ITEM 1. BUSINESS
Northland Cable Properties Seven Limited Partnership (the “Partnership”) is a Washington limited partnership consisting of one general partner and approximately 2,524 limited partners holding 49,656 units as of December 31, 2010. Northland Communications Corporation, a Washington corporation, is the managing and administrative general partner of the Partnership (referred to herein as “Northland” or the “Managing General Partner”). Northland manages the operations of the Partnership under the terms of an Amended and Restated Agreement of Limited Partnership which will expire on December 31, 2013. An Amendment to extend the term of the Partnership from December 31, 2010 to December 31, 2013, was approved at a special meeting of the limited partners on November 19, 2009.
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 Managing General Partner for cable television systems owned by two limited partnerships. Northland is also the parent company of NCPI Holdco, Inc. which is the parent company of Northland Cable Properties, Inc., which was formed in February 1995 and is principally involved in direct ownership of cable television systems and is the majority member and manager of Northland Cable Ventures LLC (“NCV”). Northland is a subsidiary of Northland Telecommunications Corporation (“NTC”). Other subsidiaries of NTC include:
NORTHLAND NETWORKS, INC. - formed in 2010 and is the parent company of Northland Cable Television, Inc.
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and principally involved in the direct ownership of cable television systems.
NORTHLAND CABLE SERVICES CORPORATION (“NCSC”) - formed in August 1993 and principally involved in the support of computer software used in billing and financial record keeping for, and Internet services offered by, Northland-affiliated cable systems. NCSC also provides technical support associated with the build out and upgrade of Northland affiliated cable systems. NCSC is the sole shareholder of Cable Ad-Concepts, Inc.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally involved in the sale, development and production of video commercial advertisements that are cablecast on Northland-affiliated cable systems.
The Partnership was formed on April 17, 1987 and began operations on September 1, 1987. The Partnership serves the communities and surrounding areas of Vidalia, Sandersville, Toccoa and Royston, Georgia (the “Systems”). As of December 31, 2010, the total number of basic subscribers served by the Systems was 9,854, and the Partnership’s penetration rate (basic subscribers as a percentage of homes passed) was approximately 36%.
The Partnership has 17 non-exclusive franchises to operate the Systems. These franchises, which will expire at various dates through 2018, have been granted by local and county authorities in the areas in which the Systems operate. While the franchises have defined lives based on the franchising authority, renewals are routinely granted, and management expects them to continue to be granted. These franchise agreements are expected to be used by the Partnership for the foreseeable future and effects of obsolescence and other factors are minimal. In addition, the level of maintenance expenditures required to obtain the future cash flows expected from the franchises is not material in relation to the carrying value of the franchises. This expectation is supported by management’s experience with the Partnership’s franchising authorities and the franchising authorities of the Partnership’s affiliates. Franchise fees are paid to the granting governmental authorities. These fees vary between 1% and 5% and are generally based on the respective gross revenues of the systems in a particular community. The franchises may be terminated for failure to comply with their respective conditions.
The following is a description of the areas served by the Systems as of December 31, 2010. The subscriber data below represents the number of customers that subscribe to each level of service. A customer may subscribe to multiple services and therefore counted as a customer for each service (video, internet and telephone).
Vidalia, GA: Located approximately 15 miles south of Interstate 16, the city of Vidalia is in Toombs County and lies midway between Savannah and Macon. With a population of approximately 11,200, Vidalia is home of the Vidalia Sweet Onion and provides services and support for the surrounding agricultural and light manufacturing industries. Nearby Lyons, with a population of approximately 4,500 is the county seat of Toombs County. Certain information regarding the Vidalia, GA system as of December 31, 2010, is as follows:
Sandersville, GA: Located midway between Augusta and Macon, Sandersville is the county seat of Washington County. Major employers with operations in the communities served by the Sandersville system include kaolin processors, transportation, both trucking and rail and a variety of light manufacturers. Certain information regarding the Sandersville, GA system as of December 31, 2010 is as follows:
Toccoa and Royston, GA: The City of Toccoa is located in northeastern Georgia adjacent to the South Carolina border at the headwaters of Lake Hartwell. It is 81 miles northeast of Atlanta and 65 miles southwest of Greenville, South Carolina. Toccoa serves as the county seat of Stephens County and its economy is driven by the textile industry as well as agricultural products such as poultry, pulpwood and livestock.
