expenses
required to be paid by NCP Eight, including without limitation the nonrefundable
loan fee of $54,625.
ARTICLE VI. GENERAL PROVISIONS
6.1 Notice to U.S. Bank. The designation of the Person to be
notified at Agent and Agent's and Lenders' address for the purpose of any notice
are hereby changed to:
U.S. Bank National Association
1420 Fifth Avenue
Post Office Box 720
Seattle, Washington 98111-0720
Attention: Matthew S. Thoreson, Vice President
Facsimile Number: (206) 344-2331
6.2 Representations and Warranties. NCP Eight hereby represents
and warrants to Agent that as of the date of this Amendment, there exists no
Default or Event of Default. All representations and warranties of NCP Eight
contained in the Credit Agreement or any other Loan Document, or otherwise made
in connection therewith or herewith are true and correct as of the date of this
Amendment.
6.3 Security. The parties hereto agree that all Loan Documents,
whether creating, evidencing, or Perfecting Lenders' security interests and
liens against the Collateral, including without limitation the Amendment to
Security Agreement, the Security Agreement, the Franchise Assignment, the NCC
Subordination Agreement, and all financing statements (a) shall remain in full
force and effect, (b) shall secure the Loan, as amended, and all other
Obligations of NCP Eight under the Credit Agreement and the other Loan
Documents, and (c) are enforceable without defense, offset, or counterclaim.
Without limiting the scope of the foregoing agreement, NCP Eight hereby
acknowledges and agrees that its lease with respect to the New Headend Site is a
Material Agreement and that it is among the "Rights" assigned to Lenders under
the Franchise Assignment.
6.4 Payment of Expenses. NCP Eight shall pay on demand all costs
and expenses of Agent and Lenders incurred in connection with the preparation,
negotiation, execution, and delivery of this Amendment, including without
limitation reasonable attorney fees.
7
<PAGE> 8
6.5 Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original agreement, but all of
which together shall constitute one and the same agreement.
6.6 Statutorv Notice. ORAL AGREEMENTS OR ORAL COMMITMENTS TO
LOAN MONEY, TO EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT
ARE NOT ENFORCEABLE UNDER WASHNGTON LAW.
8
<PAGE> 9
IN WITNESS OF, Agent and Lenders and NCP Eight have caused this Amendment to be
duly executed to be effective as of March 30, 1998, although signed after that
date.
NCP EIGHT:
NORTHLAND CABLE PROPERTIES EIGHT
LIMITED PARTNERSHIP
By: Northland Communications
Corporation, its
Managing General Partner
BY
Title
AGENT:
U.S. BANK NATIONAL ASSOCIATION
BY
--------------------------------------
Matthew S. Thoreson, Vice President
LENDER:
U.S. BANK NATIONAL ASSOCIATION
By
--------------------------------------
Matthew S. Thoreson, Vice President
9
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 800,110
<SECURITIES> 0
<RECEIVABLES> 108,011
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,454,452
<DEPRECIATION> 4,641,375
<TOTAL-ASSETS> 13,197,193
<CURRENT-LIABILITIES> 1,134,371
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,437,822
<TOTAL-LIABILITY-AND-EQUITY> 13,197,193
<SALES> 4,876,464
<TOTAL-REVENUES> 4,876,464
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,566,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 908,651
<INCOME-PRETAX> (634,150)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (634,150)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
