ITEM 1. BUSINESS
Northland Cable Properties Four Limited Partnership (the "Partnership") is a Washington limited partnership consisting of two general partners (the "General Partners") and approximately 1,028 limited partners as of December 31, 1996. Northland Communications Corporation, a Washington corporation, is the Managing General Partner of the Partnership (referred to herein as "Northland" or the "Managing General Partner"). FN Equities Joint Venture, a California general partnership, is the Administrative General Partner of the Partnership (the "Administrative General Partner").
Northland was formed in March 1981 and is principally involved in the ownership and management of cable television systems. Northland currently manages the operations and is the General Partner for cable television systems owned by 5 limited partnerships. Northland is also the parent company of Northland Cable Properties, Inc. which was formed in February 1995 and is principally involved in direct ownership of cable television systems. Northland is a subsidiary of Northland Telecommunications Corporation ("NTC"). Other subsidiaries of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and principally involved in the direct ownership of cable television systems. Owner of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally involved in the production and development of local programming.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 as the holding company for the following entities:
CABLE TELEVISION BILLING, INC. - formed in June 1987 and principally involved in the development and production of computer software used in connection with the billing and financial recordkeeping for cable systems owned or managed by Northland or Northland Cable Television, Inc.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally involved in the production and development of video commercial advertisements.
NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company for the following entity:
STATESBORO MEDIA, INC. - formed in April 1995 and principally involved in acquiring and operating an AM radio station serving the community of Statesboro, GA and surrounding areas.
The Partnership was formed on January 2, 1985 and began operations in 1985 with the acquisition of several cable television systems in Texas and California (the "Systems"). In September 1995, the Partnership acquired the cable television systems in and around Kaufman, Oak Grove, Hillsboro, New Waverly and Waterwood, TX (the "SLT System"). In October 1995, the Partnership purchased the cable television systems in and around Huffman Prairie View, Waller, Cut and Shoot, Brookshire, Tarkenton, Ace, Simonton and Fulshear, TX (the "Brookridge System"). As of December 31, 1996, the total number of basic subscribers served by the Systems was 22,554, and the Partnership's penetration rate (basic subscribers as a percentage of homes passed) was approximately 64% as compared to an industry average of approximately 66%, as reported by PAUL KAGAN ASSOCIATES, INC.
The Partnership has 40 non-exclusive franchises to operate the Systems. The franchises, which will expire at various dates through the year 2012, have been granted by county, city and other local governmental authorities in the areas in which the Systems operate. Annual franchise fees are paid to the granting governmental authorities. These fees vary between 2% and 5% of the respective gross revenues of the Systems in a particular community. The franchises may be terminated for failure to comply with their respective conditions.
The Partnership serves the communities and surrounding areas of Flint/Tyler, New Caney, Whitewright, Kaufman, Hillsboro and Prairie View, Texas, as well as Chowchilla, California. The following is a description of these areas:
Flint/Tyler, TX: The S.W. Tyler and S.E. Tyler systems serve most of the suburban areas to the southeast, south and southwest of Tyler, TX. This east Texas area is known for its tree-lined lakes which offer year-round fishing, swimming, skiing and other water-related sports during the summer months. The area's largest lakes are Lake Palestine and Lake Tyler. The Tyler area enjoys a mild subtropical climate. This allows farmers and gardeners to plant in both spring and fall due to the area's long growing season of 259 days. Tyler also features a 22-acre municipally-owned rose garden which is renowned for its 38,000 rose bushes and 450 rose varieties. Certain information regarding the Tyler, TX system as of December 31, 1996 is as follows:
New Caney, TX: The New Caney system serves the communities and surrounding areas of Patton Village, Splendora, Woodbranch Village, Roman Forest, New Waverly, Waterwood, Huffman and New Caney, TX. This system is approximately forty miles north of Houston, TX and has very easy access to Houston Intercontinental Airport. Certain information regarding the New Caney, TX system as of December 31, 1996 is as follows:
Whitewright, TX: The cities of Whitewright, Van Alstyne, Savoy, Bells, Howe, Tom Bean and Trenton, as well as the city of Sherman, Texas, are located in a region that is referred to as the "Texoma Region." The Texoma Region includes Lake Texoma, a large 89,000-acre lake which has over 600 miles of sandy beaches, an 11,000-acre wildlife refuge and 43 park areas. The wide variety of recreational opportunities has created a popular resort area attracting more than 11,000,000 visitors each year. Certain information regarding the Whitewright, TX system as of December 31, 1996 is as follows:
Kaufman, TX: The Kaufman system includes the community of Oak Grove and is located in north central Texas, approximately 32 miles southeast of Dallas, Texas. Major industries in the area include manufacturing and health care. Trinity Valley College is located in the area. Certain information regarding the Kaufman, TX system as of December 31, 1996 is as follows:
Hillsboro, TX: The Hillsboro system is located in north central Texas, approximately 65 miles south of Dallas, Texas. Major industries in the area include retail, manufacturing and health care. In addition, Hill College is located in the area. Certain information regarding the Hillsboro, TX system as of December 31, 1996 is as follows:
Prairie View, TX: The Prairie View system is located northwest of Houston, Texas and includes the community of Waller, Texas. Prairie View is a branch location of Texas A & M University, one of the largest universities in southeast Texas. Certain information regarding the Prairie View, TX system as of December 31, 1996 is as follows:
Chowchilla, CA: The Chowchilla system serves the communities of and contiguous areas surrounding Chowchilla, Planada and Riverdale, which are all located in the San Joaquin Valley in west-central California. The San Joaquin Valley is one of the nation's leading agricultural areas. The alluvial deposits from the San Joaquin and Chowchilla rivers over the centuries have made the valley ideally suited for fruits, nuts, vegetables, cotton and grain. The climate is warm and dry with temperatures that approach 100 degrees in July and August. The winters are mild with only occasional frosts. In recent years, the valley has become increasingly popular because of its climate and access to recreational areas, with many rivers, lakes and close proximity to the Sierra National Forest and Yosemite National Park. Certain information regarding the Chowchilla, CA system as of December 31, 1996 is as follows:
The Partnership had 37 employees as of December 31, 1996. Management of these systems is handled through offices located in the towns of Flint, New Caney, Whitewright, Texas and Chowchilla, California. The Kaufman, Hillsboro, Waterwood and Prairie View, Texas systems share the costs of offices maintained by affiliates of the Partnership pursuant to the terms of operating management agreements. Pursuant to the Agreement of Limited Partnership, the Partnership reimburses the Managing General Partner for time spent by the Managing General Partner's accounting staff on Partnership accounting and bookkeeping matters. (See Part III Item 13(a) below.)
The Partnership's cable television business is not considered seasonal. The business of the Partnership is not dependent upon a single customer or a few customers, the loss of any one or more of which would have a material adverse effect on its business. No customer accounts for 10% or more of revenues. No material portion of the Partnership's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental unit, except that franchise agreements may be terminated or modified by the franchising authorities as noted above. During the last year, the Partnership did not engage in any research and development activities.
Partnership revenues are derived primarily from monthly payments received from cable television subscribers. Subscribers are divided into three categories: basic subscribers, tier subscribers and premium subscribers. "Basic subscribers" are households that subscribe to the basic level of service, which generally provides access to the three major television networks (ABC, NBC and CBS), a few independent local stations, PBS (the Public Broadcasting System) and certain satellite programming services, such as ESPN, CNN or The Discovery Channel. "Tier subscribers" are households that subscribe to an additional level of certain satellite programming services the content of which varies from system to system. "Premium subscribers" are households that subscribe to one or more "pay channels" in addition to the basic service. These pay channels include such services as Showtime, Home Box Office, Cinemax, Disney or The Movie Channel.
On January 31, 1997, the Partnership sold the undivided portion of the cable systems that was attributable to the limited partners' and Administrative General Partner's collective interests in the Partnership. These assets were purchased by affiliates of Northland, based on an aggregate valuation of $32,000,000 for the cable systems. At closing, the Partnership received approximately $25,400,000, of cash from the buyers and an unsecured, subordinated promissory note in the amount of approximately $4,600,000, together representing the value of the limited partners' and administrative general partner's undivided portion of the cable systems. The note obligation has been assumed by Northland and will be payable, subject to adjustment for unknown liabilities existing as of the closing date, in two equal annual installments beginning January 31, 1998 with interest at 6%.
COMPETITION
Due to factors such as the non-exclusivity of the Partnership's franchises, recent regulatory changes and Congressional action, the rapid pace of technological developments, and the adverse publicity received by the cable industry regarding the lack of competition, there is a substantial likelihood that the Partnership's systems will be subject to a greater degree of competition in the future.