Split between Hart and Franklin counties, Royston is located in northeastern Georgia approximately 60 miles north of Athens. The economy of Royston is primarily driven by manufacturing industries. Certain information regarding the Toccoa and Royston, Georgia systems as of December 31, 2010, is as follows:
The Partnership had 28 employees as of December 31, 2010. Management of these systems is handled through offices located in the towns of Vidalia, Sandersville and Toccoa, Georgia. Pursuant to the Agreement of Limited Partnership, the Partnership reimburses the Managing General Partner for time spent by the Managing General Partner’s accounting staff on Partnership accounting and bookkeeping matters. (See Item 13 (a) below.)
The Partnership’s cable television business is not considered seasonal. The business of the Partnership is not dependent upon a single customer or a few customers, the loss of any one or more of which would have a material adverse effect on its business. No customer accounts for 10% or more of revenues. No material portion of the Partnership’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental unit, except that franchise agreements may be terminated or modified by the franchising authorities as noted above. During the last year, the Partnership did not engage in any research and development activities.
Partnership revenues are derived primarily from monthly payments received from cable television, high-speed Internet and telephone subscribers. Subscribers are divided into six categories: basic subscribers, expanded basic
subscribers, premium subscribers, digital subscribers, Internet subscribers and telephone subscribers. “Basic subscribers” are households that subscribe to the basic level of service, which generally provides access to the four major television networks (ABC, NBC, CBS and FOX), a few independent local stations, PBS (the Public Broadcasting System) and certain satellite programming services, such as ESPN, CNN or The Discovery Channel. “Expanded basic subscribers” are households that subscribe to an additional level of programming service, the content of which varies from system to system. “Premium subscribers” are households that subscribe to one or more “pay channels” in addition to the basic service. These pay channels include such services as Showtime, Home Box Office, Cinemax, The Movie Channel, Starz and Encore. “Digital subscribers” are those who subscribe to digitally delivered video and audio services. “Internet Subscribers” are those who subscribe to the Partnership’s high speed Internet service, which is offered via a cable modem. “Telephone Subscribers” are those who subscribe to the Partnership’s telephony service, known as Voice over Internet Protocol, or VoIP.
COMPETITION
Cable television systems currently experience competition from several sources, including broadcast television, cable overbuilds, direct broadcast satellite services, private cable and multichannel multipoint distribution service systems, Multichannel Video Distribution and Data Service, or MVDDS, and most recently, telephone companies. Cable television systems are also in competition in various degrees with other communications and entertainment media, including motion pictures, DVDs, Internet data delivery, Internet video delivery and telecommunications companies. The following provides a summary description of these sources of competition.
Broadcast Television
Cable television systems have traditionally competed with broadcast television, which consists of television signals that the viewer is able to receive directly on his television without charge using an “off-air” antenna. The extent of this competition is dependent in part upon the quality and quantity of signals available by antenna reception as compared to the services provided by the local cable system. Accordingly, cable operators find it less difficult to obtain higher penetration rates in rural areas (where signals available off-air are limited) than in metropolitan areas where numerous, high quality off-air signals are often available without the aid of cable television systems. The recent licensing of digital spectrum by the FCC has provided incumbent broadcast licenses with the ability to deliver high definition television pictures and multiple digital-quality program streams, as well as advanced digital services such as subscription video.
