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FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-29354 eff. 7-1-91)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from ________to________
Commission file number 0-16718
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
STATE OF WASHINGTON 91-1366564
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 WASHINGTON MUTUAL TOWER
1201 THIRD AVENUE, SEATTLE, WASHINGTON 98101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 621-1351
Securities registered pursuant to including Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
(NONE) (NONE)
Securities registered pursuant to Section 12(g) of the Act:
UNITS OF LIMITED PARTNERSHIP INTEREST
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
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DOCUMENTS INCORPORATED BY REFERENCE
(Partially Incorporated into Part IV)
(1) Form S-1 Registration Statement declared effective on August 6, 1987
(No. 33-13879).
(2) Form 10-K Annual Reports for fiscal years ended December 31, 1987,
December 31, 1988, December 31, 1990, December 31, 1992 and December 31,
1993 respectively.
(3) Form 10-Q Quarterly Reports for periods ended June 30, 1989, September
30, 1989 and March 31, 1993, respectively.
(4) Form 8-K dated September 27, 1993
(5) Form 8-K dated March 1, 1996
(6) Form 8-K dated December 5, 1997
This filing contains ____ pages. Exhibits Index appears on page ____. Financial
Statements/Schedules Index appears on page ____. -
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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 Seven Limited Partnership (the "Partnership") is
a Washington limited partnership consisting of two general partners (the
"General Partners") and approximately 2,825 limited partners as of December 31,
2000. Northland Communications Corporation, a Washington corporation, is the
Managing General Partner of the Partnership (referred to herein as "Northland"
or the "Managing General Partner"). FN Equities Joint Venture, a California
general partnership, is the Administrative General Partner of the Partnership
(the "Administrative General Partner").
Northland was formed in March 1981 and is principally involved in the
ownership and management of cable television systems. Northland currently
manages the operations and is the General Partner for cable television systems
owned by 4 limited partnerships. Northland is also the parent company of
Northland Cable Properties, Inc. which was formed in February 1995 and is
principally involved in direct ownership of cable television systems and is the
majority member and manager of Northland Cable Ventures LLC ("NCV"). Northland
is a subsidiary of Northland Telecommunications Corporation ("NTC"). Other
subsidiaries of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and principally
involved in the direct ownership of cable television systems. Sole
shareholder of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally
involved in the production and development of local news, sports and
informational programming for the Partnership and other Northland
affiliates.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and
principally involved in the development and production of computer software
used in billing and financial record keeping for Northland-affiliated cable
systems. Sole shareholder of Cable Ad-Concepts.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally
involved in the sale, development and production of video commercial
advertisements that are cablecast on Northland-affiliated cable
systems.
NORTHLAND MEDIA, INC. - formed in April 1995 as a holding company. Sole
shareholder of the two following 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 April 17, 1987 and began operations in 1987.
As of December 31, 2000, the total number of basic subscribers served by the
Systems was 37,358, and the Partnership's penetration rate (basic subscribers as
a percentage of homes passed) was approximately 62%.
The Partnership has 26 non-exclusive franchises to operate the Systems.
These franchises, which will expire at various dates through 2024, have been
granted by local and county authorities in the areas in which the Systems
operate. Franchise fees are paid to the granting governmental authorities. These
fees vary between 1% 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 Brenham and
Bay City, Texas, Camano Island and Sequim, Washington, as well as Vidalia,
Sandersville, Toccoa and Royston, Georgia. The following is a description of
these areas:
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Brenham, TX: Brenham, Texas, with a population of approximately 12,000 is
strategically located about midway between Houston and Austin. The population
has grown steadily over the last 15 years at a rate of two and one-half percent
per year. The city of Brenham serves as a hub for commerce, trade and services
to the surrounding counties of Burleson, Waller, Lee, Fayette, Austin, Colorado
and Grimes. Brenham's proximity to Houston makes it a gateway through which
international trade and commerce proceed to Austin, San Antonio and other
western cities. A main line of the Santa Fe Railway also services the city.
Certain information regarding the Brenham, TX system as of December 31, 2000, is
as follows:
Basic Subscribers 3,957
Tier Subscribers 1,516
Premium Subscribers 1,445
Estimated Homes Passed 5,690
Bay City, TX: The Bay City system serves the communities of Bay City,
Markham, Matagorda, Van Vleck and certain unincorporated areas of Matagorda
county in southeast Texas. The local economies of the communities included in
the Bay City system are based primarily in agriculture, chemical manufacturing
and petroleum processing. Rich, productive agricultural lands are located along
the banks of the Colorado River in the Bay City area. Rice is the major crop.
There is an abundance of recreational and sporting activities in the Bay
City area, including freshwater and deep-sea fishing. The Gulf of Mexico,
Matagorda Beach, the Colorado River, bays and bayous combine to meet the
recreational needs of both tourists and residents. Certain information regarding
the Bay City, TX system as of December 31, 2000, is as follows:
Basic Subscribers 5,107
Tier Subscribers 2,259
Premium Subscribers 2,140
Estimated Homes Passed 8,720
Camano Island, WA: Camano Island is approximately 16 miles long and six
miles wide with a year-round population of over 6,000. Located in the Puget
Sound, north of Seattle and five miles west of Stanwood, Washington, the island
is connected to the mainland by a bridge which provides easy access to
neighboring communities. The Camano Island system also serves the communities of
Stanwood, WA and Bayview, WA.
Camano Island is currently experiencing growth at a rate of 200 to 250 new
homes per year. The island is primarily residential with neighborhood grocery
stores, service stations, restaurants and other incidental services. The
neighboring mainland community of Stanwood provides the area with an education
system, additional shopping and medical services. Many employed residents of
Camano Island work in the neighboring cities of Everett (an industrial center),
Stanwood and Mount Vernon (mainly agricultural), while many have chosen Camano
Island as a retirement residence. Certain information regarding the Camano
Island, WA system as of December 31, 2000, is as follows:
Basic Subscribers 6,910
Tier Subscribers 3,753
Premium Subscribers 2,976
Estimated Homes Passed 10,100
Sequim, WA: Clallam County's population is approximately 63,600, with
approximately 18,500 residing in the city of Port Angeles, WA, the county seat.
Sequim is located approximately 15 miles east of Port Angeles. The county's work
force is concentrated in the lumber/wood products, logging, tourism,
aerospace/aviation, fishing and education industries. Some of the most
productive forest land in the United States is located on the Olympic Peninsula,
and timber has been the traditional mainstay of Clallam County's economy. A
natural deep-water harbor and relative proximity to the Far East have encouraged
international trade development for the county's products. The Olympic National
Park, ferry access to Victoria, British Columbia, Canada, sport fishing, and
other scenic and recreational attractions bring a steady stream of tourists
through Clallam County. Certain information regarding the Sequim, WA system as
of December 31, 2000, is as follows:
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Basic Subscribers 5,152
Tier Subscribers 2,903
Premium Subscribers 680
Estimated Homes Passed 7,230
Vidalia, GA: Located approximately 15 miles south of Interstate 16, the
city of Vidalia is in Toombs County and lies midway between Savannah and Macon.
With a population of approximately 12,000, Vidalia is home of the Vidalia Sweet
Onion and provides services and support for the surrounding agricultural and
light manufacturing industries. Nearby Lyons, with a population of approximately
4,500 is the county seat of Toombs County. Certain information regarding the
Vidalia, GA system as of December 31, 2000, is as follows:
Basic Subscribers 5,549
Tier Subscribers 1,685
Premium Subscribers 2,499
Estimated Homes Passed 12,625
Sandersville, GA: Located midway between Augusta and Macon, Sandersville is
the county seat of Washington County. Major employers with operations in the
communities served by the Sandersville system include kaolin processors,
transportation, both trucking and rail and a variety of light manufacturers.
Certain information regarding the Sandersville, GA system as of December 31,
2000, is as follows:
Basic Subscribers 3,364
Tier Subscribers 926
Premium Subscribers 2,458
Estimated Homes Passed 4,730
Toccoa and Royston, GA: The City of Toccoa is located in northeastern
Georgia adjacent to the South Carolina border at the headwaters of Lake
Hartwell. It is 81 miles northeast of Atlanta and 65 miles southwest of
Greenville, South Carolina. Toccoa serves as the county seat of Stephens County
and its economy is driven by the textile industry as well as agricultural
products such as poultry, pulpwood and livestock.
Split between Hart and Franklin counties, Royston is located in northeastern
Georgia approximately 60 miles north of Athens. The economy of Royston is
primarily driven by manufacturing industries. Certain information regarding the
Toccoa and Royston, Georgia systems as of December 31, 2000, is as follows:
Basic Subscribers 7,319
Super Basic Subscribers 1,630
Premium Subscribers 3,166
Estimated Homes Passed 11,610
The Partnership had 72 employees as of December 31, 2000. Management of
these systems is handled through offices located in the towns of Brenham and Bay
City, Texas, as well as Vidalia, Sandersville, Toccoa and Royston, Georgia. The
Sequim and Camano systems share the costs of offices maintained by affiliates of
the Partnership pursuant to the terms of operating management agreements.
Pursuant to the Agreement of Limited Partnership, the Partnership reimburses the
Managing General Partner for time spent by the Managing General Partner's
accounting staff on Partnership accounting and bookkeeping matters. (See Item
13(a) below.)
The Partnership's cable television business is not considered seasonal. The
business of the Partnership is not dependent upon a single customer or a few
customers, the loss of any one or more of which would have a material adverse
effect on its business. No customer accounts for 10% or more of revenues. No
material portion of the Partnership's business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of any
governmental unit, except that franchise agreements may be terminated or
modified by the franchising authorities as noted above. During the last year,
the Partnership did not engage in any research and development activities.
Partnership revenues are derived primarily from monthly payments received
from cable television subscribers. Subscribers are divided into four categories:
basic subscribers, expanded basic subscribers, premium subscribers and digital
subscribers. "Basic
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subscribers" are households that subscribe to the basic level of service, which
generally provides access to the three major television networks (ABC, NBC and
CBS), a few independent local stations, PBS (the Public Broadcasting System) and
certain satellite programming services, such as ESPN, CNN or The Discovery
Channel. "Expanded basic subscribers" are households that subscribe to an
additional level of programming service, the content of which varies from system
to system. "Premium subscribers" are households that subscribe to one or more
"pay channels" in addition to the basic service. These pay channels include such
services as Showtime, Home Box Office, Cinemax, Disney, The Movie Channel, Starz
and Encore. "Digital subscribers" are those who subscribe to digitally delivered
video and audio services where offered.
COMPETITION
Cable television systems currently experience competition from several
sources, including broadcast television, cable overbuilds, direct broadcast
satellite services, private cable and multichannel multipoint distribution
service systems. Cable television systems are also in competition in various
degrees with other communications and entertainment media, including motion
pictures, home video cassette recorders, internet data delivery and internet
video delivery. The following provides a summary description of these sources of
competition.
BROADCAST TELEVISION
Cable television systems have traditionally competed with broadcast
television, which consists of television signals that the viewer is able to
receive directly on his television without charge using an "off-air" antenna.