Other Entertainment Alternatives The Partnership's systems compete with other communications and entertainment media, including conventional over-the-air television broadcasting stations. Cable television service was first offered as a means of improving television reception in markets where terrain factors or remoteness from major cities limited the availability of over-the-air television broadcasts. In some of the areas served by the Partnership's systems, several of the broadcast television channels can be adequately received off-air. The extent to which cable television service is competitive with broadcast stations depends in significant part upon the cable television system's ability to provide an even greater variety of programming than available off-air.
Cable television systems also are susceptible to competition from other video programming delivery systems (discussed below), from other forms of home entertainment such as video cassette recorders, and, in varying degrees, from sources of entertainment in the communities served, including motion picture theaters, live theater and sporting events.
Overbuilds Recent federal legislation and court decisions have increased the likelihood that incumbent cable operators will face instances of "overbuilding". Overbuilding occurs when a cable operator who is not affiliated with the incumbent franchise holder applies for and receives a second franchise from the local franchising authority and constructs a cable system in direct competition with that of the incumbent. None of the Partnership's franchises provide for exclusivity. Overbuilding typically occurs where the overbuilder believes it can attract a profitable share of the incumbent operator's customer base. Overbuilding also may occur if the local franchising authority authorizes construction of a governmentally owned and operated cable system. At present none of the Partnership's cable systems are overbuilt. Given the regulatory developments making it easier for overbuilders, both private and governmental entities, to enter the marketplace, there can be no assurances that overbuilder competition will not occur in the future. However, Management believes that given the current regulatory environment related to cable rates, the attractiveness of overbuilding may have been diminished.
Wireless Services A variety of services, often generically referred to as "wireless" cable, distribute video programming via omnidirectional low-power microwave signals from a stationary transmitter to customers at fixed locations. For many years such services faced governmental restrictions on the types of programming they could distribute and were generally prevented, by regulatory and technological reasons, from distributing the quantity of programming distributed by cable operators. Wireless operators also faced difficulty in obtaining access to certain programming produced by vendors affiliated with the cable industry. In recent years, the Federal Communications Commission (the "FCC") has adopted policies for authorizing new technologies and providing a more favorable regulatory environment for certain existing wireless technologies. Such policies have the potential to create additional competition for cable television systems. The FCC recently amended its regulations to enable multi-channel, multi-point distribution services ("MMDS"), to compete more effectively with cable television systems by making available additional channels to the MMDS industry.
On December 10, 1992, the FCC commenced a rulemaking in which a new wireless multichannel video service is proposed to be created. The proposed new service is called the Local Multichannel Distribution Service ("LMDS") and will operate in the 27.5 - 29.5 MHz frequency band. LMDS providers, as the FCC currently proposes, would have no restrictions on the kinds of service that may be offered. No major technological advances which would adversely affect the Partnership's business have been made during 1996.
The Partnership has experienced competition from MMDS operators in certain systems during the past year. The Whitewright System experienced a loss of approximately 500 subscribers to an MMDS operator. The Partnership has not experienced significant subscriber losses in any other system.
There can be no assurance, however, that future competition brought about by MMDS, LMDS and other wireless technologies will not have a material adverse effect on Partnership operations. As noted below, the recent Congressional legislation, among other things, is designed to make programming that is currently available to the cable television industry available to other technologies to foster the growth of alternative video programming delivery services.
Satellite Delivered Services Additional competition exists from private cable television systems serving condominiums, apartment complexes and other private residential developments. The operators of these private systems, generally referred to as Satellite Master Antenna Television ("SMATV") providers, often enter into exclusive agreements with apartment building owners or homeowner's associations that preclude operators of franchised cable television systems from serving residents of such private complexes. Due to the widespread availability of reasonably priced satellite signal reception dishes or earth stations, SMATV systems now can offer both improved reception of local television stations and many of the same satellite-delivered programming services that are offered by franchised cable television systems. Moreover, SMATV systems generally are free of the regulatory burdens imposed on franchised cable television systems. Although a number of states and some municipalities have enacted laws and ordinances to afford operators of franchised cable television systems access to private complexes, several of such laws and ordinances have been challenged successfully in the courts, and others are under attack. Because the Partnership generally has been able to enter into access agreements with owners of private complexes, in Management's opinion, successful challenges to access statutes would not have a material adverse effect on the operations of the Partnership.
Reasonably priced earth stations designed for private home use now enable individual households to receive many of the satellite-delivered programming services formerly available only to cable television subscribers. Many satellite programmers now encode their signals in order to allow reception only by means of authorized decoding equipment.
Direct broadcast satellite ("DBS") service consists of satellite services that focus on delivering programming services directly to homes using high-power signals transmitted by satellites to receiving facilities located on the premises of subscribers. With an antenna as small as 18 inches, a DBS customer can receive a hundred or more programming signals. Using a national base of subscribers, it is possible that DBS companies may be able to offer new and highly specialized services which may not be available to the cable television industry, but as channel capacity and penetration of cable television systems increase, the cable industry is expected to have the ability to offer additional services as well. Because DBS systems deliver their services using satellite technology, they may not be able to economically provide services that are of local interest to their subscribers, and may not be able to maintain a local presence, which is considered a significant advantage in developing and maintaining subscriber support. During 1996, the Partnership did not experience any significant subscriber loss to DBS. There can be no assurance, however, that future competition brought about by DBS will not have a material adverse impact on Partnership operations.
Telephone Companies Federal law, FCC regulations and the 1982 federal court consent decree (the "Modified Final Judgment") that settled the 1974 antitrust suit against AT&T all limit in various ways the provision of video programming and other information services by telephone companies. Federal law codifies FCC cross-ownership regulations which, among other things, prohibit local telephone exchange companies including the seven Regional Bell Operating Companies ("RBOCs"), from providing video programming directly to subscribers within their local exchange service areas, except in rural areas or by specific waiver of FCC rules. These statutory provisions and corresponding FCC regulations are of particular competitive importance because these telephone companies already own much of the plant necessary for cable television operations, such as poles, underground conduits, associated rights-of-way and connections to the home.
In July 1991, the U.S. District Court responsible for the Modified Final Judgment lifted the prohibition on the provision of information services by the RBOCs. As a result, the RBOCs were allowed to acquire or construct cable television systems outside of their own service areas. Another federal court held that the cable/telco cross-ownership prohibitions unconstitutionally abridge the First Amendment rights of the RBOCs and other telephone companies. Several RBOCs have entered into agreements to purchase cable television systems outside their service areas. Management believes that such purchases of existing cable television systems do not represent a significant competitive threat to the Partnership
In July 1992, the FCC voted to authorize additional competition to cable television by video programmers using broadband common carrier facilities constructed by telephone companies. The FCC allowed telephone companies to take ownership interests of up to 5% in such programmers. Several telephone companies have sought approval from the FCC to build such systems and several experimental systems have been approved by the FCC. No such systems were proposed in a community in which the Partnership holds a cable franchise.
Recent Federal laws have significantly changed the restrictions on telephone companies with respect to their ability to own and operate video programming delivery systems within their own service areas. See "Regulation - The 1996 Act."
There can be no assurance that future competition brought on by telephone company participation in the cable television industry will not have a material adverse effect on the Partnership's operations.
REGULATION
The Partnership's business is subject to intensive regulation at the federal and local levels, and to a lesser degree, at the state level. The FCC, the principal federal regulatory agency with jurisdiction over cable television, is responsible for implementing federal policies such as rate regulation, cable system relations with other communications media, cross-ownership, signal carriage, equal employment opportunity and technical performance. Provisions of regulatory events that have impacted the Partnership's operations are summarized below.
The 1992 Cable Act. On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), which significantly increased regulation of the cable television industry. The 1992 Cable Act became generally effective on December 4, 1992, although certain provisions became effective at later dates. The 1992 Cable Act represented a significant change in the regulatory framework under which cable television systems operate and has had and likely will continue to have a significant impact on the cable industry and the Partnership's business.
Since the Cable Communications Policy Act of 1984 (the "1984 Cable Act") became effective, and prior to the enactment of the 1992 Cable Act, rates for cable services were unregulated for substantially all of the Partnership's systems. Effective September 1, 1993, rate regulation was instituted for certain cable television services and equipment in communities that are not subject to "effective competition" as defined in the legislation. Effective competition is defined by this law to exist only where (i) fewer than 30 percent of the households in the franchise area subscribe to the cable service of a cable system; (ii) there are at least two unaffiliated multichannel video programming distributors serving the franchise area meeting certain penetration criteria; or (iii) a multichannel video programming distributor is available to 50 percent of the homes in the franchise area and is operated by the franchising authority. Virtually all cable television systems in the United States, including all of the Partnership's systems, are not subject to effective competition under this definition and therefore are subject to rate regulation for basic service by local franchising authority officials under the oversight of the FCC and subject to rate regulation for their remaining programming services (other than those offered for a per-channel or per-program charge) by the FCC.