Overbuilds
Cable television franchises are not exclusive. More than one cable television system may be built in the same area. This is known as an “overbuild.” Overbuilds have the potential to result in loss of revenues to the operator of the original cable television system. Generally, an overbuilder is required to obtain franchises from the state or local governmental authorities, although in some instances, the overbuilder could be the local government itself and no franchise is required. Recently, many states have passed legislation that limits the ability of local franchises to negotiate franchises with an overbuilder. In many states, franchises are now obtained from the state, not the local governmental authority. As a result, it is the general industry consensus that new franchises will be easier to obtain. An overbuilder would obtain programming contracts from entertainment programmers and, in most cases, would build a complete cable system such as headends, trunk lines and drops to individual subscribers’ homes throughout the franchise areas.
Companies with considerable resources have entered the business. These companies include public utilities to whose poles the Partnership’s cables are attached. Federal law allows telephone companies to provide a wide variety of services that are competitive with the Partnership’s services, including video and Internet services within and outside their telephone service areas. The nation’s leading telephone companies have entered the multichannel video programming distribution business on a nationwide basis. These companies have considerable resources and could be formidable competitors. The Partnership cannot predict at this time the extent of the competition that will emerge in areas served by the Partnership’s cable television systems. The entry of telephone companies, public and private utilities and local governments as direct competitors, however, is likely to continue over the next several years and could adversely affect the profitability and market value of the Partnership’s systems.
Direct Broadcast Satellite Service
High-powered direct-to-home satellites have made possible the wide-scale delivery of programming to individuals throughout the United States using small roof-top or wall-mounted antennas. The two leading DBS providers have experienced dramatic growth over the last several years. Companies offering direct broadcast
satellite service use video compression technology to increase channel capacity of their systems and to provide packages of movies, satellite networks and other program services which are competitive to those of cable television systems. DBS companies historically faced significant legal and technological impediments to providing popular local broadcast programming to their customers. Federal legislation has reduced this competitive disadvantage, and has reduced the compulsory copyright fees paid by DBS companies and allowed them to continue offering distant network signals to rural customers. The availability of low or no cost DBS equipment, delivery of local signals in some markets and exclusivity with respect to certain sports programming has increased DBS’s market share over recent years. The impact of DBS services on the Partnership’s market share within its service areas cannot be precisely determined but is estimated to have taken away a significant number of subscribers. Satellite carriers are attempting to expand their service offerings to include, among other things, high-speed Internet services and are entering joint marketing arrangements with local telecommunications providers.
Satellite Master Antenna Television
Additional competition is provided by private cable television systems, known as satellite master antenna television (“SMATV”), serving multi-unit dwellings such as condominiums, apartment complexes, and private residential communities. These private cable systems may enter into exclusive agreements with apartment owners and homeowners associations, although some states have enacted laws to provide cable system access to these facilities. Operators of private cable, which do not cross public rights of way, are largely free from the federal, state and local regulatory requirements imposed on franchised cable television operators. In addition, some SMATV operators are developing and/or offering packages of telephony, data and video services to private residential and commercial developments.
Multichannel Multipoint Distribution Service Systems
Cable television systems also compete with wireless program distribution services such as multichannel, multipoint distribution service systems (“MMDSS”) commonly called wireless cable, which are licensed to serve specific areas. MMDSS uses low-power microwave frequencies to transmit television programming over-the-air to paying subscribers. This industry is less capital intensive than the cable television industry, and it is therefore more practical to construct systems using this technology in areas of lower subscriber penetration.
High-Speed Internet Services
The Partnership’s cable systems are offering high-speed Internet services to subscribers. These systems compete with a number of other companies, many of whom have substantial resources, such as existing Internet service providers (“ISPs”) and telecommunications companies. The deployment of digital subscriber line (“DSL”) technology allows Internet access over telephone lines and transmission rates far in excess of conventional dial-up modems. Many local telephone companies are seeking to provide Internet services without regard to their present service boundaries. Further, the FCC has recently reduced the regulatory burden on local telephone companies by, for example, reducing their obligation to provide Internet on a wholesale basis to competitors.