The extent of this competition is dependent in part upon the quality and
quantity of signals available by antenna reception as compared to the services
provided by the local cable system. Accordingly, cable operators find it less
difficult to obtain higher penetration rates in rural areas (where signals
available off-air are limited) than in metropolitan areas where numerous, high
quality off-air signals are often available without the aid of cable television
systems. The recent licensing of digital spectrum by the FCC will provide
incumbent broadcast licenses with the ability to deliver high definition
television pictures and multiple digital-quality program streams, as well as
advanced digital services such as subscription video.
OVERBUILDS
Cable television franchises are not exclusive, so that more than one cable
television system may be built in the same area. This is known as an
"overbuild." Overbuilds have the potential to result in loss of revenues to the
operator of the original cable television system. Constructing and developing a
cable television system is a capital intensive process, and it is often
difficult for a new cable system operator to create a marketing edge over the
existing system. Generally, an overbuilder would be required to obtain
franchises from the local governmental authorities, although in some instances,
the overbuilder could be the local government itself. In any case, an
overbuilder would be required to obtain programming contracts from entertainment
programmers and, in most cases, would have to build a complete cable system such
as headends, trunk lines and drops to individual subscribers homes throughout
the franchise areas.
Federal cross-ownership restrictions historically limited entry by local
telephone companies into the cable television business. The 1996 Telecom Act
eliminated this cross-ownership restriction. See "Regulation and Legislation"
below. It is therefore possible for companies with considerable resources to
overbuild existing cable operators and enter the business. Several telephone
companies have begun seeking cable television franchises from local governmental
authorities and constructing cable television systems. The Partnership cannot
predict at this time the extent of telephone company competition that will
emerge in areas served by the Partnership's cable television systems. The entry
of telephone companies as direct competitors, however, is likely to continue
over the next several years and could adversely affect the profitability and
market value of the Partnership's systems. The entry of electric utility
companies into the cable television business, as now authorized by the 1996
Telecom Act, could have a similar adverse effect.
DIRECT BROADCAST SATELLITE SERVICE
High powered direct-to-home satellites have made possible the wide-scale
delivery of programming to individuals throughout the United States using small
roof-top or wall-mounted antennas. The two leading DBS providers have
experienced dramatic growth over the last several years and together now serve
over 10 million customers nationwide. Companies offering direct broadcast
satellite service use video compression technology to increase channel capacity
of their systems to more than 100 channels and to provide
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packages of movies, satellite networks and other program services which are
competitive to those of cable television systems. DBS companies historically
faced significant legal and technological impediments to providing popular local
broadcast programming to their customers. Recent federal legislation reduced
this competitive disadvantage. Nevertheless, technological limitations still
affect DBS companies, and it is expected that DBS companies will offer local
broadcast programming only in the top 50 to 100 U.S. markets for the foreseeable
future. The same legislation reduced the compulsory copyright fees paid by DBS
companies and allowed them to continue offering distant network signals to rural
customers. The availability of low or no cost DBS equipment, delivery of local
signals in some markets and exclusivity with respect to certain sports
programming has increased DBS's market share over recent years. The impact of
DBS services on the Partnership's market share within its service areas cannot
be precisely determined but is estimated to have taken away between 2% and 6%,
depending upon the specific area.
PRIVATE CABLE
Additional competition is provided by private cable television systems,
known as satellite master antenna television, serving multi-unit dwellings such
as condominiums, apartment complexes, and private residential communities. These
private cable systems may enter into exclusive agreements with apartment owners
and homeowners associations, which may preclude operators of franchised systems
from serving residents of these private complexes. Operators of private cable,
which do not cross public rights of way, are free from the federal, state and
local regulatory requirements imposed on franchised cable television operators.
MULTICHANNEL MULTIPOINT DISTRIBUTION SERVICE SYSTEMS
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution service systems, commonly
called wireless cable, which are licensed to serve specific areas. Multichannel,
multipoint distribution service systems use low-power microwave frequencies to
transmit television programming over-the-air to paying subscribers. This
industry is less capital intensive than the cable television industry, and it is
therefore more practical to construct systems using this technology in areas of
lower subscriber penetration.
REGULATION AND LEGISLATION
SUMMARY
The following summary addresses the key regulatory developments and
legislation affecting the cable television industry. Other existing federal
legislation and regulations, copyright licensing and, in many jurisdictions,
state and local franchise requirements are currently the subject of a variety of
judicial proceedings, legislative hearings and administrative and legislative
proposals which could change, in varying degrees, the manner in which cable
television systems operate. Neither the outcome of these proceedings nor their
impact upon the cable television industry or the Partnership can be predicted at
this time.
The Partnership expects to adapt its business to adjust to the changes that
may be required under any scenario of regulation. At this time, the Partnership
cannot assess the effects, if any, that present regulation may have on the
Partnership's operations and potential appreciation of its Systems. There can be
no assurance that the final form of regulation will not have a material adverse
impact on the Partnership's operations.
The operation of a cable system is extensively regulated at the federal,
local, and, in some instances, state levels. The Cable Communications Policy Act
of 1984, the Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), and the 1996 Telecommunications Act (the "1996 Telecom
Act", and, collectively, the "Cable Act") establish a national policy to guide
the development and regulation of cable television systems. The Federal
Communications Commission ("FCC") has principal responsibility for implementing
the policies of the Cable Act. Many aspects of such regulation are currently the
subject of judicial proceedings and administrative or legislative proposals.
Legislation and regulations continue to change, and the Partnership cannot
predict the impact of future developments on the cable television industry.
Future regulatory and legislative changes could adversely affect the
Partnership's operations.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the cable
television industry, which limited the ability of cable companies to increase
subscriber fees. Under that regime, all cable systems were subject to rate
regulation, unless they face
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"effective competition" in their local franchise area. Federal law now defines
"effective competition" on a community-specific basis as requiring satisfaction
of conditions rarely satisfied in the current marketplace.
Although the FCC established the underlying regulatory scheme, local
government units, commonly referred to as local franchising authorities, are
primarily responsible for administering the regulation of the lowest level of
cable service called the basic service tier. The basic service tier typically
contains local broadcast stations and public, educational, and government access
channels. Local franchising authorities also have primary responsibility for
regulating cable equipment rates. Under federal law, charges for various types
of cable equipment must be unbundled from each other and from monthly charges
for programming services. Before a local franchising authority begins basic
service rate regulation, it must certify to the FCC that it will follow
applicable federal rules. Many local franchising authorities have voluntarily
declined to exercise their authority to regulate basic service rates.
As of December 31, 2000, approximately 4% of the Partnership's local
franchising authorities were certified to regulate basic tier rates. The 1992
Cable Act permits communities to certify and regulate rates at any time, so that
it is possible that additional localities served by the systems may choose to
certify and regulate rates in the future.
The FCC itself historically administered rate regulation of cable
programming service tiers, which represent the expanded level of non- "basic"
and non-"premium", programming services. The 1996 Telecom Act, however, provided
special rate relief for small cable operators offering cable programming service
tiers. The elimination of cable programming service tier regulation afforded the
Partnership substantially greater pricing flexibility.
Under the rate regulations of the FCC, most cable systems were required to
reduce their basic service tier and cable programming service tier rates in 1993
and 1994, and have since had their rate increases governed by a complicated
price cap scheme that allows for the recovery of inflation and certain increased
costs, as well as providing some incentive for expanding channel carriage. The
FCC has modified its rate adjustment regulations to allow for annual rate
increases and to minimize previous problems associated with regulatory lag.
Operators also have the opportunity to bypass this "benchmark" regulatory scheme
in favor of traditional "cost-of-service" regulation in cases where the latter
methodology appears favorable. Cost of service regulation is a traditional form
of rate regulation, under which a utility is allowed to recover its costs of
providing the regulated service, plus a reasonable profit.
In a particular effort to ease the regulatory burden on small cable
systems, the FCC created special rate rules applicable for systems with fewer
than 15,000 subscribers owned by an operator with fewer than 400,000
subscribers. The special rate rules allow for a simplified cost-of-service
showing. All of the Partnership's systems are eligible for these simplified
cost-of-service rules, and have calculated rates generally in accordance with
those rules.
Under the FCC's rate rules, premium cable services offered on a per-channel
or per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. However, federal law requires
that the basic service tier be offered to all cable subscribers and limits the
ability of operators to require purchase of any cable programming service tier
if a customer seeks to purchase premium services offered on a per-channel or
per-program basis, subject to a technology exception which sunsets in 2002. The
1996 Telecom Act also relaxes existing "uniform rate" requirements by specifying
that uniform rate requirements do not apply where the operator faces "effective
competition," and by exempting bulk discounts to multiple dwelling units,
although complaints about predatory pricing still may be made to the FCC.
Regulation by the FCC of cable programming service tier rates for all
systems, regardless of size, sunset pursuant to the 1996 Telecom Act on March
31, 1999. Certain legislators, however, have called for new rate regulations.
Should this occur, all rate deregulation, including that applicable to small
operators like the Partnership, could be jeopardized.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom Act creates a more favorable environment for the
Partnership to provide telecommunications services beyond traditional video
delivery. It provides that no state or local laws or regulations may prohibit or
have the effect of prohibiting any entity from providing any interstate or
intrastate telecommunications service. A cable operator is authorized under the
1996 Telecom Act to provide telecommunications services without obtaining a
separate local franchise. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way and
may require reasonable, competitively neutral compensation for management of the
public rights-of-way when cable operators provide telecommunications service.
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The favorable pole attachment rates afforded cable operators under federal
law can be gradually increased by utility companies owning the poles, beginning
in 2001, if the operator provides telecommunications service, as well as cable
service, over its plant. The FCC recently clarified that a cable operator's
favorable pole rates are not endangered by the provision of Internet services,
but the U.S. Court of Appeals for the 11th Circuit recently ruled in Gulf Power
Co. v. FCC, 208F.3d 1263 (11th Cir. 2000) ("Gulf Power") that the FCC has no
authority to regulate pole rents for cable systems providing Internet services
(because, the court ruled, Internet services are not telecommunications services
or cable services). The court subsequently stayed the issuance of the mandate in
Gulf Power pending the filing of and final action on a petition for write of
certiorari seeking review of the Gulf Power decision in the U.S. Supreme Court.
The stay allows for the orderly review of the decision in the U.S. Supreme
Court. In the interim, the FCC may continue to process pending pole attachment
complaints under its existing rules and procedures. If the 11th Circuit decision
goes into effect, it could significantly increase pole attachment rates and
adversely impact cable operators.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Telecom Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. The Supreme Court
effectively upheld most of the FCC interconnection regulations, but recently the
8th Circuit Court of Appeals vacated other portions of the FCC's rules on
slightly different grounds. More recently, the 9th Circuit Court of Appeals
ruled in the FCC's favor on these same rules, creating a split in authority that
may be resolved by the Supreme Court. Although these regulations should enable
new telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including which specific network elements the
FCC can mandate that incumbent carriers make available to competitors, remain
unresolved.