The 1992 Cable Act requires each cable system to establish a basic service tier consisting, at a minimum, of all local broadcast signals and all non-satellite delivered distant broadcast signals which the system wishes to carry, and all public, educational and governmental access programming. On April 1, 1993, the FCC adopted its initial regulations governing rates for the basic service tier. Under the regulations adopted by the FCC on April 1, 1993, local franchising authorities, after meeting certain requirements, were authorized to require cable operators to reduce the rates for the basic service tier by up to 10 percent from the rates in effect on September 30, 1992, if those rates exceed a per-channel benchmark established by the FCC. Local franchising authorities also were empowered to regulate the rates charged for installation and lease of the equipment used by subscribers to receive the basic service tier and the installation and monthly use of connections for additional television sets.
A local franchising authority seeking to regulate basic service rates must certify to the FCC that, among other things, it has adopted regulations consistent with the FCC's rate regulation guidelines and criteria. If a local franchising authority's certification is deficient or subsequently is revoked, then the FCC is required to regulate the cable operator's basic service rates until the local franchising authority is properly certified or until such time as effective competition exists within the cable system's franchise area.
As part of the implementation of the new regulations, the FCC froze all rates in effect on April 5, 1993 until May 15, 1994, except rates for premium and pay-per-view programming services and equipment. On February 22, 1994, the FCC adopted rules that modified, among other things, the FCC's benchmark system for determining the maximum rates for regulated services on cable systems not subject to effective competition. In addition to adopting new, lower benchmark levels, the FCC's regulations (i) allowed local franchising authorities to require cable operators to reduce the rate for the basic service tier by up to 17 percent from the rates in effect on September 30, 1992 if those rates exceed the new per-channel benchmarks by that amount, and (ii) allowed the FCC, in response to a complaint, to require cable operators to reduce the rates for CPST's by up to 17 percent from the rates in effect on September 30, 1992 if those rates exceed the new per-channel benchmarks by that amount.
Under the 1992 Cable Act, cable systems may not require subscribers to purchase any service tier other than the basic tier as a condition of access to video programming offered on a per-channel or per-program basis. Cable systems are allowed a 10-year phase-in period to the extent necessary to implement the required technology to facilitate such access. The FCC may grant extensions of the 10-year time period, if deemed necessary.
The 1992 Cable Act also provides that the consent of most television stations (except satellite-delivered television stations that were provided to the cable television industry as of May 1, 1991, and noncommercial stations) would be required before a cable system could retransmit their signals. Alternatively, a television station could elect to exercise must-carry rights. Must-carry rights entitle a local broadcast station to demand carriage on a cable system, and a system generally is required to devote up to one-third of its channel capacity for the carriage of local stations. Litigation challenging the constitutionality of the mandatory broadcast signal carriage requirements of the 1992 Cable Act is currently pending before the United States Supreme Court. The must-carry rules will remain in effect during the pendency of the proceedings before the United States Supreme Court. If must-carry requirements withstand judicial review, the requirements may cause displacement of more attractive programming. If retransmission consent requirements withstand judicial review and broadcast stations require significant monetary payments for cable system carriage of their signals, the cost of such signal carriage may adversely affect the Partnership's operations.
In addition, the 1992 Cable Act (i) requires cable programmers under certain circumstances to offer their programming to present and future competitors of cable television such as multichannel multipoint distribution services ("MMDS"), satellite master antenna systems ("SMATV") and direct broadcast satellite system operators; (ii) prohibits new exclusive contracts with program suppliers without FCC approval; (iii) bars municipalities from granting exclusive franchises and from unreasonably refusing to grant additional competitive franchises; (iv) permits municipal authorities to operate a cable system without a franchise; (v) regulates the ownership by cable operators of other media such as MMDS and SMATV; (vi) bars, subject to several stated exceptions, cable operators from selling or transferring ownership in a cable system for a three-year period following the acquisition or initial construction of the system; and (vii) prohibits a cable operator from charging a customer for any service or equipment that the subscriber has not affirmatively requested.
In response to the 1992 Cable Act, the FCC has imposed or will impose new regulations in the areas of customer service, technical standards, compatibility with other consumer electronic equipment such as "cable ready" television sets and video cassette recorders, equal employment opportunity, privacy, rates for leased access channels, obscene or indecent programming, limits on national cable system ownership concentration, standards for limiting the number of channels that a cable television system operator could program with programming services controlled by such operator and disposition of a customer's home wiring.
The 1992 Cable Act and subsequent FCC rulings have generally increased the administrative and operational expenses of cable television systems as a result of additional regulatory oversight by the FCC and local franchise authorities. There have been several lawsuits filed by cable operators and programmers in federal court challenging various aspects of the 1992 Cable Act. The litigation concerning the must-carry rules is described above. Appeals also have been filed in connection with litigation resulting from the FCC's rate regulation rulemaking decisions. The Partnership cannot determine at this time the outcome of pending FCC rulemakings, the litigation described herein, or the impact of any adverse judicial or administrative decisions on the Partnership's systems or business.
The 1996 Act. On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act") was enacted which dramatically changed federal telecommunications laws and the future competitiveness of the industry. Many of the changes called for by the 1996 Act will not take effect until the FCC issues new regulations which, in some cases, may not be completed for several 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 certain provisions affecting the cable television industry.
FCC regulation of rates for cable programming service tiers (i.e., cable programming carried on a level other than the basic service tier or offered on a pay-per-channel or pay-per-view basis) ("CPST") has been eliminated for small cable systems served by small companies. Small cable systems are those having 50,000 or fewer subscribers served by companies with fewer than one percent of national cable subscribers (approximately 600,000). All of the Partnership's cable systems qualify as small cable systems. Basic service tier rates remain subject to regulation by the local franchising authority under most circumstances until effective competition exists. The 1996 Act expands the definition of effective competition to include the offering of video programming services directly to subscribers in a franchised area by the local exchange carrier (i.e. local telephone company), its affiliates, or any multichannel video programming distributor which uses the facilities of the local exchange carrier. No penetration criteria exists that triggers the presence of effective competition under these circumstances. The 1996 Act allows telephone companies to offer video programming directly to customers in their service areas immediately upon enactment. They may provide video programming as a cable operator fully subject to the 1996 Act, or as a radio-based multichannel programming distributor not subject to any provisions of the 1996 Act, or through non-franchised "open video systems" offering non-discriminatory capacity to unaffiliated programmers, subject to selected provisions of the 1996 Act. Although Management's current opinion is that there is low probability of competition from telcos in rural areas in the near future, there are no assurances such competition will not materialize.
The 1996 Act encompasses various other aspects of providing cable television service including prices for equipment, discounting of rates to multiple dwelling units, lifting of anti-trafficking restrictions, cable-telephone cross ownership provisions, pole attachment rate formulas, rate uniformity, program access, scrambling and censoring of PEG and leased access channels.
Other Regulatory Developments In November 1991, the FCC released a Report and Order in which it concluded, among other things, that the 1984 Cable Act and the FCC's regulatory cross-ownership restrictions do not prohibit interexchange carriers (i.e., long distance telephone companies) from acquiring cable television systems or entering into joint ventures with cable operators in areas where such interexchange carriers provide their long distance telephone services. The FCC also concluded that a local exchange carrier (i.e., the local telephone company) that provides a common carrier-based system to distribute video programming to subscribers and a third party programmer using such common carrier services are not required by federal law to obtain a cable television franchise from the local franchising authority in order to provide such video programming services to the public. The FCC's decision described in the preceding sentence has been appealed and these appeals are currently pending.
In 1989, the FCC issued new syndicated exclusivity and network non-duplication rules which enable local television broadcasters to compel cable television operators to delete certain programming on distant broadcast signals. Those rules took effect January 1, 1990. Under the rules, all television broadcasters, including independent stations, can compel cable television operators to delete syndicated programming from distant signals if the local broadcaster negotiated exclusive rights to such programming. Local network affiliates may insist that a cable television operator delete a network broadcast on a distant signal. The rules made certain distant signals a less attractive source of programming for the Partnership's systems, since much of such distant signals' programming may have to be deleted.
The FCC currently regulates the rates and conditions imposed by public utilities for use of their poles, unless, under the Federal Pole Attachments Act, state public service commissions are able to demonstrate that they regulate the cable television pole attachment rates. In the absence of state regulation, the FCC administers pole attachment rates through the use of a formula which it has devised. The validity of this FCC function was upheld by the United States Supreme Court.