A number of cable operators have reached agreements with unaffiliated ISPs to grant them access to their cable facilities for the purpose of providing competitive Internet services. The Partnership has not entered into any such “access” arrangement. However, Northland cannot provide any assurance that regulatory authorities will not impose “open access” or similar requirements on the Partnership as part of an industry-wide requirement. These requirements could adversely affect the Partnership’s results of operations.
Telephony Services
The Partnership’s cable systems are offering a type of telephony service, known as Voice over Internet Protocol, or VoIP. These systems compete with a number of other companies, many of whom have substantial resources, such as existing traditional telephony companies and large VoIP providers, such as Vonage. The Partnership will continue to face rigorous competition from established telephone companies, who have considerable resources and well-established enterprises in these business areas. It is also possible that electric utilities and others will increasingly offer products in competition with the Partnership’s cable systems.
REGULATION AND LEGISLATION
The following summary addresses the key regulatory and legislative developments affecting the cable industry. Cable system operations are extensively regulated by the FCC, some state governments and most local governments. A failure to comply with these regulations could subject the Partnership to substantial penalties. The
Partnership’s business can be dramatically impacted by changes to the existing regulatory framework, whether triggered by legislative, administrative, or judicial rulings. Congress and the FCC have expressed a particular interest in increasing competition in the communications field generally and in the cable television field specifically. The 1996 Telecom Act, which amended the Communications Act, altered the regulatory structure governing the nation’s communications providers. It removed barriers to competition in both the cable television market and the local telephone market. The Partnership could face additional material disadvantages in the future if it is subject to new or changed regulations that do not equally impact the Partnership’s competitors.
Congress and the FCC have frequently revisited the subject of communications regulation, and it is likely to do so in the future. In addition, franchise agreements with local governments must be periodically renewed, and new operating terms may be imposed. Future legislative, regulatory, or judicial changes could adversely affect the Partnership’s operations. The Managing General Partner can provide no assurance that the already extensive regulation of the Partnership’s business will not be expanded in the future.
Cable Rate Regulation and Program Tiering
The cable industry has operated under a federal rate regulation regime for more than a decade. The regulations currently restrict the prices that cable systems charge for the minimum level of video programming service, referred to as “basic service,” and associated equipment. All other cable offerings are now universally exempt from rate regulation. Although basic rate regulation operates pursuant to a federal formula, local governments, commonly referred to as local franchising authorities, are primarily responsible for administering this regulation. Many of the Partnership’s local franchising authorities have not certified to regulate basic cable rates, but they retain the right to do so (and obtain the power to order rate reductions and refunds), except in those specific communities facing “effective competition,” as defined under federal law.
There have been frequent calls to impose expanded rate regulation on the cable industry. Confronted with rapidly increasing cable programming costs, it is possible that Congress may adopt new constraints on the retail pricing or packaging of cable programming. For example, there has been considerable legislative and regulatory interest in requiring cable companies to offer programming on an a la carte basis or at least to offer a separately available child-friendly “Family Tier”. Programming services have historically been bundled into programming packages containing a variety of programming services. Any constraints on this practice could adversely affect the Partnership’s operations.
Federal rate regulations generally require cable operators to allow subscribers to purchase premium or pay-per-view services without the necessity of subscribing to any tier of service, other than the basic service tier. As the Partnership attempts to respond to a changing marketplace with competitive pricing practices, such as targeted promotions and discounts, the Partnership may face additional legal restraints and challenges that impede the Partnership’s ability to compete.
Must Carry/Retransmission Consent
There are two alternative legal methods for carriage of local broadcast television stations on cable systems. Federal law currently includes “must carry” regulations, which require cable systems to carry certain local broadcast television stations that the cable operator may not select voluntarily. Alternatively, federal law includes “retransmission consent” regulations, by which popular commercial television stations can prohibit cable carriage unless the cable operator first negotiates for “retransmission consent,” which may be conditioned on significant payments or other concessions. Either option has a potentially adverse effect on the Partnership’s business.