Similarly, if another FCC decision requiring that incumbent telephone
companies permit co-location of competitors' equipment on terms more favorable
to competitors is sustained on administrative and judicial appeal, this
decision, too, would make it easier for new entrants, including the Partnership,
to provide telecommunications service.
INTERNET SERVICE
There is at present no significant federal regulation of cable system
delivery of Internet services. Furthermore, the FCC recently issued several
reports finding no immediate need to impose this type of regulation. However,
this situation may change as cable systems expand their broadband delivery of
Internet services. In particular, proposals have been advanced at the federal
level that would require cable operators to provide access to unaffiliated
Internet-service providers and online service providers. In one instance, the
Federal Trade Commission is considering whether and to what extent to impose, as
a condition of Time Warner's merger with America Online, certain "open access"
requirements on Time Warner's cable systems, thereby allowing unaffiliated
Internet-service providers access to Time Warner's broadband distribution
infrastructure.
Some local franchising authorities unsuccessfully tried to impose mandatory
Internet access or "open access" requirements as part of cable franchise
renewals or transfers. In AT&T Corp v. City of Portland, No. 99-35609 (9th Cir.,
June 22, 2000), the federal Court of Appeals for the Ninth Circuit overturned a
federal district court in Portland, Oregon's ruling that local franchising
authorities have the lawful authority to impose these type of conditions. The
lower court had ruled that the City of Portland had inherent authority to
require, as a condition of the City's consent to the transfer of TCI's cable
franchise to AT&T, that AT&T provide "open access" to the "cable modem platform"
of the Excite@Home Internet service. On appeal, the Court of Appeals rejected
the City's attempt to impose "open access" conditions on AT&T delivery of
Internet service over the cable system because that service, according to the
Court, is not a cable service, but a "telecommunications service." The potential
regulatory state and federal implications of this rationale are unclear, given
the various regulatory requirements for the provision of telecommunications
services. There have been at least two additional court rulings that have
rejected local imposition of "open access" conditions on cable-provided Internet
access, but those ruling have employed very different legal reasoning. A federal
court in Virginia found that Internet service was a cable service, but as such
was exempt from local "open access" regulation. Another federal court in Florida
even more recently ruled that "open access" could not be imposed on local
operators because doing so would violate the First Amendment. Other local
authorities have imposed or may impose mandatory Internet access requirements on
cable operators. These developments could, if they become widespread, burden the
capacity of cable systems and complicate any plans the Partnership may have to
develop for providing Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
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The 1996 Telecom Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers, including the regional telephone
companies, can now compete with cable operators both inside and outside their
telephone service areas with certain regulatory safeguards. Because of their
resources, local exchange carriers could be formidable competitors to
traditional cable operators. Various local exchange carriers currently are
providing video programming services within their telephone service areas
through a variety of distribution methods, including both the deployment of
broadband wire facilities and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers providing video
programming should be regulated as a traditional cable operator, subject to
local franchising and federal regulatory requirements, unless the local exchange
carrier elects to deploy its plant as an open video system. To qualify for
favorable open video system status, the competitor must reserve two-thirds of
the system's activated channels for unaffiliated entities. The Fifth Circuit
Court of Appeals reversed certain of the FCC's open video system rules,
including its preemption of local franchising. The FCC recently revised its OVS
rules to eliminate this general preemption, thereby leaving franchising
discretion to local and state authorities. It is unclear what effect this ruling
will have on the entities pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Cable operator
buyouts of co-located local exchange carrier systems, and joint ventures between
cable operators and local exchange carriers in the same market also are
prohibited. The 1996 Telecom Act provides a few limited exceptions to this
buyout prohibition, including a carefully circumscribed "rural exemption." The
1996 Telecom Act also provides the FCC with the limited authority to grant
waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utility Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several of these utilities have been granted broad authority by the FCC to
engage in activities which could include the provision of video programming.
ADDITIONAL OWNERSHIP RESTRICTIONS
The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable
cross-ownership, including broadcast network/cable restrictions, but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Cable Act leaves in
place existing restrictions on cable cross-ownership with satellite master
antenna television and multichannel multipoint distribution service facilities,
but lifts those restrictions where the cable operator is subject to effective
competition. FCC regulations permit cable operators to own and operate satellite
master antenna television systems within their franchise area, provided that
their operation is consistent with local cable franchise requirements.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements.
Broadcast signal carriage is the transmission of broadcast television signals
over a cable system to cable customers. These requirements, among other things,
allow local commercial television broadcast stations to elect once every three
years between a "must carry" status or a "retransmission consent" status. Less
popular stations typically elect must carry, which is the broadcast signal
carriage requirement that allows local commercial television broadcast stations
to require a cable system to carry the station. Must carry requests can dilute
the appeal of a cable system's programming offerings because a cable system with
limited channel capacity may be required to forego carriage of popular channels
in favor of less popular broadcast stations electing must carry. More popular
stations, such as those affiliated with a national network, typically elect
retransmission consent, which is the broadcast signal carriage rule that allows
local commercial television broadcast stations to negotiate terms (such as
mandating carriage of an affiliated cable network) for granting permission to
the cable operator to carry the stations. Retransmission consent demands may
require substantial payments or other concessions.
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The Partnership has been able to reach agreements with all of the
broadcasters who elected retransmission consent. To date, compliance with the
"retransmission consent" and "must carry" provisions of the 1992 Cable Act has
not had a material effect on the Partnership, although these provisions may
affect the operations of the Partnership in the future, depending on factors as
market conditions, the introduction of digital broadcasts, channel capacity and
similar matters when these arrangements are negotiated or renegotiated.
The burden associated with must carry may increase substantially if
broadcasters proceed with planned conversion to digital transmission and the FCC
determines that cable systems must carry all analog and digital broadcasts in
their entirety. This burden would reduce capacity available for more popular
video programming and new Internet and telecommunication offerings. The
broadcast industry continues to press the FCC on the issue of digital must
carry. A rulemaking regarding must carry obligations during the transition from
analog to digital broadcasting remains pending at the FCC. It remains unclear
when a final decision will be released.
ACCESS CHANNELS
Local franchising authorities can include franchise provisions requiring
cable operators to set aside certain channels for public, educational and
governmental access programming. Federal law also requires cable systems to
designate a portion of their channel capacity, up to 15% in some cases, for
commercial leased access by unaffiliated third parties. The FCC has adopted
rules regulating the terms, conditions and maximum rates a cable operator may
charge for commercial leased access use. In the Partnership's experience to
date, requests for commercial leased access carriages have been relatively
limited.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes video
programmers affiliated with cable companies from favoring their cable operators
over new competitors and requires these programmers to sell their programming to
other multichannel video distributors. This provision limits the ability of
vertically integrated cable programmers to offer exclusive programming
arrangements to cable companies. There also has been interest expressed in
further restricting the marketing practices of cable programmers, including
subjecting programmers who are not affiliated with cable operators or
programmers who deliver their service by terrestrial means (rather than by
satellite) to the program access requirements. These changes should not have a
dramatic impact on the Partnership, but would limit potential competitive
advantages the Partnership enjoys.
INSIDE WIRING; SUBSCRIBER ACCESS
In an order issued in 1997, the FCC established rules that require an
incumbent cable operator upon expiration of a multiple dwelling unit service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a multiple dwelling unit building. These inside wiring rules
are expected to assist building owners in their attempts to replace existing
cable operators with new programming providers who are willing to pay the
building owner a higher fee, where this fee is permissible. The FCC has also
proposed abrogating all exclusive multiple dwelling unit service agreements held
by incumbent operators.
With limited exceptions, existing FCC regulations prohibit any state or
local law or regulations, or private covenant, private contract, lease
provision, homeowners' association rule or similar restriction, impairing the
installation, maintenance or use of certain video reception antennas on property
within the exclusive control of a tenant or property owner.
OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as:
- equal employment opportunity,
- subscriber privacy,
- programming practices, including, among other things,
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- 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 cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
- lockbox availability,
- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
- technical standards,
- consumer electronics equipment compatibility, and
- emergency alert systems.
The FCC recently ruled that cable customers must be allowed to purchase
cable converters from third parties and established a multi-year phase-in during
which security functions, which would remain in the operator's exclusive
control, would be unbundled from basic converter functions, which could then be
satisfied by third party vendors.
The FCC has the authority to enforce its regulations through the imposition
of substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenues to a
federal copyright royalty pool, cable operators can obtain blanket permission to
retransmit copyrighted material included in broadcast signals. Effective July 1,
2000, the federal Copyright Office increased the cable compulsory license rates
used to calculate cable systems' copyright payments under the cable
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compulsory license. The possible modification or elimination of this compulsory
copyright license is the subject of continuing legislative review and could
adversely affect the Partnership's ability to obtain desired broadcast
programming. The outcome of this legislative activity cannot be predicted.
Copyright clearances for nonbroadcast programming services are arranged through
private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers (ASCAP)
and BroadcastMusic, Inc. (BMI). The cable industry has had a long series of
negotiations and adjudications with both organizations. A prior voluntarily
negotiated settlement with BMI has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for ASCAP music based on the previously negotiated BMI
rate. Although the Partnership cannot predict the ultimate outcome of these
industry proceedings or the amount of any license fees that they may be required
to pay for past and future use of association-controlled music, the Partnership
does not currently believe these license fees will be significant to their
business and operations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in order to cross public rights-of-way. Federal law now prohibits local
franchising authorities from granting exclusive franchises or from unreasonably
refusing to award additional franchises.
Cable franchises generally are granted for fixed terms and in many cases
include monetary penalties for non-compliance and may be terminable if the
franchisee fails to comply with material provisions. The specific terms and
conditions of franchises vary materially between jurisdictions. Each franchise
generally contains provisions governing cable operations, service rates,
franchising fees, system construction and maintenance obligations, system
channel capacity, design and technical performance, customer service standards,
and indemnification protections. A number of states subject cable systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. Although local
franchising authorities have considerable discretion in establishing franchise
terms, there are certain federal limitations. For example, local franchising
authorities cannot insist on franchise fees exceeding 5% of the system's gross
cable-related revenues, cannot dictate the particular technology used by the
system, and cannot specify video programming other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, the local franchising authority may attempt to impose more burdensome
or onerous franchise requirements in connection with a request for consent. The
Cable Act requires franchising authorities to act on any franchise transfer
request within 120 days after receipt by the franchising authority of all
information required by FCC regulations. Approval is deemed to be granted if the
franchising authority fails to act within such 120-day period. Historically,
most of the Partnership's franchises have been renewed and transfer consents
granted.
Under the 1996 Telecom Act, local franchising authorities are prohibited
from limiting, restricting, or conditioning the provision of competitive
telecommunications services except for certain "competitively neutral"
requirements necessary to manage public rights of way. In addition, local
franchising authorities may not require the Partnership to provide any
telecommunications service or facilities, other than institutional networks
under certain circumstances, as a condition of an initial cable franchise grant,
franchise renewal, or franchise transfer. The 1996 Telecom Act also provides
that franchising fees are limited to an operator's cable-related revenues and do
not apply to revenues that the Partnership derives from providing new
telecommunications services.