Copyright Cable television systems are subject to federal copyright licensing, covering carriage of television broadcast signals. In exchange for paying a percentage of their revenues to a federal copyright royalty pool, cable television operators obtain a compulsory license to retransmit copyrighted materials from broadcast signals. Existing Copyright Office regulations require that compulsory copyright payments be calculated on the basis of revenue derived from any service tier containing broadcast retransmission. Although the FCC has no formal jurisdiction over this area, it has recommended to Congress to eliminate the compulsory copyright scheme altogether. The Copyright Office has similarly recommended such a repeal. Without the compulsory license, cable television operators would need to negotiate rights from the copyright owners for each program carried on each broadcast station in each cable system's channel lineup. Such negotiated agreements could increase the cost to cable television operators of carrying broadcast signals. Thus, given the uncertain but possible adoption of this type of copyright legislation, the nature or amount of the Partnership's future payments for broadcast signal carriage cannot be predicted at this time. Local Regulation Cable television systems are generally operated pursuant to franchises, permits or licenses issued by a municipality or other local government entity. Each franchise generally contains provisions governing fees to be paid to the franchising authority, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public streets and number and types of cable television services provided. Franchises are usually issued for fixed terms and must periodically be renewed. There can be no assurance that the franchises for the Partnership's systems will be renewed as they expire, although the Partnership believes that its cable systems generally have been operated in a manner that satisfies the standards of the 1984 Cable Act, as amended by the 1992 Cable Act, for franchise renewal. In the event the franchises are renewed, the Partnership cannot predict the impact of any new or different conditions that might be imposed by the franchising authorities in connection with such renewals.
Summary The foregoing does not purport to be a summary of all present and proposed federal, state and local regulations and legislation relating to the cable television industry. Other existing federal legislation and regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements are currently the subject of a variety of judicial proceedings, legislative hearings and administrative and legislative proposals which could change, in varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings nor their impact upon the cable television industry or the Partnership can be predicted at this time.
The Partnership expects to adapt its business to adjust to the changes that may be required under any scenario of regulation. At this time, the Partnership cannot assess the effects, if any, that present regulation may have on the Partnership's operations and potential appreciation of its Systems. There can be no assurance, however, that the final form of regulation will not have a material adverse impact on partnership operations.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership's cable television systems are located in and around Chowchilla, California and Flint/Tyler, Whitewright, New Caney, Kaufman, Hillsboro and Prairie View, Texas. The principal physical properties of the Systems consist of system components (including antennas, coaxial cable, electronic amplification and distribution equipment), motor vehicles, miscellaneous hardware, spare parts and real property, including land and buildings. The Partnership's cable plant passed approximately 39,985 homes as of December 31, 1996. Management believes that the Partnership's plant passes all areas which are currently economically feasible to service. Future line extensions depend upon the density of homes in the area as well as available capital resources for the construction of new plant. (See Part II. Item 7. Liquidity and Capital Resources.)
On February 16, 1996, the Partnership acquired substantially all operating assets and franchise rights of the cable television system serving approximately 220 subscribers in and around LeGrand, California. The purchase price was $268,750 of which $255,250 was paid, at the closing date and the balance of $13,500 was paid, net of any post closing adjustments in 1996.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On December 18, 1996 a special meeting of the Limited Partners was held at the executive offices of the Managing General Partner. The purpose of the meeting was to consider and vote upon the proposed liquidation of the collective partnership interests in the Systems owned by the Partnership. All votes cast at the special meeting were tabulated. Of the total 14,663 limited partnership units outstanding, 10,940 approved the proposed liquidation, 526 disapproved and 145 abstained.
PART II
ITEM 5.
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, 1996, is as follows:
Limited Partners: 1,028
General Partners: 2
(c) During 1996, the Partnership made cash distributions of $73,315 to the limited partners and $741 to the Managing General Partner. The limited partners have received in the aggregate in the form of cash distributions $5,223,574 on total initial contributions of $7,500,000 as of December 31, 1996. As of December 31, 1996, the Partnership had repurchased $154,500 of limited partnership units (267 units at $500 per unit and 70 units at $300 per unit). In February 1997 the Limited Partners received cash distributions of $375 per $500 unit pursuant to the liquidation of the Partnership. The Limited Partners will receive further distributions in 1998 and 1999 pursuant to the terms of a promissory note payable by Northland bearing interest at 6%.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1996 AND 1995
Total revenue reached $8,766,578 for the year ended December 31, 1996, representing an increase of approximately 32% over 1995. This increase is primarily due to a full year of operations for the SLT and Brookridge systems, acquired in September 1995 and October 1995, respectively. Furthermore, rate increases placed into effect during the third quarter of 1996 and increases in advertising revenue contributed to the increased revenue. Of the 1996 revenue, $6,626,011 (76%) is derived from subscriptions to basic service, $936,588 (11%) from subscriptions to premium services, $260,755 (3%) from subscriptions to tier services, $343,659 (4%) from advertising, $176,484 (2%) from installation charges, $188,156 (2%) from service contracts and $234,925 (2%) from other sources.
The following table displays historical average rate information for various services offered by the Partnership's systems (amounts per subscriber per month):
Operating expenses totaled $1,100,469 for 1996, representing an increase of approximately 31% as compared to 1995. This operating expense increase was due to a full year of operations for the SLT and Brookridge systems, acquired in September 1995 and October 1995, respectively. In addition, salary and benefit costs increased as a result of cost of living adjustments. Salary and benefit costs are the major component of operating expenses. Employee wages are reviewed annually and, in most cases, increased based on cost of living adjustments and other factors.
General and administrative expenses totaled $2,375,748 for 1996, representing an increase of approximately 37% over 1995. This net increase is due to higher revenue based expenses such as franchise fees, copyright fees and management fees as a result of revenue gains discussed above. Significant general and administrative expenses are based on revenues. In addition, the net increase is attributable to a full year of operations for the SLT and Brookridge systems, acquired in September 1995 and October 1995, respectively. The aforementioned increases were offset by a decrease in discretionary incentive compensation.
Programming expenses totaled $2,004,467 for 1996, representing an increase of approximately 44% over 1995. This is due to a full year of programming costs as a result of the SLT and Brookridge system acquisitions, the addition of new channels, and increases in costs charged by various program suppliers. Programming expenses mainly consist of payments made to the suppliers of various cable programming services. As these costs are based on the number of subscribers, future subscriber increases will cause the trend of programming expense increases to continue. In addition, rate increases from program suppliers, as well as new fees due to the launch of additional channels, will contribute to the trend of increased programming costs.
Depreciation and amortization expense increased from $1,381,435 in 1995 to $1,981,883 in 1996 (approximately 43%). This is due to a full year of depreciation and amortization on plant, equipment and intangible assets acquired with the purchase of the SLT and Brookridge systems and depreciation on assets placed into service during 1996.
Interest expense increased from $1,005,691 in 1995 to $1,761,791 in 1996 (approximately 75%). The Partnership's average debt balance increased from $14,559,000 in 1995 to $19,470,000 in 1996. In addition, the Partnership's effective interest rate increased from 6.91% in 1995 to 9.05% in 1996.
1995 AND 1994
Total revenue reached $6,617,205 for the year ended December 31, 1995, representing an increase of approximately 17% over 1994. This increase is primarily due to the acquisition of the SLT and Brookridge systems, in September 1995 and October 1995, respectively. The Partnership experienced a 4% increase in revenue exclusive of the activity for the SLT and Brookridge systems which is attributable to a 2% increase in basic subscribers, rate increases placed into effect during the second quarter 1995, and increases in advertising revenue. These increases were offset by a 5% decrease in revenue for the Chowchilla, CA system resulting from the elimination of the Easton headend in January 1995. Of the 1995 revenue, $4,717,279 (71%) is derived from subscriptions to basic service, $764,484 (12%) from subscriptions to premium services, $366,870 (6%) from subscriptions to tier services, $148,911 (2%) from installation charges, $205,405 (3%) from service contracts and $414,256 (6%) from other sources.
Operating expenses totaled $838,545 for 1995, representing a decrease of approximately 1% as compared to 1994. This operating expense decrease was due to a reduction in pole rental expense resulting from a retroactive charge in the previous year and a decrease in system maintenance expense. The decrease was offset by an increase in salary and benefit costs as a result of the SLT and Brookridge system acquisitions and cost of living increases.
General and administrative expenses totaled $1,740,021 for 1995, representing an increase of approximately 17% over 1994. Approximately two-thirds of the increase is attributable to expenses associated with the SLT and Brookridge acquisitions. The remaining increase is due to increases in revenue based expenses, such as franchise and management fees.
Programming expenses totaled $1,394,806 for 1995, representing an increase of approximately 27% over 1994. This is due to the additional subscribers as a result of the SLT and Brookridge system acquisitions, increased payroll and other costs related to local programming and advertising support, the addition of new channels, and increases in costs charged by various program suppliers.
Depreciation and amortization expense decreased from $1,653,369 in 1994 to $1,381,435 in 1995 (approximately 16%). This is due to fixed assets related to the formation of the Partnership becoming fully depreciated, offset by depreciation and amortization on plant, equipment and intangible assets acquired with the purchase of the SLT and Brookridge systems and depreciation on assets placed into service during 1995.
Interest expense increased from $601,948 in 1994 to $1,005,691 in 1995 (approximately 67%). The Partnership's average debt balance increased from $10,197,000 in 1994 to $14,559,000 in 1995. In addition, the Partnership's effective interest rate increased from 5.90% in 1994 to 6.91% in 1995.
EFFECTS OF REGULATION
On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Act"). The 1992 Act and subsequent revisions and rulemakings substantially re-regulated the cable television industry. The regulatory aspects of the 1992 Act included giving the local franchising authorities and the FCC the ability to regulate rates for basic services, equipment charges and additional CPST's when certain conditions were met. All of the Partnership's cable systems were potentially subject to rate regulation. The most significant impact of rate regulation was the inability to raise rates for regulated services as costs of operation rose during an FCC imposed rate freeze from April 5, 1993 to May 15, 1994.
On February 8, 1996, the Communications Act of 1996 (the "1996 Act") became law. The 1996 Act will eliminate all rate regulation on CPST's of small cable systems, defined by the 1996 Act as systems serving fewer than 50,000 subscribers owned by operators serving fewer than 1% of all subscribers in the United States (approximately 600,000 subscribers). All of the Partnership's cable systems qualify as small cable systems. Many of the changes called for by the 1996 Act will not take effect until the FCC issues new regulations, a process that could take from several months to a few years depending on the complexity of the required changes and the statutory time limits. Because of this, the full impact of the 1996 Act on the Partnership's operations cannot be determined at this time.
As of the date of this filing, the Partnership has received notification that local franchising authorities with jurisdiction over approximately 7% of total subscribers have elected to certify and no formal requests for rate justifications have been received from franchise authorities. Based on Management's analysis, the basic service tier rates charged by these systems are within the maximum rates allowed under FCC rate regulations.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, the Partnership's primary source of liquidity was cash flow from operations and borrowings under the Partnership's credit facility. The Partnership generates cash on a monthly basis through the monthly billing of subscribers for cable services. Losses from uncollectible accounts have not been material. During 1996, the cash generated from monthly billings and borrowings of $950,000 were used to meet the Partnership's needs for working capital, capital expenditures and debt service.
On January 31, 1997, the Partnership paid in full the term and revolving loan with the proceeds from the sale of substantially all of the operating assets to an affiliate of the Partnership.
CAPITAL EXPENDITURES
During 1996, the partnership incurred approximately $1,869,000 (excluding the LeGrand system acquisition) in capital expenditures. These expenditures included an upgrade of a portion of the system to 330MHz in the Whitewright, TX system; tier launches in the Chowchilla, CA and Hillsboro, TX systems; the purchase of advertising equipment in the Tyler, TX system; the purchase of a vehicle in the New Caney, TX system; an upgrade of a portion of the system to 450 MHz in the Kaufman, TX system; continuation of phased in fiber upgrades of the distribution plant in the Whitewright, TX, Tyler, TX and New Caney, TX systems; channel additions in the New Caney, TX and Prairie View, TX systems and various line extensions in all of the systems.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended December 31, 1996, 1995 and 1994 are included as a part of this filing (see Item 14(a)(1) below). ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 10.
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 55). 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 the subsidiaries. He has been involved with the cable television industry for over 22 years and currently serves as a director on the board of the Cable Telecommunications Association, a national cable television association. Between March 1979 and February 1982 he was in charge of the Ernst & Whinney national cable television consulting services. Mr. Whetzell first became involved in the cable television industry when he served as the Chief Economist of the Cable Television Bureau of the Federal Communications Commission (FCC) from May 1974 to February 1979. He provided economic studies to support the deregulation of cable television both in federal and state arenas. He participated in the formulation of accounting standards for the industry and assisted the FCC in negotiating and developing the pole attachment rate formula for cable television. His undergraduate degree is in economics from George Washington University, and he has an MBA degree from New York University.
JOHN E. IVERSON (AGE 60). Mr. Iverson is the Assistant Secretary of Northland Communications Corporation and has served on the Board of Directors since December 1984. He also serves on the Board of Directors of Northland Telecommunications Corporation and each of its subsidiaries. He is currently a partner in the law firm of Ryan, Swanson & Cleveland, Northland's general counsel. He is a member of the Washington State Bar Association and American Bar Association and has been practicing law for more than 34 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.
ARLEN I. PRENTICE (AGE 59). Since July 1985, Mr. Prentice has served on the Board of Directors of Northland Telecommunications Corporation, and he served on the Board of Directors of Northland Communications Corporation between March 1982 and July 1985. Since 1969, Mr. Prentice has been Chairman and Chief Executive Officer of Kibble & Prentice, a diversified financial services firm. Kibble & Prentice has four divisions, which include Estate Planning and Business Insurance, Financial Planning and Investments, Employee Benefit Services, and Property and Casualty Insurance. Mr. Prentice is a Chartered Life Underwriter, Chartered Financial Consultant, past President of the Million Dollar Round Table and a registered representative of Investment Management and Research. Mr. Prentice has a Bachelor of Arts degree from the University of Washington.
MILTON A. BARRETT, JR. (AGE 62). Since April 1986, Mr. Barrett has served on the Board of Directors of Northland Telecommunications Corporation. In 1995, he retired from the Weyerhaeuser Company after thirty-four years of service with that company. At the time of his retirement he was a Vice President of Sales and Marketing as well as chairman of Weyerhaeuser's business ethics committee. Mr. Barrett is a graduate of Princeton University magna cum laude and of the Harvard University Graduate School of Business Administration.
RICHARD I. CLARK (AGE 39). Mr. Clark has served as Vice President of Northland since March 1982. He has served on the Board of Directors of both Northland Communications Corporation and Northland Telecommunications Corporation since July 1985. He also serves as Vice President and Director of all subsidiaries of Northland Telecommunications Corporation. Mr. Clark was elected Treasurer in April 1987, prior to which he served as Secretary from March 1982. Mr. Clark was an original incorporator of Northland and is responsible for the administration and investor relations activities of Northland, including financial planning and corporate development. From July 1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the area of providing cable television consultation services and has been involved with the cable television industry for nearly 18 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.
ARTHUR H. MAZZOLA (AGE 74). Mr. Mazzola was elected to the Board of Directors of Northland Telecommunications Corporation in April 1987. From 1985 to 1990, he was Senior Vice President of Benjamin Franklin Leasing Company, Inc., an equipment lease financing company. Currently, Mr. Mazzola is serving as Business Development Coordinator for the Bank of California. Prior to his association with Benjamin Franklin Leasing Company, Mr. Mazzola served as President of Federal Capital Corporation and Trans Pacific Lease Company. Both of these companies also engaged exclusively in equipment lease financing. Mr. Mazzola is a past Board Chairman and current Trustee of the Pacific Northwest Ballet Association and current Board Member of the Dante Alighieri Society. Mr. Mazzola attended Boston University School of Business in 1943 where he studied economics.
TRAVIS H. KEELER (AGE 56). Mr. Keeler was elected to the Board of Directors of Northland Telecommunications Corporation in April 1987. Since May 1985, he has served as President of Overall Laundry Services, Inc., an industrial laundry and garment rental firm. Mr. Keeler received a Bachelor of Arts degree from the University of Washington in 1962.
JAMES E. HANLON (AGE 63). Since June 1985, Mr. Hanlon has been a Divisional Vice President for Northland's Tyler, Texas regional office and is currently responsible for the management of systems serving approximately 90,400 basic subscribers in Texas, Alabama and Mississippi. Prior to his association with Northland, he served as Chief Executive of M.C.T. Communications, a cable television company, from 1981 to June 1985. His responsibilities included supervision of the franchise, construction and operation of a cable television system located near Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of the CATV Division of Buford Television, Inc., and from 1973 to 1979, he served as President and General Manager of Suffolk Cablevision in Suffolk County, New York. Mr. Hanlon has also served as Vice President and Corporate Controller of Viacom International, Inc. and Division Controller of New York Yankees, Inc. Mr. Hanlon has a Bachelor of Science degree in Business Administration from St. Johns University.
JAMES A. PENNEY (AGE 42). Mr. Penney is Vice President and General Counsel for Northland Telecommunications Corporation and each of its subsidiaries and has served in this role since September 1985. He was elected Secretary in April 1987. Mr. Penney is responsible for advising all Northland systems with regard to legal and regulatory matters, and also is involved in the acquisition and financing of new cable systems. From 1983 until 1985 he was associated with the law firm of Ryan, Swanson & Cleveland, Northland's general counsel. Mr. Penney holds a Bachelor of Arts Degree from the University of Florida and a Juris Doctor from The College of William and Mary, where he was a member of The William and Mary Law Review.