ITEM 2. PROPERTIES
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The Partnership's cable television systems are located in and around
Brenham and Bay City, Texas; Camano Island, Sequim, Stanwood, and Bayview,
Washington, and Vidalia, Sandersville, Toccoa and Royston, Georgia. The
principal physical properties of the Systems consist of system components
(including antennas, coaxial cable, electronic amplification and distribution
equipment), motor vehicles, miscellaneous hardware, spare parts and real
property, including office buildings and headend sites and buildings. The
Partnership's cable plant passed approximately 60,705 homes as of December 31,
2000. Management believes that the Partnership's plant passes all areas which
are currently economically feasible to service. Future line extensions depend
upon the density of homes in the area as well as available capital resources for
the construction of new plant. (See Part II. Item 7. Liquidity and Capital
Resources.)
ITEM 3. LEGAL PROCEEDINGS
The Partnership is a party to ordinary and routine litigation proceedings
that are incidental to the Partnership's business. Management believes that the
outcome of all pending legal proceedings will not, individually or in the
aggregate, have a material adverse effect on the Partnership, its financial
condition, prospects and debt service ability.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) There is no established public trading market for the Partnership's
units of limited partnership interest.
(b) The approximate number of equity holders as of December 31, 2000, is as
follows:
Limited Partners: 2,825
General Partners: 2
(c) During 2000, the Partnership did not make cash distributions to the
limited partners or to the General Partners. The limited partners have received
in the aggregate in the form of cash distributions $3,108,554 on total initial
contributions of $24,893,000 as of December 31, 2000. As of December 31, 2000,
the Partnership had repurchased $65,000 in limited partnership units ($500 per
unit). Future distributions depend upon results of operations, leverage ratios,
and compliance with financial covenants required by the Partnership's lender.
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ -------------
SUMMARY OF OPERATIONS:
Revenue $ 18,187,025 $ 17,605,125 $ 16,877,376 $ 13,573,985 $ 11,310,000
Operating income 2,771,397 2,654,459 1,884,639 372,969 16,476
Loss on disposal of
Assets (86,952) (86,565) (202,025) (14,486) (10,146)
Net loss (815,334) (1,043,449) (2,053,933) (2,421,083) (2,215,885)
Net loss per limited
partner unit
(weighted average) (16) (21) (41) (48) (44)
Cumulative tax losses
per limited partner
unit (402) (402) (402) (402) (402)
DECEMBER 31,
----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Total assets $ 31,786,692 $ 31,785,098 $ 34,424,298 $ 36,349,084 $ 28,151,750
Notes payable 40,016,323 39,943,721 41,217,445 41,543,600 31,200,000
Total liabilities 43,098,506 42,281,578 43,877,329 43,784,182 33,129,765
General partners'
Deficit (325,586) (317,433) (306,999) (286,460) (262,249)
Limited partners'
(deficit) (10,986,228) (10,179,047) (9,146,032) (7,112,638) (4,715,766)
Distributions per
Limited partner unit 0 0 0 0 3
Cumulative distribu-
tions per limited
partner unit 63 63 63 63 63
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
2000 AND 1999
Total revenue reached $18,187,025 for the year ended December 31, 2000,
representing an increase of approximately 3% over 1999. Of the 2000 revenue,
$12,899,026 (72%) is derived from subscriptions to basic service, $1,327,789
(7%) from subscriptions to premium services, $1,466,352 (8%) from subscriptions
to expanded basic services, $417,502 (2%) from service maintenance revenue,
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$1,172,590 (6%) from advertising revenue and $903,766 (5%) from other sources.
The increase in revenues are primarily attributable to: (i) rate increases
implemented in the Partnership's systems during the year; and (ii) revenue from
the increase in penetration of new product tiers; and (iii) increases in ad
sales revenue.
The following table displays historical average rate information for
various services offered by the Partnership's systems (amounts per subscriber
per month):
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Basic Rate $ 27.85 $ 25.85 $ 24.55 $ 23.75 $ 22.45
Tier Rate 8.95 8.65 8.25 8.15 7.30
HBO Rate 10.75 10.65 10.65 10.15 10.05
Cinemax Rate 7.65 7.45 7.25 8.70 8.50
Showtime Rate 8.65 8.60 8.10 8.50 8.00
Movie Channel Rate 7.00 7.25 7.00 7.50 7.45
Disney Rate -- 7.25 6.50 7.50 7.20
Encore Rate 1.50 1.50 1.50 -- --
Starz Rate 5.50 7.00 7.00 -- --
Service Contract Rate 2.20 2.20 2.35 2.60 3.05
Operating expenses totaled $1,493,864 for the year ended December 31, 2000,
representing a decrease of approximately 7% over 1999. This decrease is
primarily attributable to decreased system maintenance expense and drop
materials. Salary and benefit costs are a major component of operating expense.
Employee wages are reviewed annually, and in most cases, increased based on cost
of living adjustments and other factors. Therefore, management expects increases
in operating expenses in the future.
General and administrative expenses totaled $4,288,711 for the year ended
December 31, 2000, representing an increase of approximately 4% over 1999. This
increase is mainly due to increases in salary and benefit costs, and increases
in revenue based expenses, such as franchise fees and management fees.
Significant administrative expenses are based on Partnership revenues (franchise
fees, copyright fees and management fees). Therefore, as the Partnership's
revenues increase, the trend of increased administrative expenses is expected to
continue.
Programming expenses totaled $4,987,278 for the year ended December 31,
2000, representing an increase of approximately 6% over 1999. This increase is
primarily due to higher costs charged by various program suppliers, as well as
the addition of new channels. Programming expenses mainly consist of payments
made to suppliers of various cable programming services. As these costs are
based on the number of subscribers served, future subscriber increases will
cause the trend of programming expense increases to continue. Moreover, rate
increases from program suppliers, as well as fees due to the launch of
additional channels, will contribute to the trend of increased programming
costs.
Depreciation and amortization expense increased approximately 3% as
compared to 1999. This is due to depreciation and amortization on recent
purchases of plant and equipment offset by assets that became fully depreciated
and amortized during the year.
Interest expense for the year ended December 31, 2000 decreased
approximately 3% as compared to 1999. The Partnership's average bank debt
balance decreased from approximately $40,580,583 during 1999 to $39,980,022
during 2000. The Partnership's effective interest rate during 2000 was
approximately 8.50% as compared to a rate of approximately 8.24% during 1999.
The operating losses incurred by the Partnership are historically a result
of significant non-cash charges to income for depreciation and amortization.
Prior to the deduction for these non-cash items, the Partnership has generated
positive operating income in each year in the three year period ending December
31, 2000. Management anticipates that this trend will continue, and that the
Partnership will continue to generate net operating losses after depreciation
and amortization until a majority of the Partnership's assets are fully
depreciated.
1999 AND 1998
Total revenue reached $17,605,125 for the year ended December 31, 1999,
representing an increase of approximately 4% over 1998. Of the 1999 revenue,
$12,526,573 (72%) is derived from subscriptions to basic service, $1,431,127
(8%) from subscriptions to premium services, $1,382,357 (8%) from subscriptions
to expanded basic services, $396,955 (2%) from service maintenance
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revenue, $926,625 (5%) from advertising revenue and $941,488 (5%) from other
sources. Revenue increases in 1999 are attributable to rate increases, increased
penetration of new product tiers and increased ad sales revenue.
Operating expenses totaled $1,598,931 for the year ended December 31, 1999,
representing an increase of approximately 6% over 1998. This increase is
primarily attributable to salary and benefit costs which are a major component
of operating expense. Employee wages are reviewed annually, and in most cases,
increased based on cost of living adjustments and other factors. Therefore,
management expects the trend of increases in operating expenses to continue.
General and administrative expenses totaled $4,134,554 for the year ended
December 31, 1999, representing an increase of approximately 4% over 1998. This
increase is mainly due to increases in salary and benefit costs, and increases
in revenue based expenses, such as franchise fees and management fees.
Significant administrative expense are based on Partnership revenues (franchise
fees, copyright fees and management fees ). Therefore, as the Partnership's
revenues increase, the trend of increased administrative expenses is expected to
continue.
Programming expenses totaled $4,706,054 for the year ended December 31,
1999, representing an increase of approximately 6% over 1998. This increase is
primarily due to higher costs charged by various program suppliers, as well as
the addition of new channels. Programming expenses mainly consist of payments
made to suppliers of various cable programming services. As these costs are
based on the number of subscribers served, future subscriber increases will
cause the trend of programming expense increases to continue. Moreover, rate
increases from program suppliers, as well as fees due to the launch of
additional channels, will contribute to the trend of increased programming
costs.
Depreciation and amortization expense decreased approximately 11% as
compared to 1998. This is due to assets that became fully depreciated and
amortized during the year offset by depreciation and amortization on recent
purchases of plant and equipment.
Interest expense for the year ended December 31, 1999 decreased
approximately 3% as compared to 1998. The Partnership's average bank debt
balance decreased from approximately $41,380,523 during 1998 to $40,580,583
during 1999. The Partnership's effective interest rate during 1999 was
approximately 8.24% as compared to a rate of approximately 8.39% during 1998.
The operating losses incurred by the Partnership are historically a result
of significant non-cash charges to income for depreciation and amortization.
Prior to the deduction for these non-cash items, the Partnership has generated
positive operating income, which has increased in each year in the three year
period ending December 31, 1999. Management anticipates that this trend will
continue, and that the Partnership will continue to generate net operating
losses after depreciation and amortization until a majority of the Partnership's
assets are fully depreciated.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, the Partnership's primary source of liquidity was cash flow
from operations and credit available under the bank loan facility. The
Partnership generates cash on a monthly basis through the monthly billing of
subscribers for cable services. Losses from uncollectible accounts have not been
material. During 2000, the Partnership borrowed $2.1 million under its revolving
credit facility to fund a portion of its capital expenditures. Management's
estimates for 2001 indicate that the cash generated from monthly subscriber
billings and amounts available under its revolving credit facility are expected
to be sufficient to meet the Partnership's working capital needs, as well as the
debt service obligations of its bank loan.
In December 1997 the Partnership amended its term loan agreement
increasing its overall credit limit to $45,000,000 to finance the acquisition of
the Toccoa and Royston systems. Terms of the credit agreement provide for a
$37,000,000 term loan payable in graduating quarterly installments which began
March 31, 1998. An $8,000,000 revolving credit facility converted to a term loan
on December 1, 2000 with graduating quarterly installments of principal. Both
facilities mature June 30, 2006. On January 26, 2001 the Partnership amended its
loan agreement to modify certain financial covenants and make available an
additional $4,500,000 revolving line of credit.
At December 31, 2000, the Partnership's term loan balance was $39,700,000.