GARY S. JONES (AGE 39). Mr. Jones is Vice President for Northland. Mr. Jones joined Northland in March 1986 as Controller and has been Vice President of Northland Telecommunications Corporation and each of its subsidiaries since October 1986. Mr. Jones is responsible for cash management, financial reporting and banking relations for Northland and is involved in the acquisition and financing of new cable systems. Prior to joining Northland, Mr. Jones was employed as a Certified Public Accountant with Laventhol & Horwath from 1980 to 1986. Mr. Jones received his Bachelor of Arts degree in Business Administration with a major in accounting from the University of Washington in 1979. RICHARD J. DYSTE (AGE 51). 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 performances as well as system upgrades and rebuilds. He is a past president and current member of the Mount Rainier Chapter of the Society of Cable Television Engineers, Inc. Mr. Dyste joined Northland in 1986 as an engineer and served as Operations Consultant to Northland Communications Corporation from August 1986 until April 1987. From 1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is a graduate of Washington Technology Institute.
H. LEE JOHNSON (AGE 53). Mr. Johnson has served as Divisional Vice President for Northland's Statesboro, Georgia regional office since March 1994. He is responsible for the management of systems serving approximately 62,000 basic subscribers in Georgia, Mississippi, North Carolina and South Carolina. Prior to his association with Northland he served as Regional Manager for Warner Communications, managing four cable systems in Georgia from 1968 to 1973. Mr. Johnson has also served as President of Sunbelt Finance Corporation and was employed as a System Manager for Statesboro CATV when Northland purchased the system in 1986. Mr. Johnson has been involved in the cable television industry for nearly 28 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.
JOHN T. WAECHTER (AGE 34). Mr. Waechter was promoted to Divisional Vice President for Western operations on January 1, 1997. He is responsible for the management of systems serving over 60,400 basic subscribers in California, Oregon, Idaho and Washington. Mr. Waechter also serves as the Director of Marketing and manages programming efforts for Northland. Prior to joining Northland in July 1995, Mr. Waechter was employed with GTE, Northwest from 1987 to 1993 as Marketing and Sales Manager. Prior to his employment with GTE, Mr. Waechter worked as Marketing Executive for the Xerox Corporation. He received a Bachelor of Arts degree in Political Science and Economics from Whitman College in 1984, and also attended the London School of Economics in 1983. Mr. Waechter received his MBA from the University of Washington in 1995.
A certain information regarding the officers and directors of FN Equities Joint Venture is set forth below:
A. MILES Z. GORDON (AGE 49). Mr. Gordon, President and Chief Executive Officer of Financial Network Investment Corporation (FNIC), has a comprehensive background in both the securities industry and securities law and regulation. In 1972, he joined the Los Angeles office of the Securities and Exchange Commission (SEC), and in 1974 he was appointed Branch Chief of the Investment Company and Investment Advisors Examination Division. Mr. Gordon left the SEC in 1978 to practice law. Within one year, he accepted a position as Vice President of a major national securities broker/dealer firm headquartered in Long Beach, California. He subsequently accepted the presidency of this firm in early 1980. In 1983, he helped form and became President and Chief Executive Officer of FNIC. This leading firm is now one of the largest independent broker/dealers in the United States. A graduate of Michigan State University (and current board member of the Visitors for the College of Social Science for MSU), Mr. Gordon received his Juris Doctorate from the University of California at Los Angeles School of Law. He presently serves as Chairman of the Securities Industry Association Independent Contractor Firms Committee. Mr. Gordon was also Chairman and a member of the NASD District Business Conduct Committee and a former member of the NASD Board of Governors. He is past president of the California Syndication Forum and has also served on several committees for the Securities Industry Association. Mr. Gordon has appeared on television and radio programs, been featured in numerous magazine and newspaper articles as an industry spokesperson, and is a frequent speaker at many industry seminars and conventions.
JOHN S. SIMMERS (AGE 46). Mr. Simmers, Executive Vice President and Chief Operating Officer of Financial Network Investment Corporation (FNIC), has an extensive background in the securities industry. He began his career as a reporter for Dunn and Bradstreet, then joined the National Association of Securities Dealers (NASD) in 1974. Knowledgeable in all aspects of broker/dealer regulations, operations, and products, Mr. Simmers was responsible for reviewing the activities of member firms in twelve states. Mr. Simmers left the NASD seven years later to accept a position as Vice President of the securities broker/dealer, retail, wholesale and investment advisory subsidiaries of a publicly held investment company headquartered in Long Beach, California. He left this firm in 1983 to help form and become Executive Vice President and Chief Operating Officer of FNIC. This full service broker/dealer firm has offices located across the United States. Mr. Simmers is a graduate of Ohio State University. He served on the Board of Directors of the California Association of Independent Broker/Dealers and was a member of the Real Estate Securities and Syndication Institute, the NASD District Business Conduct Committee (District 2 South), and the International Association for Financial Planning Due Diligence Steering Committee, which was organized to work toward improving the quality and consistency of due diligence in the securities industry. Mr. Simmers currently serves as a member of the NASD Direct Participation Programs Committee, and has spoken at numerous seminars and conventions.
HARRY M. KITTER (AGE 41). Mr. Kitter has served as Controller for Financial Network Investment Corporation since 1983. Prior to this association from 1981 to 1983 he was employed as the Los Angeles Internal Audit Manager at the Pacific Stock Exchange. From 1978 to 1981, he was Senior Accountant at Arthur Young & Co., C.P.A. He holds an MBA from the University of Pittsburgh and a bachelor's degree in economics from Lafayette College, Easton, Pennsylvania.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation was paid to the Managing General Partner during 1996 as indicated in Note 3 of the Notes to Financial Statements--December 31, 1996 (see Items 13(a) and 14(a)(1) below). In addition, cash distributions were made to the Managing General Partner in 1996 (see Item 5(c) above).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of management as of December 31, 1996 is as follows:
Note A: Northland has a 1% interest in the Partnership, which increases to 20% interest in the Partnership at such time as the limited partners have received 100% of their aggregate cash contributions. Northland also owns 20 units of limited partnership interest in the Partnership. The natural person who exercises voting and/or investment control over these interests is John S. Whetzell.
Note B: FN Equities Joint Venture has no interest (0%) in the Partnership until such time as the limited partners have received 100% of their aggregate cash contributions, at which time FN Equities Joint Venture will have a 5% interest in the Partnership. The natural person who exercises voting and/or investment control over these interests in John S. Simmers. ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Managing General Partner receives a management fee equal to 6% of the gross revenues of the Partnership, not including revenues from any sale or refinancing of the Partnership's Systems. The Managing General Partner also receives reimbursement of normal operating and general and administrative expenses incurred on behalf of the Partnership.
The Partnership had an agreement with Northland Cable Properties Two Limited Partnership ("NCP-Two") and Northland Cable Properties Five Limited Partnership ("NCP-Five"), affiliated partnerships owned and managed by Northland. Under the terms of these agreements, the Partnership provided certain programming services to Mexia, TX and Cedar Creek, TX systems and was reimbursed for its costs. During 1994, the Partnership discontinued providing programming services to these affiliates because it is now provided by Northland Cable News, Inc. ("NCN").
The Partnership has agreements with Northland Cable Properties Seven Limited Partnership ("NCP-Seven") and Northland Cable Television, Inc. ("NCTV"), affiliates of the Partnership organized and managed by Northland. Under the terms of these agreements, NCP-Seven and NCTV provide certain operating, administrative and programming services to the New Caney, Waterwood and Prairie View, TX systems and is reimbursed for its costs.
Cable Television Billing, Inc. ("CTB"), an affiliate of Northland, provides software installation and billing services to the Partnership's Systems.
NCN, an affiliate of Northland, provides programming to the Partnership's systems.
Cable Ad-Concepts, Inc. ("CAC"), an affiliate of Northland, provides the production and development of video commercial advertisements and advertising sales support.
See Note 3 of the Notes to Financial Statements--December 31, 1996 for disclosures regarding transactions with the General Partners or affiliates.
The following schedule summarizes these transactions:
Management believes that all of the above transactions are on terms as favorable to the Partnership as could be obtained from unaffiliated third parties for comparable goods or services.
As disclosed in the Partnership's Prospectus (which has been incorporated by reference), certain conflicts of interest may arise between the Partnership and the General Partners and their Affiliates. Certain conflicts may arise due to the allocation of management time, services and functions between the Partnership and existing and future partnerships as well as other business ventures. The General Partners have sought to minimize these conflicts by allocating costs between systems on a reasonable basis. Each limited partner may have access to the books and non-confidential records of the Partnership. A review of the books will allow a limited partner to assess the reasonableness of these allocations. The Agreement of Limited Partnership provides that any limited partner owning 10% or more of the Partnership units may call a special meeting of the Limited Partners, by giving written notice to the General Partners specifying in general terms the subjects to be considered. In the event of a dispute between the General Partners and Limited Partners which cannot be otherwise resolved, the Agreement of Limited Partnership provides steps for the removal of a General Partner by the Limited Partners.