As of the date of this filing, interest rates on the credit facility were as
follows: $20,350,000 interest rate swap agreement fixed at a rate of 7.015%
expiring March 12, 2002; $17,250,000 at a LIBOR based rate of 8.56313% expiring
March 30, 2001; $2,100,000 at a LIBOR based rate of 8.49625% expiring March 30,
2001 and $250,000 at a LIBOR based rate of 8.7025% expiring March 12, 2001. The
above rates include a margin paid to
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the lender based on overall leverage and may increase or decrease as the
Partnership's overall leverage fluctuates. The Partnership also entered into a
forward interest rate swap agreement in which $20,000,000 will be fixed at a
rate of 7.015%, beginning March 30, 2001 and expiring March 29, 2002.
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Partnership periodically enters into
interest rate swap agreements with major banks or financial institutions
(typically its bank) in which the Partnership pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
Gains or losses associated with changes in fair values of these swaps and the
underlying notional principal amounts are deferred and recognized against
interest expense over the term of the agreements in the Partnership's statements
of operations.
The Partnership is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations, as the Partnership
currently deals only with its bank. The notional amounts of these interest rate
swaps are $20,350,000 at the date of this filing. 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.
As of January 1, 2001, the Partnership implemented SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." As a result the
Partnership recorded the fair value of all swap agreements on its balance
sheet, based on fair value estimates received from its financial institutions.
Each quarter the change in market value of the Partnership's derivatives will
be recorded as other income or expense.
Expected Maturity Date
-----------------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total
------------- --------- --------- --------- --------- --------- -------------
Liabilities
Debt Maturity 3,279,776 4,632,362 6,183,572 7,527,579 8,929,868 9,463,166 40,016,323
Debt Interest Payments 3,261,997 2,925,731 2,466,054 1,883,330 1,183,889 402,185 12,123,186
Average Interest Rate 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Interest Rate Swaps
Variable to Fixed
Notional Amount 20,350,000 -- -- -- -- -- 20,350,000
Average Pay Rate* 4.89% -- -- -- -- -- 4.89%
Average Receive Rate* 5.06% -- -- -- -- -- 5.06%
*plus an applicable margin, currently 2.125%
It is the Partnership's policy to renegotiate swap agreements on or near
expiration.
At December 31, 2000 the Partnership was required under the terms of its
credit agreement to maintain certain financial ratios including a Total Debt to
Annualized Cash Flow Ratio of 4.50 to 1 and an Annualized Cash Flow to Pro Forma
Debt Service Ratio of 1.20 to 1, among other covenants. At December 31, 2000,
the Partnership was not in compliance with its Total Debt to Annualized Cash
Flow, Fixed Charge Coverage Ratio, and Capital Expenditure covenants; however,
appropriate waivers have been obtained from the partnership's creditor. The
Partnership anticipates being in compliance with the terms of its credit
agreement for the quarter ending March 31, 2001.
CAPITAL EXPENDITURES
During 2000, the Partnership incurred approximately $4,300,000 in capital
expenditures. These expenditures included an upgrade of the distribution plant
to 550 MHz and the continuation of the construction phase of a fiber optic
backbone in the Brenham, TX system; a digital service launch in the Camano, WA
system; a digital service launch in the Bay City, TX system; the initial phase
of an upgrade of the distribution plant to 500 MHz in the Sandersville, GA
system continuation of the 550 MHz upgrade in the Toccoa, GA system; a digital
service launch in the Vidalia, GA system; as well as line extensions and vehicle
replacements in various systems.
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Management estimates that the Partnership will spend approximately $3,500,000 on
capital expenditures during 2001. These expenditures include distribution plant
upgrades, digital service launches, line extensions, channel additions, and
vehicle replacements in various systems.
YEAR 2000 READINESS DISCLOSURE
The efficient operation of the Partnership's business is dependent in part
on its computer software programs and operating systems. These programs and
systems are used in several key areas of the Partnership's business, including
subscriber billing and collections and financial reporting. Management has
evaluated the programs and systems utilized in the conduct of the Partnership's
business for the purpose of identifying Year 2000 compliance problems. We
experienced no material issues or problems arising out of the Year 2000 issues,
either in connection with our internal operations, third-party relationships or
software products. We will continue to monitor our software products to ensure
no problems arise either with regard to leap year or Year 2000 issues. We
anticipate no material additional costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended
December 31, 2000, 1999 and 1998 are included as a part of this filing (see Item
14(a)(1) below).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or officers. The Managing General Partner
of the Partnership is Northland Communications Corporation, a Washington
corporation; the Administrative General Partner of the Partnership is FN
Equities Joint Venture, a California general partnership.
Certain information regarding the officers and directors of Northland is
set forth below.
JOHN S. WHETZELL (AGE 59). Mr. Whetzell is the founder of Northland
Communications Corporation and has been President since its inception and a
Director since March 1982. Mr. Whetzell became Chairman of the Board of
Directors in December 1984. He also serves as President and Chairman of the
Board of Northland Telecommunications Corporation and each of its subsidiaries.
He has been involved with the cable television industry for over 26 years.
Between March 1979 and February 1982 he was in charge of the Ernst & Whinney
national cable television consulting services. Mr. Whetzell first became
involved in the cable television industry when he served as the Chief Economist
of the Cable Television Bureau of the Federal Communications Commission (FCC)
from May 1974 to February 1979. He provided economic studies to support the
deregulation of cable television both in federal and state arenas. He
participated in the formulation of accounting standards for the industry and
assisted the FCC in negotiating and developing the pole attachment rate formula
for cable television. His undergraduate degree is in economics from George
Washington University, and he has an MBA degree from New York University.
JOHN E. IVERSON (AGE 64). Mr. Iverson is the Secretary of Northland
Communications Corporation and has served on the Board of Directors since
December 1984. He also is the Secretary and serves on the Board of Directors of
Northland Telecommunications Corporation and each of its subsidiaries. He is
currently a member in the law firm of Ryan, Swanson & Cleveland, P.L.L.C. He is
a member of the Washington State Bar Association and American Bar Association
and has been practicing law for more than 38 years. Mr. Iverson is the past
President and a Trustee of the Pacific Northwest Ballet Association. Mr. Iverson
has a Juris Doctor degree from the University of Washington.
RICHARD I. CLARK (AGE 43). Mr. Clark is an original incorporator of
Northland Communications Corporation and serves as Vice President, Assistant
Secretary and Assistant Treasurer of Northland Communications Corporation. He
also serves as Vice President, Assistant Secretary and Treasurer of Northland
Telecommunications Corporation. Mr. Clark has served on the Board of Directors
of both Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. In addition to his other responsibilities, Mr.
Clark is responsible for the administration and investor relations activities of
Northland, including financial planning and corporate development. From July
1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the area of
providing cable television consultation services and has been involved with the
cable television industry for nearly 22 years. He has directed cable television
feasibility studies and on-site market surveys. Mr. Clark has assisted in the
design and maintenance of financial and budget computer programs, and he has
prepared documents for major cable television companies in franchising and
budgeting projects through the application of these programs. In 1979, Mr. Clark
graduated cum laude from Pacific Lutheran University with a Bachelor of Arts
degree in accounting.
GARY S. JONES (AGE 43). Mr. Jones is Vice President and Chief Financial
Officer for Northland. Mr. Jones joined Northland in March 1986 as Controller
and has been Vice President of Northland Telecommunications Corporation and each
of its subsidiaries since October 1986. Mr. Jones is responsible for cash
management, financial reporting and banking relations for Northland and is
involved in the acquisition and financing of new cable systems. Prior to joining
Northland, Mr. Jones was employed as a Certified Public Accountant with
Laventhol & Horwath from 1980 to 1986. Mr. Jones received his Bachelor of Arts
degree in Business Administration with a major in accounting from the University
of Washington in 1979.
RICHARD J. DYSTE (AGE 55). Mr. Dyste has served as Vice President-Technical
Services of Northland Telecommunications Corporation and each of its
subsidiaries since April 1987. Mr. Dyste is responsible for planning and
advising all Northland cable systems with regard to technical performance as
well as system upgrades and rebuilds. He is a past president and current member
of the Mount Rainier Chapter of the Society of Cable Television Engineers, Inc.
Mr. Dyste joined Northland in 1986 as an engineer and served as Operations
Consultant to Northland Communications Corporation from August 1986 until April
1987. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is
a graduate of Washington Technology Institute.
20
21
H. LEE JOHNSON (AGE 57). Mr. Johnson has served as Divisional Vice
President for Northland since March 1994. He is responsible for the management
of systems serving subscribers in Alabama, Georgia, Mississippi, North Carolina
and South Carolina. Prior to his association with Northland he served as
Regional Manager for Warner Communications, managing four cable systems in
Georgia from 1968 to 1973. Mr. Johnson has also served as President of Sunbelt
Finance Corporation and was employed as a System Manager for Statesboro CATV
when Northland purchased the system in 1986. Mr. Johnson has been involved in
the cable television industry for over 32 years and is a current member of the
Society of Cable Television Engineers. He is a graduate of Swainsboro Technical
Institute and has attended numerous training seminars, including courses
sponsored by Jerrold Electronics, Scientific Atlanta, The Society of Cable
Television Engineers and CATA.
R. GREGORY FERRER (AGE 45). Mr. Ferrer joined Northland in March 1984 as
Assistant Controller and currently serves as Vice President and Treasurer of
Northland Communications Corporation. Mr. Ferrer also serves as Vice President
and Assistant Treasurer of Northland Telecommunications Corporation. Mr. Ferrer
is responsible for coordinating all of Northland's property tax filing,
insurance requirements and system programming contracts as well as interest rate
management and other treasury functions. Prior to joining Northland, he was a
Certified Public Accountant at Benson & McLaughlin, a local public accounting
firm, from 1981 to 1984. Mr. Ferrer received his Bachelor of Arts in Business
Administration from Washington State University with majors in marketing in 1978
and accounting and finance in 1981.
MATTHEW J. CRYAN (AGE 36). Mr. Cryan is Vice President - Budgets and
Planning and has been with Northland since September 1990. Mr. Cryan is
responsible for the development of current and long-term operating budgets for
all Northland entities. Additional responsibilities include the development of
financial models used in support of acquisition financing, analytical support
for system and regional managers, financial performance monitoring and reporting
and programming analysis. Prior to joining Northland, Mr. Cryan was employed as
an analyst with NKV Corp., a securities litigation support firm located in
Redmond, Washington. Mr. Cryan graduated from the University of Montana in 1988
with honors and holds a Bachelor of Arts in Business Administration with a major
in finance.
LAURA N. WILLIAMS (age 34). Ms Williams is Vice President and Senior Counsel
for Northland and has served in this role since August 2000. Prior to this time,
she served as Associate Counsel for each of the Northland entities from August
1995. She is a member of the Washington State Bar Association, American Bar
Association and Women in Telecommunications. Ms. Williams received her Bachelor
of Science in Business Administration with a major in finance and an MBA degree
from California State University, Long Beach, and has a Juris Doctor degree from
Seattle University School of Law.
Certain information regarding the officers and directors of FN Equities
Joint Venture is set forth below:
MILES Z. GORDON (AGE 54). Mr. Gordon is President of FNE and President and
Chief Executive Officer of Financial Network Investment Corporation (FNIC), and
has held those positions since 1983. From 1979 through April 1983 he was
President of University Securities Corporation. In 1978, Mr. Gordon was engaged
in the private practice of law, and from 1973 through 1978 he was employed by
the Securities and Exchange commission. He presently serves as Chairman of the
Securities Industry Association Independent Contractor Firms Committee. Mr.
Gordon was also Chairman and a member of the NASD District Business Conduct
Committee and a former member of the NASD Board of Governors. He is past
president of the California Syndication Forum and has also served on several
committees for the Securities Industry Association.
JOHN S. SIMMERS (AGE 51). Mr. Simmers is Vice President, Secretary and
Treasurer of FNE and Executive Vice President and Chief Operating Officer of
FNIC and has held those positions since 1983. From June 1980 through April 1983
he was Executive Vice President of University Securities Corporation, Vice
President of University Capital Corporation, and Vice President of University
Asset Management Group. From 1974 through May 1980 he was employed by the
National Association of Securities Dealers.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation was
paid to the General Partner during 2000 as indicated in Note 3 to the Notes to
Financial Statements--December 31, 2000 (see Items 14(a)(1) and 13(a) below).
21
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of
management as of December 31, 1999 is as follows:
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ---------------------- ------------------------------ ----------------------------- -------------
General Partner's Northland Communications (See Note A) (See Note A)
Interest Corporation
1201 Third Avenue
Suite 3600
Seattle, Washington 98101
General Partner's FN Equities Joint Venture (See Note B) (See Note B)
Interest 2780 Skypark Dr.
Suite 300
Torrance, California 90505
Note A: Northland has a 1% interest in the Partnership, which increases to
20% interest in the Partnership at such time as the limited partners have
received 100% of their aggregate cash contributions plus a preferred return. The
natural person who exercises voting and/or investment control over these
interests is John S. Whetzell.
Note B: FN Equities Joint Venture has no interest (0%) in the Partnership
until such time as the limited partners have received 100% of their aggregate
cash contributions plus a preferred return, at which time FN Equities Joint
Venture will have a 5% interest in the Partnership. The natural person who
exercises voting and/or investment control over these interests is John S.
Simmers.
(b) CHANGES IN CONTROL. Northland has pledged its ownership interest as
Managing General Partner of the Partnership to the Partnership's lender as
collateral pursuant to the terms of the Partnership's term loan agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Managing General Partner
receives a management fee equal to 5% of the gross revenues of the Partnership,
not including revenues from any sale or refinancing of the Partnership's
Systems. The Managing General Partner also receives reimbursement of normal
operating and general and administrative expenses incurred on behalf of the
Partnership.
The Partnership has entered into operating management agreements with
affiliates managed by the Managing General Partner. Under the terms of these
agreements, the Partnership or an affiliate serves as the executive managing
agent for certain cable television systems and is reimbursed for certain
operating, programming and administrative expenses.
The Partnership has also entered into an operating and management agreement
with NCTV, an affiliate of Northland. Under the terms of this agreement, the
Partnership serves as the exclusive managing agent for one of NCTV's cable
systems, and is reimbursed for certain operating, administrative and programming
costs.
Northland Cable Services Corporation ("NCSC"), an affiliate of Northland,
provides software installation and billing services to the Partnership's
Systems.
Northland Cable News, Inc. ("NCN"), an affiliate of Northland, provided
programming to certain of 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.
22
23
See Note 3 of the Notes to Financial Statements--December 31, 2000 or
disclosures regarding transactions with the General Partners and affiliates.
The following schedule summarizes these transactions:
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
--------- --------- ---------
Partnership management fees $ 902,976 $ 869,688 $ 835,838
Operating expense reimbursements 996,585 877,597 853,979
Software installation and
billing service fees to NCSC 73,749 69,620 79,141
Programming fees to NCN 184,317 200,107 198,077
Reimbursements to CAC for
services 154,890 93,808 66,734
Reimbursements from affiliates (net) 108,633 140,992 173,699
Amounts due (from) to General Partner
and affiliates at year end 116,170 (36,750) 237,048
Management believes that all of the above transactions are on terms as
favorable to the Partnership as could be obtained from unaffiliated parties for
comparable goods or services.
As disclosed in the Partnership's Prospectus (which has been incorporated
by reference), certain conflicts of interest may arise between the Partnership
and the General Partners and their affiliates. Certain conflicts may arise due
to the allocation of management time, services and functions between the
Partnership and existing and future partnerships as well as other business
ventures. The General Partners have sought to minimize these conflicts by
allocating costs between systems on a reasonable basis. Each limited partner may
have access to the books and non-confidential records of the Partnership. A
review of the books will allow a limited partner to assess the reasonableness of
these allocations. The Agreement of Limited Partnership provides that any
limited partner owning 10% or more of the Partnership units may call a special
meeting of the Limited Partners, by giving written notice to the General
Partners specifying in general terms the subjects to be considered. In the event
of a dispute between the General Partners and Limited Partners which cannot be
otherwise resolved, the Agreement of Limited Partnership provides steps for the
removal of a General Partner by the Limited Partners.
(b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and
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.
23
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
SEQUENTIALLY
NUMBERED
PAGE
------------
(1) FINANCIAL STATEMENTS:
Report of Independent Public Accountants............................................... ____
Balance Sheets--December 31, 2000 and 1999............................................. ____
Statements of Operations for the years ended December 31, 2000, 1999 and 1998.......... ____
Statements of Changes in Partners' Capital (Deficit) for the years ended
December 31, 2000, 1999 and 1998...................................................... ____
Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.......... ____
Notes to Financial Statements--December 31, 2000...................................... ____
(2) EXHIBITS:
4.1 Forms of Amended and Restated Certificate of Agreement of Limited Partnership(1)
10.1 Brenham Franchise (2)
10.1 Amendment to Brenham Franchise (4)
10.3 Washington County Franchise (2)
10.4 Island County Franchise (Amended) (2)
10.5 Bay City Franchise (2)
10.6 Sweeney Franchise (2)
10.7 West Columbia Franchise (2)
10.8 Wharton Franchise (2)
10.9 Tenneco Development Corp. Franchise (3)
10.10 Sequim Franchise (1)
10.11 Clallam County Franchise (1)
10.12 Credit Agreement with National Westminster Bank USA (1)
10.13 First, Second and Third Amendments to Credit Agreement with National
Westminster Bank USA (3)
10.14 Amended and Restated Management Agreement with Northland Communications
Corporation (3)
10.15 Operating Management Agreement with Northland Cable Television, Inc. (3)
25
25
10.16 Assignment and Transfer Agreement with Northland Telecommunications Corporation
dated May 24, 1989 (4)
10.17 Agreement of Purchase and Sale with Sagebrush Cable Limited Partnership (5)
10.18 Fourth, Fifth, Sixth and Seventh Amendments to Credit Agreement with National
Westminster Bank USA (6)
10.19 Franchise Agreement with the City of Sequim, WA effective as of May 6, 1992 (7)
10.20 Franchise Agreement with Clallam County, WA effective as of May 29, 1992 (7)
10.21 Eighth Amendment to Credit Agreement with National Westminster Bank USA dated
as of May 28, 1992 (7)
10.22 Asset Purchase Agreement between Northland Cable Properties Seven Limited
Partnership (Buyer) and Country Cable, Inc. (Seller) (8)
10.23 Amendment to Asset Purchase Agreement between Northland Cable Properties
Seven Limited Partnership and Country Cable, Inc. dated September 14, 1993 (9)
10.24 Commercial Loan Agreement between Seattle-First National Bank and Northland
Cable Properties Seven Limited Partnership dated September 24, 1993 (9)
10.25 Franchise Agreement with Island County, WA dated October 4, 1993 (10)
10.26 Franchise Agreement with Skagit County - Assignment and Assumption Agreement
dated September 27, 1993 (10)
10.27 Franchise Agreement with Whatcom County - Assignment and Assumption Agreement
dated September 27, 1993 (10)
10.28 Amendment to Commercial Loan Agreement dated March 15, 1994 (10)
10.29 Operating and Management Agreement with Northland Cable Television, Inc. dated
November 1, 1994 (11)
10.30 Asset Purchase Agreement between Northland Cable Properties Seven Limited Partnership
and Southland Cablevision, Inc. (12)
10.31 Asset Purchase Agreement between Northland Cable Properties Seven Limited Partnership
and TCI Cablevision of Georgia, Inc. (12)
10.32 Commercial Loan Agreement between Northland Cable Properties Seven Limited Partnership
and Seattle First National Bank dated February 29, 1996 (12)
10.33 Asset purchase agreement between Northland Cable Properties Seven Limited Partnership
and Robin Media Group, Inc. (13) 10.34 Commercial Loan Agreement between Northland
Cable Properties Seven Limited Partnership and Seattle First National Bank dated
December 1, 1997. (13)
25
26
- ------------
(1) Incorporated by reference from the Partnership's Form S-1
Registration Statement declared effective on August 6, 1987
(2) Incorporated by reference from the partnership's Form 10-K Annual
Report for the fiscal year ended December 31, 1987.
(3) Incorporated by reference from the partnership's Form 10-K Annual
Report for the year ended December 31, 1988.
(4) Incorporated by reference from the partnership's Form 10-Q Quarterly
Report for the period ended June 30, 1989.
(5) Incorporated by reference from the partnership's Form 10-Q Quarterly
Report for the period ended September 30, 1989.
(6) Incorporated by reference from the partnership's Form 10-K Annual
Report for the fiscal year ended December 31, 1990.
(7) Incorporated by reference from the partnership's Form 10-K Annual
Report for the fiscal year ended December 31, 1992.
(8) Incorporated by reference from the partnership's Form 10-Q Quarterly
Report for the period ended March 31, 1993
(9) Incorporated by reference from the partnership's Form 8-K dated
September 27, 1993 10Incorporated by reference from the
partnership's Form 10-K Annual Report for the fiscal year ended
December 31, 1993.
(11) Incorporated by reference from the partnership's Form 10-K Annual
Report for the fiscal year ended December 31, 1993.
(12) Incorporated by reference from the partnership's Form 8-K dated
March 1, 1996.
(13) Incorporated by reference from the partnership's Form 8-K dated
December 5, 1997.
(b) REPORTS ON FORM 8-K. Form 8-K dated December 5, 1997, was filed December
19, 1997 reporting the acquisition of the Toccoa and Royston systems.