(b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and Assistant Secretary of the Managing General Partner, is a partner of the law firm of Ryan, Swanson & Cleveland, which has rendered legal services to the Managing General Partner and the Partnership.
(c) INDEBTEDNESS OF MANAGEMENT. None. PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS A PART OF THIS REPORT:
(2) EXHIBITS:
4.1 Amended and Restated Certificate and Agreement of Limited Partnership Dated April 19, 1985(1)
4.2 Amendment to Agreement of Limited Partnership Dated June 28, 1990(6)
10.1 Management Agreement dated as of December 15, 1984(2)
10.2 Merced Franchise(2)
10.3 Madera Franchise(2)
10.4 Fresno Franchise(2)
10.5 Chowchilla Franchise(2)
10.6 Whitewright Franchise(7)
10.7 Van Alstyne Franchise(7)
10.8 Trenton Franchise(2)
10.9 Tom Bean Franchise(7)
10.10 Savoy Franchise(7)
10.11 Howe Franchise(2)
10.12 Bells Franchise(7)
10.13 Frankston Franchise(2) 10.14 Bullard Franchise(2)
10.15 Stoneridge Addition Development Franchise(2)
10.16 Chandler Franchise(2)
10.17 Tyler Franchise(2)
10.18 Woodard Place Development Franchise(2)
10.19 Berryville Franchise(2)
10.20 Hide Away Bay Franchise(2)
10.21 Emerald Bay Franchise(2)
10.22 Chapel Hill Franchise(7)
10.23 Patton Village Franchise(3)
10.24 Roman Forest Franchise(3)
10.25 Splendora Franchise(3)
10.26 Woodbranch Franchise(3)
10.27 Brownsboro Franchise(4)
10.28 Noonday Franchise(4)
10.29 Buddy Perkins Franchise(4)
10.30 Pinecrest Subdivision Franchise(4)
10.32 Revolving Credit and Term Loan Agreement with U.S. Bank of Washington dated July 5, 1990(5)
10.33 Amendment to Revolving Credit and Term Loan Agreement with U.S. Bank of Washington dated February 15, 1991(6)
10.34 Second Amendment to the Loan Agreement with U.S. Bank of Washington dated October 22, 1992(8)
10.35 Subordination Agreement dated as of July 25, 1991(9)
10.36 Franchise Agreement with the City of Noonday, TX, effective as of August 24, 1992(9)
10.37 Asset Purchase Agreement between Northland Telecommunications Corporation and SLT Cable TV, Inc., dated April 10, 1995(10)
10.38 Credit Agreement between Northland Cable Properties Four Limited Partnership and the First National Bank of Chicago dated August 31, 1995(11)
10.39 Franchise Agreement with City of Hillsboro, TX - Assignment and Assumption dated August 15, 1995(11)
10.40 Franchise Agreement with City of Kaufman, TX - Assignment and Assumption dated September 15, 1995(11)
10.41 Asset Purchase Agreement between Northland Cable Properties Four Limited Partnership and Brookridge Cable Special Purpose Partnership; Brookridge Cable Special Purpose Partnership II; Brookshire Cable TV, Limited Partnership; Carthage Cable TV, Limited Partnership; and Hillsboro Cable TV, Limited Partnership dated September 13, 1995(12)
10.42 Franchise Agreement with City of Oak Grove, TX - Assignment and Assumption dated September 15, 1995(11)
10.43 Franchise Agreement with City of New Waverly, TX - Assignment and Assumption dated September 15, 1995(11)
10.44 Asset Purchase Agreement between Northland Cable Properties Four Limited Partnership and UACC Midwest, Inc. dated November 17, 1995(12)
10.45 Notice of Special Meeting and Proxy Statement to the Limited Partners of the Partnership dated November 1, 1996(13)
(1) Incorporated by reference from the Partnership's Form 8-A Registration Statement filed July 24, 1987.
(2) Incorporated by reference from the Partnership's Form 10-K Annual Report for the fiscal year ended December 31, 1986.
(3) Incorporated by reference from the Partnership's Form 10-K Annual Report for the fiscal year ended December 31, 1987.
(4) Incorporated by reference from the Partnership's Form 10-K Annual Report for the fiscal year ended December 31, 1988.
(5) Incorporated by reference from the Partnership's Form 10-Q Quarterly Report for the period ended June 30, 1990.
(6) Incorporated by reference from the Partnership's Form 10-K Annual Report for the fiscal year ended December 31, 1990.
(7) Incorporated by reference from the Partnership's Form 10-K Annual Report for the fiscal year ended December 31, 1991.
(8) Incorporated by reference from the Partnership's Form 10-Q Quarterly Report for the period ended September 30, 1992.
(9) Incorporated by reference from the Partnership's Form 10-K Annual Report for the fiscal year ended December 31, 1992.
(10) Incorporated by reference from the Partnership's Form 10-Q Quarterly Report for the period ended June 30, 1995.
(11) Incorporated by reference from the Partnership's Form 8-K dated September 15, 1995.
(12) Incorporated by reference from the Partnership's Form 10-K annual report for the fiscal year ended December 31, 1995.
(13) Incorporated by reference from the Partnership's Form 8-K dated January 31, 1997.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K have been filed during the quarter ended December 31, 1996. Form 8-K was filed on January 31, 1997 reporting the sale of the Limited Partners' and Administrative General Partner's collective interests in Partnership's assets to affiliates of the Partnership.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION (Managing General Partner)
By /s/ John S. Whetzell Date: --------------------------- -------------- 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.
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 TOGETHER WITH AUDITORS' REPORT
[ARTHUR ANDERSEN LLP LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Northland Cable Properties Four Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties Four Limited Partnership (a Washington limited partnership) as of December 31, 1996 and 1995, 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, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northland Cable Properties Four Limited Partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Arthur Anderson LLP
Seattle, Washington, February 24, 1997 NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
ASSETS
LIABILITIES AND PARTNERS' DEFICIT
The accompanying notes are an integral part of these balance sheets. NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these statements. NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these statements. NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these statements. NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Four Limited Partnership (the Partnership), a Washington limited partnership, was formed on January 2, 1985. The Partnership was formed to acquire, develop and operate cable television systems. The Partnership began operations on April 19, 1985, by acquiring cable television systems in the city of Sherman, Texas. Additional systems were acquired in San Joaquin, California, and Tyler, Texas. In September 1995, the Partnership acquired cable television systems serving the areas of Hillsboro, Kaufman, New Waverly, Waterwood and Oak Grove, Texas. In October 1995, the Partnership acquired cable television systems serving the areas of Huffman, Prairie View, Cut and Shoot, Brookshire, Tarkenton, Ace, Simonton and Fulshear, Texas. In February 1996, the Partnership acquired the cable television systems serving LeGrand, California. The Partnership has 40 nonexclusive franchises to operate the cable systems for periods which will expire at various dates through the year 2012.
Northland Communications Corporation (Northland) is the Managing General Partner (the General Partner) of the Partnership. The General Partner and its affiliates also own and operate cable television systems. In addition, the General Partner manages cable television systems for other limited partnerships for which it is the General Partner.
FN Equities Joint Venture is the Administrative General Partner of the Partnership.
On January 31, 1997, the Partnership sold the undivided portion of the cable systems that was attributable to the limited partners' and Administrative General Partner's collective interests in the Partnership. These assets were purchased by affiliates of Northland, based on an aggregate valuation of $32,000,000 for the cable systems. At closing the Partnership received approximately $25,400,000 of cash from the buyers and an unsecured, subordinated promissory note in the amount of approximately $4,600,000, together representing the value of the limited partners' and administrative general partner's undivided portion of the cable systems. The note obligation has been assumed by Northland and will be payable, subject to adjustment for unknown liabilities existing as of the closing date, in two equal annual installments beginning January 31, 1998 with interest at 6%.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying statements of changes in partners' deficit. No limited partner is obligated to make any additional contribution to partnership capital.