26
27
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CABLE PROPERTIES SEVEN
LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION
(Managing General Partner)
Date: 3/30/00 By /s/ John S. Whetzell
------- -------------------------------------
John S. Whetzell, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES CAPACITIES DATE
---------- ---------- ----
/s/ John S. Whetzell Chief executive officer of registrant; chief executive 3/30/01
- --------------------------------------------- officer and chairman of the board of directors of -------
John S. Whetzell Northland Communications Corporation
/s/ Richard I. Clark Director of Northland Communications Corporation 3/30/01
- --------------------------------------------- -------
Richard I. Clark
/s/ John E. Iverson Secretary and Director of Northland 3/30/01
- --------------------------------------------- Communications Corporation -------
John E. Iverson
/s/ Gary S. Jones Principal financial officer and 3/30/01
- --------------------------------------------- principal accounting -------
Gary S. Jones officer of the registrant; vice
president and principal accounting officer
of Northland Communications Corporation
27
28
EXHIBITS INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
28
29
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
Financial Statements
As of December 31, 2000 and 1999
Together with Auditors' Report
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Seven Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Seven Limited Partnership (a Washington limited partnership) as of December 31,
2000 and 1999, and the related statements of operations, changes in partners'
deficit and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties
Seven Limited Partnership as of December 31, 2000 and 1999, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Seattle, Washington,
February 2, 2001
31
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
------------ ------------
CASH $ 492,858 $ 534,003
ACCOUNTS RECEIVABLE 597,585 508,387
DUE FROM GENERAL PARTNER AND AFFILIATES 41,170 56,699
PREPAID EXPENSES 124,286 109,062
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment 36,184,490 31,982,367
Less- Accumulated depreciation (19,025,522) (17,141,878)
------------ ------------
17,158,968 14,840,489
Franchise agreements (net of accumulated
amortization of $9,111,670 and
$7,490,983 in 2000 and 1999,
respectively) 12,525,200 14,512,464
Acquisition costs (net of accumulated
amortization of $296,875 and $235,951
in 2000 and 1999, respectively) 62,809 123,733
Loan fees and other intangibles (net of
accumulated amortization of $1,448,173
and $1,164,248 in 2000 and 1999,
respectively) 625,443 936,315
Goodwill (net of accumulated amortization
of $64,556 and $58,983 in 2000 and
1999, respectively) 158,373 163,946
------------ ------------
Total investment in cable
television properties 30,530,793 30,576,947
------------ ------------
Total assets $ 31,786,692 $ 31,785,098
============ ============
LIABILITIES AND PARTNERS' DEFICITS
2000 1999
------------ ------------
LIABILITIES:
Accounts payable and accrued expenses $ 2,248,109 $ 1,546,045
Due to General Partner and affiliates 157,340 19,949
Deposits 43,580 37,510
Subscriber prepayments 633,154 734,353
Notes payable 40,016,323 39,943,721
------------ ------------
Total liabilities 43,098,506 42,281,578
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' DEFICIT:
General partners-
Contributed capital (25,367) (25,367)
Accumulated deficit (300,219) (292,066)
------------ ------------
(325,586) (317,433)
------------ ------------
Limited partners-
Contributed capital, net -
49,656 units 18,735,576 18,735,576
Accumulated deficit (29,721,804) (28,914,623)
------------ ------------
(10,986,228) (10,179,047)
------------ ------------
Total liabilities and partners'
deficit $ 31,786,692 $ 31,785,098
============ ============
The accompanying notes are an integral part of these balance sheets.
32
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ ------------
REVENUE $ 18,187,025 $ 17,605,125 $ 16,877,376
------------ ------------ ------------
EXPENSES:
Operating (including $194,541, $176,200 and
$87,794, net, paid to affiliates in 2000, 1999
and 1998, respectively) 1,493,864 1,598,931 1,506,573
General and administrative (including $1,736,970,
$1,571,398 and $1,495,928, net, paid to
affiliates in 2000, 1999 and 1998,
respectively) 4,288,711 4,134,554 3,962,335
Programming (including $272,343, $240,809 and
$205,030, net, paid to affiliates in 2000,
1999 and 1998, respectively)
4,987,278 4,706,054 4,450,948
Depreciation and amortization 4,645,775 4,511,127 5,072,881
------------ ------------ ------------
15,415,628 14,950,666 14,992,737
------------ ------------ ------------
Operating income 2,771,397 2,654,459 1,884,639
OTHER INCOME (EXPENSE):
Amortization of loan fees (141,573) (151,670) (151,700)
Interest income 18,365 26,629 24,932
Interest expense (3,376,571) (3,488,367) (3,607,539)
Loss on disposal of assets (86,952) (86,565) (202,025)
Other -- 2,065 (2,240)
------------ ------------ ------------
Net loss $ (815,334) $ (1,043,449) $ (2,053,933)
============ ============ ============
ALLOCATION OF NET LOSS:
General partners $ (8,153) $ (10,434) $ (20,539)
============ ============ ============
Limited partners $ (807,181) $ (1,033,015) $ (2,033,394)
============ ============ ============
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (16) $ (21) $ (41)
============ ============ ============
The accompanying notes are an integral part of these statements.
33
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
General Limited
Partners Partners Total
------------ ------------ ------------
BALANCE, December 31, 1997 $ (286,460) $ (7,112,638) $ (7,399,098)
Net loss (20,539) (2,033,394) (2,053,933)
------------ ------------ ------------
BALANCE, December 31, 1998 (306,999) (9,146,032) (9,453,031)
Net loss (10,434) (1,033,015) (1,043,449)
------------ ------------ ------------
BALANCE, December 31, 1999 (317,433) (10,179,047) (10,496,480)
Net loss (8,153) (807,181) (815,334)
------------ ------------ ------------
BALANCE, December 31, 2000 (325,586) (10,986,228) (11,311,814)
============ ============ ============
The accompanying notes are an integral part of these statements.
34
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (815,334) $(1,043,449) $(2,053,933)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization expense 4,645,775 4,511,127 5,072,881
Amortization of loan fees 141,573 151,670 151,700
Loss on disposal of assets 86,952 86,565 202,025
Changes in certain assets and liabilities:
Accounts receivable (89,198) (79,861) 365,474
Prepaid expenses (15,224) (3,944) (21,212)
Accounts payable and accrued expenses 166,593 (145,160) 271,979
Due to General Partner and affiliates 152,920 (273,798) 178,495
Deposits 6,070 2,206 5,063
Subscriber prepayments (101,199) 91,169 (6,998)
----------- ----------- -----------
Net cash provided by operating activities 4,178,928 3,296,525 4,165,474
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,318,329) (2,950,608) (2,947,746)
Purchase of other intangibles (4,900) (57,059) (9,709)
Proceeds from fixed asset disposals 30,554 42,642 10,034
----------- ----------- -----------
Net cash used in investing activities (4,292,675) (2,965,025) (2,947,421)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,100,000 -- 190,100
Principal payments on notes payable (2,027,398) (1,273,724) (516,255)
Loan fees and other -- -- (1,671)
----------- ----------- -----------
Net cash (used in) provided by financing activities 72,602 (1,273,724) (327,826)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH (41,145) (942,224) 890,227
CASH, beginning of year 534,003 1,476,227 586,000
----------- ----------- -----------
CASH, end of year $ 492,858 $ 534,003 $ 1,476,227
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 3,332,982 $ 3,490,994 $ 3,628,555
=========== =========== ===========
The accompanying notes are an integral part of these statements.
35
NORTHLAND CABLE PROPERTIES SEVEN LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Seven Limited Partnership (the Partnership), a
Washington limited partnership, was formed on April 17, 1987. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on September 1, 1987, by acquiring a cable
television system in Brenham, Texas. Additional acquisitions include systems
serving seven cities and three unincorporated counties in southeast Texas; a
system serving Camano Island, Washington; two systems serving certain
unincorporated portions of Clallam County, Washington; a system serving certain
portions of Skagit and Whatcom counties, Washington; two systems serving four
cities in or around Vidalia, Georgia; a system serving two cities in or around
Sandersville, Georgia; and two systems serving several communities in and around
Toccoa and Royston, Georgia. The Partnership has 26 nonexclusive franchises to
operate the cable systems for periods which will expire at various dates through
2024.
Northland Communications Corporation is the Managing General Partner (the
General Partner or Northland) of the Partnership. Certain affiliates of the
Partnership also own and operate other cable television systems. In addition,
the General Partner manages cable television systems for other limited
partnerships for which it is General Partner.
FN Equities Joint Venture, a California joint venture, is the Administrative
General Partner of the Partnership.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' deficit. No limited partner is obligated to
make any additional contribution.
The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to partnership capital.
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate of
the Administrative General Partner and other offering costs paid to the general
partner were recorded as a reduction of limited partners' capital. The
Administrative General Partner received a fee for providing certain
administrative services to the Partnership.
36
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred.
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold improvements 5-20 years
The Partnership periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocates the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to noncompetition agreements, franchise agreements and
other intangibles; then, any excess is allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, acquisition costs, loan fees and other
intangibles and goodwill are being amortized using the straight-line method over
the following estimated useful lives:
Franchise agreements 9-25 years
Acquisition costs 5 years
Loan fees and other intangibles 1-9 years
Goodwill 40 years
Revenue Recognition
Cable television service revenue, including service maintenance, is recognized
in the month service is provided to customers. Advance payments on cable
services to be rendered are recorded as subscriber prepayments. Revenues
resulting from the sale of local spot advertising are recognized when the
related advertisements or commercials appear before the public. Local spot
advertising revenues earned were $1,172,590, $926,625 and $788,527,
respectively, in 2000, 1999 and 1998.
Derivatives
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Partnership periodically enters into
interest rate swap agreements with major banks or financial institutions
(typically its bank) in which the Partnership pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
Gains or losses associated with
37
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 are $10,100,000 at December 31, 2000. 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.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133 - In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS 133) and in June 2000
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," an amendment of SFAS 133. These statements establish
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. These statements require that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the statement of
operations, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB No. 133 -- an Amendment to
FASB Statement No. 133," (SFAS 137) the effective date of SFAS 133 has been
deferred until fiscal years beginning after January 15, 2000. SFAS 133 cannot be
applied retroactively. SFAS 133 and SFAS 137 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at the company's election, before January 1, 1999).
The Partnership's use of derivative instruments is limited to the
fixed-to-floating swap contract on its debt facilities. See Note 6 regarding
implementation of SFAS 133.
38
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH 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 $902,976, $869,688 and $835,838, for 2000, 1999 and 1998,
respectively.
Income Allocation
All items of income, loss, deduction and credit are allocated 99% to the limited
partners and 1% to the general partners until the limited partners have received
aggregate cash distributions in an amount equal to aggregate capital
contributions as defined in the limited partnership agreement. Thereafter, the
general partners receive 25% and the limited partners are allocated 75% of
partnership income and losses. Cash distributions from operations will be
allocated in accordance with the net income and net loss percentages then in
effect. Prior to the General Partner's receiving cash distributions from
operations for any year, the limited partners must receive cash distributions in
an amount equal to the lesser of i) 50% of the limited partners' allocable share
of net income for such year or ii) the federal income tax payable on the limited
partners' allocable share of net income using the then highest marginal federal
income tax rate applicable to such net income. Any distributions other than from
cash flow, such as from the sale or refinancing of a system or upon dissolution
of the Partnership, will be determined according to contractual stipulations in
the Partnership Agreement.