The general partners purchased their 1% interest in the Partnership by contributing $1,000 to partnership capital. -2-
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate of the Administrative General Partner and other offering costs were recorded as a reduction of limited partners' capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Depreciation
Depreciation of property and equipment is provided using the straight-line method over the following estimated service lives:
Buildings 20 years Distribution plant 10 years Other equipment 5-10 years
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocates the total contract purchase price of cable television systems acquired as follows: first, to the estimated fair value of net tangible assets acquired; then, to the franchise and other determinable intangible costs; then, any excess would have been allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements and other intangibles are being amortized using the straight-line method over the following estimated useful lives:
Franchise agreements 12-23 years Other intangibles 5-15 years
Revenue Recognition
The Partnership recognizes revenue in the month service is provided to customers and accounts for advance payments on services to be rendered as subscriber prepayments.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner manages the Partnership and receives a fee for its services equal to 6% of the gross revenues of the Partnership, excluding revenues from the sale of cable television systems or franchises. The amount of management fees charged by the General Partner was $525,995, $396,408 and $339,457 during 1996, 1995 and 1994, respectively. -3-
Income Allocation
All items of income, loss, deduction and credit are allocated 99% to the limited partners and 1% to the general partners until the limited partners have received aggregate cash distributions in an amount equal to aggregate capital contributions. Thereafter, the general partners receive 25% and the limited partners are allocated 75% of partnership income, losses and distributions. In any year after the limited partners have received cumulative cash distributions equal to 100% of their contributions, the limited partners will receive cash distributions equal to at least 50% of the net taxable income allocated to them prior to any cash distribution to the general partners. Any distributions other than from cash flow, such as from the sale or refinancing of a system or upon dissolution of the Partnership, will be determined according to contractual stipulations in the Partnership Agreement.
The limited partners' total initial contributions to capital were $7,500,000 ($500 per limited partnership unit). As of December 31, 1996, $5,223,574 ($356 per limited partnership unit) has been distributed to the limited partners and the Partnership has repurchased $154,500 of limited partnership units (267 units at $500 per unit and 70 units at $300 per unit).
Reimbursements
The General Partner provides certain centralized services to the Partnership and other affiliated entities. As set forth in the Partnership Agreement, the Partnership reimburses the General Partner for the cost of those services provided by the General Partner to the Partnership. These services include engineering, marketing, management services, accounting, bookkeeping, legal, copying, office rent and computer services.
The amounts billed to the Partnership for these services are based on the General Partner's cost. The cost of certain services is charged directly to the Partnership, based upon actual time spent by employees of the General Partner. The cost of other services is allocated to the Partnership, and other affiliated entities, based upon their relative size, revenue and other factors. Amounts charged to the Partnership by the General Partner for these services were $457,156, $324,511 and $270,988 for 1996, 1995 and 1994, respectively.
In 1996, 1995 and 1994, the Partnership paid installation and billing service fees to an affiliate, amounting to $67,309, $42,444 and $37,481, respectively.
The Partnership has entered into operating management agreements with affiliates managed by the General Partner. Under the terms of these agreements, the affiliate serves as the managing agent for one of the Partnership's cable television systems and is reimbursed for certain operating, administrative and programming expenses. The Partnership was billed $77,888, $29,856 and $20,590 under the terms of these agreements during 1996, 1995 and 1994, respectively.
During 1994, the Partnership served as the managing agent for an affiliate's cable television system and was reimbursed for certain operating and programming expenses. The Partnership received $23,272 under the terms of this agreement.
In September 1994, the Partnership began paying monthly program license fees to Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the rights to distribute programming developed and produced by NCN. Total license fees billed by NCN during 1996, 1995 and 1994 were $69,383, $24,619 and $40,002, respectively. -4-
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 $26,459, $14,296 and $11,950 in 1996, 1995 and 1994, respectively, for these services.
Due to General Partner and Affiliates
The liability to the General Partner and affiliates consists of the following:
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
Replacements, renewals and improvements are capitalized. Maintenance and repairs are charged to expense as incurred. -5-
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following:
6. NOTES PAYABLE:
Notes payable consists of the following:
The Partnership has entered into interest rate swap agreements to reduce the impact of changes in interest rates. Interest rate swap transactions generally involve the exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts. At December 31, 1996, the Partnership had outstanding two interest rate swap agreements with its creditor, having a notional principal amount of $13,300,000. 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, 1996 was 2.75%). Both interest rate swap agreements expire in September of 1997. At December 31, 1996, the Partnership would have been required to pay approximately $32,181 to settle these agreements, based on the fair value estimated by the counterparty.
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. -6-
The tax returns, the qualification of the Partnership as such for tax purposes and the amount of distributable partnership income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes with respect to the Partnership's qualification or in changes with respect to the income or loss, the tax liability of the partners would likely be changed accordingly.
Taxable (loss) income to the limited partners was approximately $(1,853,744), $321,000 and $846,000 for the three years in the period ended December 31, 1996, and is different from that reported in the statements of operations due to the difference in depreciation expense allowed for tax purposes and that amount recognized under generally accepted accounting principles. There were no other significant differences between taxable (loss) income and the net (loss) income reported in the statements of operations.
In general, under current federal income tax laws, a limited partner's allocated share of tax losses from a partnership is allowed as a deduction on his individual income tax return only to the extent of the partner's adjusted basis in his partnership interest at the end of the tax year. Any excess losses over adjusted basis may be carried forward to future tax years, and are allowed as a deduction to the extent the partner has an increase in his adjusted basis in the partnership through either an allocation of partnership income or additional capital contributions to the partnership.
In addition, the current tax law does not allow a taxpayer to use losses from a business activity in which he does not materially participate (a "passive activity," e.g., a limited partner in a limited partnership) to offset other income such as salary, active business income, dividends, interest, royalties and capital gains. However, such losses can be used to offset other income from passive activities. Disallowed losses can be carried forward indefinitely to offset future income from passive activities. Disallowed losses can be used in full when the taxpayer recognizes gain or loss upon the disposition of his entire interest in the passive activity.
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership rents tower sites, office facilities and pole attachments under leases accounted for as operating leases. Rental expense included in operations was $226,897, $169,945 and $190,215 in 1996, 1995 and 1994, respectively. Minimum lease payments through the end of the lease terms are as follows:
-7-
Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was enacted. This act dramatically changed federal telecommunications laws and the future competitiveness of the industry. Many of the changes called for by the 1996 Act will not take effect until the Federal Communications Commission (FCC) issues new regulations which, in some cases, may not be completed for a few years. Because of this, the full impact of the 1996 Act on the Partnership's operations cannot be determined at this time. A summary of the provisions affecting the cable television industry, more specifically those affecting the Partnership's operations, follows.
Cable Programming Service Tier Regulation. FCC regulation of rates for cable programming service tiers has been eliminated for small cable systems owned by small companies. Small cable systems are those having 50,000 or fewer subscribers which are owned by companies with fewer than 1% of national cable subscribers (approximately 600,000). The Partnership qualifies as a small cable company and all of the Partnership's cable systems qualify as small cable systems. Basic tier rates remain subject to regulations by the local franchising authority under most circumstances until effective competition exists. The 1996 Act expands the definition of effective competition to include the offering of video programming services directly to subscribers in a franchised area served by a local telephone exchange carrier, its affiliates or any multichannel video programming distributor which uses the facilities of the local exchange carrier. The FCC has not yet determined the penetration criteria that will trigger the presence of effective competition under these circumstances.
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; 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. -8-
9. CABLE TELEVISION SYSTEM ACQUISITION:
On September 15, 1995, the Partnership acquired substantially all of the operating assets and franchise rights of cable systems serving subscribers in or around the communities of Kaufman, Oak Grove, Hillsboro, New Waverly and Waterwood, all in the state of Texas. The purchase price for these systems was $4,492,254, of which $4,226,896 was paid at the closing date. The balance was paid in June 1996, net of any purchase price adjustments, under the terms of an unsecured, subordinated hold-back note.
On October 31, 1995, the Partnership acquired substantially all operating assets and franchise rights of the cable television systems in or around Huffman, Prairie View, Waller, Cut and Shoot, Brookshire, Tarkenton, Ace, Simonton and Fulshear, all in the state of Texas. The purchase price of $5,306,510 was paid at the closing date. The purchase was financed by borrowings under the Partnership's revolving credit and term loan facility.
Pro forma operating results of the Partnership for 1995, assuming the acquisitions of the systems described above had been made at the beginning of year, follow:
On February 16, 1996, the Partnership acquired substantially all operating assets and franchise rights of the cable television system serving approximately 220 subscribers in or around LeGrand, California. The purchase price was $268,750, of which $255,250 was paid at the closing date and the balance of $13,500 was paid, net of any post-closing adjustments in 1996. The impact of this purchase is not material to the operations of the Partnership. SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION (Managing General Partner)
By /s/ John S. Whetzell Date: ----------------------------- --------------- 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, principal - -------------------- financial officer, and principal ---------- John S. Whetzell accounting officer of registrant; chief executive officer, principal financial officer and chairman of the board of directors of Northland Communications Corporation
/s/ Richard I. Clark Director of Northland Communications - -------------------- Corporation ---------- Richard I. Clark
/s/ John E. Iverson Director of Northland Communications ---------- - -------------------- Corporation John E. Iverson
/s/ Gary S. Jones Vice President and principal accounting - -------------------- officer of Northland Communications ---------- Gary S. Jones Corporation
EXHIBITS INDEX
Sequentially Exhibit Numbered Number Description Page - ------ ---------------------------------------------------- ------------
27.0 Financial Data Schedule.