The limited partners' total initial contributions to capital were $24,893,000
($500 per partnership unit). As of December 31, 2000, $3,108,554 ($52.50 per
partnership unit) had been distributed to the limited partners and the
Partnership has repurchased $65,000 of limited partnership units ($500 per
unit).
Reimbursements
The General Partner provides or causes to be provided certain centralized
services to the Partnership and other affiliated entities. The General Partner
is entitled to reimbursement from the Partnership for various expenses incurred
by it or its affiliates on behalf of the Partnership allocable to its management
of the Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and
licenses, headquarters supplies and expenses, pay television expenses, equipment
and vehicle charges, operating salaries and expenses, administrative salaries
and expenses, postage and office maintenance.
39
The amounts billed to the Partnership are based on costs incurred by affiliates
in rendering the services. The costs of certain services are charged directly to
the Partnership, based upon the personnel time spent by the employees rendering
the service. The cost of other services is allocated to the Partnership and
affiliates based upon relative size and revenue. Management believes that the
methods used to allocate services to the Partnership are reasonable. Amounts
charged for these services were $996,585, $877,597 and $853,979, for 2000, 1999
and 1998, respectively.
In 2000, 1999 and 1998, the Partnership was charged software installation
charges and maintenance fees for billing system support provided by an
affiliate, amounting to $73,749, $69,620 and $79,141, respectively.
The Partnership has entered into operating management agreements with affiliates
managed by the General Partner. Under the terms of these agreements, the
Partnership or an affiliate serves as the executive managing agent for certain
cable television systems and is reimbursed for certain operating, programming
and administrative expenses. The Partnership received $108,663, $140,992 and
$173,699, net, under the terms of these agreements during 2000, 1999 and 1998,
respectively.
The Partnership pays monthly program license fees to Northland Cable News, Inc.
(NCN), an affiliate of the General Partner, for the rights to distribute
programming developed and produced by NCN. Total license fees charged by NCN
during 2000, 1999 and 1998 were $184,317, $200,107 and $198,077, respectively.
Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner, was formed
in 1993 and began operations in 1994. CAC was organized to assist in the
development of local advertising markets and management and training of local
sales staff. CAC billed the Partnership $154,890, $93,808 and $66,734, in 2000,
1999 and 1998, respectively, for these services.
Due from/to General Partner and Affiliates
The receivable from the General Partner and affiliates consists of the
following:
December 31,
----------------------
2000 1999
------- -------
Management fees $32,355 $ 6,576
Reimbursable operating costs, net 8,815 4,304
Other -- 45,819
------- -------
$41,170 $56,699
======= =======
40
The payable to the General Partner and affiliates consists of the following:
December 31,
----------------------
2000 1999
-------- --------
Reimbursable operating costs, net $136,555 $ --
Other 20,785 19,949
-------- --------
$157,340 $ 19,949
======== ========
4. PROPERTY AND EQUIPMENT:
December 31,
-----------------------------
2000 1999
----------- -----------
Land and buildings $ 968,357 $ 922,048
Distribution plant 32,431,378 28,923,412
Other equipment 2,607,748 2,114,492
Leasehold improvements 31,593 21,899
Construction in progress 145,414 516
----------- -----------
$36,184,490 $31,982,367
=========== ===========
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
December 31,
---------------------------
2000 1999
---------- ----------
Accounts payable $ 936,792 $ 358,917
Programmer license fees 499,228 423,907
Franchise fees 303,420 287,730
Interest 133,890 90,301
Taxes 104,112 69,385
Payroll 97,993 92,914
Pole rental 75,282 77,547
Copyright fees 45,372 44,532
Other 52,020 100,812
---------- ----------
$2,248,109 $1,546,045
========== ==========
41
6. NOTES PAYABLE:
December 31,
-----------------------------
2000 1999
----------- -----------
Revolving credit and term loan, collateralized by a first lien position on all
present and future assets of the Partnership. Interest rates vary based on
certain financial covenants; currently 8.5% (weighted average). Graduated
principal payments plus interest are due quarterly until maturity on June 30,
2006. On December 1, 2000, the Partnership's revolving credit facility
converted to a term loan $39,700,000 $39,600,000
Term loan, secured by parcel of land purchased with proceeds. Interest accrues
at 9.25%. Principal and interest payments are due quarterly until maturity on
January 14, 2003 175,018 182,368
Term loan, secured by parcel of land purchased with proceeds. Interest accrues
at 8.00%. Principal and interest payments are due monthly until maturity on
May 1, 2006 141,305 161,353
----------- -----------
$40,016,323 $39,943,721
=========== ===========
Annual maturities of the notes payable after December 31, 2000, are as follows:
2001 $3,279,776
2002 4,632,362
2003 6,183,572
2004 7,527,579
2005 8,929,868
Thereafter 9,463,166
-----------
$40,016,323
===========
Under the term loan agreement, the Partnership has agreed to restrictive
covenants which require the maintenance of certain ratios, including an
Annualized Cash Flow to Pro Forma Debt Service Ratio of 1.20 to 1, a Total Debt
to Annualized Cash Flow Ratio of 4.50 to 1, a Fixed Charge Coverage Ratio of
1.00 to 1, and an Investment and Capital Expenditures limit of $2,250,000, among
other restrictions. The General Partner submits quarterly debt compliance
reports to the Partnership's creditor under this agreement. At December 31,
2000, the Partnership was out of compliance with its Total Debt to Annualized
Cash Flow, Fixed Charge Coverage Ratio, and Capital Expenditure covenants;
however, appropriate waivers have been obtained from the Partnership's creditor.
42
The Partnership has entered into interest rate swap agreements to reduce the
impact of changes in interest rates. Interest rate swap transactions generally
involve the exchange of fixed and floating interest payment obligations without
the exchange of underlying principal amounts. At December 31, 2000, the
Partnership had outstanding two interest rate swap agreements with its bank,
having a notional principal amount of $10,100,000. These agreements effectively
change the Partnership's interest rate exposure to a fixed rate of 5.96%
(weighted average), plus an applicable margin based on certain financial
covenants (the margin at December 31, 2000 was 2%).
Maturity Date Fixed Rate Notional Amount
------------- ---------- ---------------
March 12, 2001 5.96% $6,000,000
March 12, 2001 5.96% $4,100,000
At December 31, 2000, the Partnership would have received from the counterparty
$15,567 to settle these agreements based on fair value estimates received from
the financial institution. The Partnership has elected not to designate its
derivatives as hedges under SFAS 133. Accordingly, the Partnership will record
an asset of $15,567 and a corresponding credit in its statement of operations
related to the cumulative effect of the implementation of SFAS 133 on January 1,
2001. Each quarter, the change in the market value of the Partnership's
derivative will be recorded as other income or expense.
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.
There was no taxable income to the limited partners in any of the three years in
the period ended December 31, 2000. Generally, subject to the allocation
procedures discussed in the following paragraph, taxable income to the limited
partners is different from that reported in the statement of operations
principally due to the differences in depreciation and amortization expense
allowed for tax purposes and that amount recognized under generally accepted
accounting principles. Traditionally, there were no other significant
differences between taxable income and the net loss reported in the statements
of operations.
The Partnership agreement provides that tax losses may not be allocated to the
limited partners if such loss allocation would create a deficit in the Limited
Partners' Capital Account. Such excess losses are reallocated to the General
Partner ("Reallocated Limited Partner Losses"). In general, in subsequent years,
100% of the Partnership's net income is allocated to the General Partner until
the General Partner has been allocated net income in amounts equal to the
Reallocated Limited Partner Losses.
43
In general, under current federal income tax laws, a partner's allocated share
of tax losses from a partnership is allowed as a deduction on his individual
income tax return only to the extent of the partner's adjusted basis in his
partnership interest at the end of the tax year. Any excess losses over adjusted
basis may be carried forward to future tax years and are allowed as deductions
to the extent the partner has an increase in his adjusted basis in the
Partnership through either an allocation of partnership income or additional
capital contributions to the Partnership.
In addition, the current tax law does not allow a taxpayer to use losses from a
business activity in which he does not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset other
income such as salary, active business income, dividends, interest, royalties
and capital gains. However, such losses can be used to offset other income from
passive activities. Disallowed losses can be carried forward indefinitely to
offset future income from passive activities. Disallowed losses can be used in
full when the taxpayer recognizes gain or loss upon the disposition of his
entire interest in the passive activity.
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounts to $390,062, $346,495 and $335,704, in 2000, 1999
and 1998, respectively. Minimum lease payments through the end of the lease
terms are as follows:
2001 $31,396
2002 30,171
2003 16,630
2004 6,700
2005 6,700
Thereafter 8,900
-----------
$100,497
===========
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.
44
Cable Programming Service Tier Regulation. FCC regulation of rates for cable
programming service tiers has been eliminated for small cable systems owned by
small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000) and more than $250 million in annual
revenue. The Partnership qualifies as a small cable company and all of the
Partnership's cable systems qualify as small cable systems. Basic tier rates
remain subject to regulations by the local franchising authority under most
circumstances until effective competition exists. The 1996 Act expands the
definition of effective competition to include the offering of video programming
services directly to subscribers in a franchised area served by a local
telephone exchange carrier, its affiliates or any multichannel video programming
distributor which uses the facilities of the local exchange carrier. The FCC has
not yet determined the penetration criteria that will trigger the presence of
effective competition under these circumstances.
Telephone Companies. The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act, or a radio-based multichannel
programming distributor not subject to any provisions of the 1996 Act, or
through nonfranchised "open video systems" offering nondiscriminatory capacity
to unaffiliated programmers, subject to select provisions of the 1996 Act.
Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public Educational and Governmental and leased
access channels.
Self-Insurance
The Partnership began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, the Partnership began making quarterly contributions into an
insurance fund maintained by an affiliate which covers all Northland entities
and would defray a portion of any loss should the Partnership be faced with a
significant uninsured loss. To the extent the Partnership's losses exceed the
fund's balance, the Partnership would absorb any such loss. If the Partnership
were to sustain a material uninsured loss, such reserves could be insufficient
to fully fund such a loss. The capital cost of replacing such equipment and
physical plant, could have a material adverse effect on the Partnership, its
financial condition, prospects and debt service ability.
Amounts paid to the affiliate, which maintains the fund for the Partnership and
its affiliates, are expensed as incurred and are included in the statements of
operations. To the extent a loss has been incurred related to risks that are
self-insured, the Partnership records an expense and an associated liability for
the amount of the loss, net of any amounts to be drawn from the fund. For 2000,
1999 and 1997, respectively, the Partnership was charged $23,443, $23,821 and
$24,132 by the fund. As of December 31, 2000, the fund had a balance of
$509,135.
45
9. SUBSEQUENT EVENT:
On January 26, 2001 the Partnership amended its revolving credit and term loan
agreement. Certain financial covenants were modified and a $4,500,000 facility
was made available as a revolving line of credit for capital expenditures,
working capital and other general business purposes.