In June of 2009, all full power broadcast stations in the United States ceased transmission of their analog signals and switched to a digital signal. As a result, in many instances, the Partnership must carry both the analog and digital signals of each television station (dual carriage), unless the Partnership transitions to a fully digital system. Additional government-mandated broadcast carriage obligations could disrupt existing programming commitments, interfere with the Partnership’s preferred use of limited channel capacity and limit its ability to offer services that would maximize customer appeal and revenue potential. In addition, Congress could legislate additional carriage obligations. The FCC may evaluate additional modifications to its digital broadcast signal carriage requirements in the future. Management cannot predict the ultimate outcome of this proceeding, or the impact any new carriage requirements may have on the operation of its cable systems.
Access Channels
Local franchise agreements and more recently, state franchise legislation, often require cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires
cable systems to designate a portion of their channel capacity for commercial leased access by unaffiliated third parties. Increased activity in this area could further burden the channel capacity of the Partnership’s cable systems.
Programming
The Communications Act and the FCC’s “program access” rules generally prevent satellite video programmers affiliated with cable operators from favoring cable operators over competing multichannel video distributors, such as DBS, and limit the ability of such programmers to offer exclusive programming arrangements to cable operators. Given the heightened competition and media consolidation that the Partnership faces, it is possible that the Partnership will find it increasingly difficult to gain access to popular programming at favorable terms. Such difficulty could adversely impact the Partnership’s business.
Ownership Restrictions
Federal regulation of the communications field traditionally included a host of ownership restrictions, which limited the size of certain media entities and restricted their ability to enter into competing enterprises. Through a series of legislative, regulatory, and judicial actions, most of these restrictions recently were eliminated or substantially relaxed. For example, historic restrictions on local exchange carriers offering cable service within their telephone service area, as well as those prohibiting broadcast stations from owning cable systems within their broadcast service area, no longer exist. Changes in this regulatory area, including some still subject to review, could alter the business landscape in which the Partnership operates, as formidable new competitors (including electric utilities, local exchange carriers, and broadcast/media companies) may increasingly choose to offer cable or cable related services.
Internet Service
Open Access: Over the past several years, proposals have been advanced at the FCC and Congress that would require a cable operator offering Internet service to provide non-discriminatory access to its network to competing Internet service providers. In a 2005 ruling, commonly referred to as Brand X, the Supreme Court upheld an FCC classification of cable-provided Internet service as an “information service” making it less likely that any non-discriminatory “open access” requirements (which are generally associated with common carrier regulation of “telecommunications services”) would be imposed on the cable industry by local, state or federal authorities.
Net Neutrality: In October 2009, the FCC published a detailed Notice of Proposed Rule Making (the “Notice”) and a draft of proposed regulation that, if adopted, would convert the existing non-binding FCC “principles” of Internet openness into enforceable regulations. On December 21, 2010, the FCC adopted net neutrality rules, which largely implement existing Internet traffic and management practices reflected in the FCC “principles” and impose new-non-discrimination and transparency rules. The FCC rules codify three basic principles for providers of broadband Internet access. The three principles (1) require transparent disclosure to consumers terms, performance, and network management practices; (2) prohibits blocking of lawful content, applications, or services, or the use of non-harmful devices; (3) bars unreasonable discrimination against the transmission of lawful traffic over broadband internet access service. These rules are directed to providers of last mile Internet access to all or substantially all Internet endpoints, not to peering or backbone arrangements. These principles apply not only for residential use but for services to small businesses, schools and libraries. Excluded from the set of regulated broadband access providers are coffee shops, bookstores, and airlines. Wireless broadband service is held to a lower bar which may give them a competitive advantage over the Partnerships
Federal Broadband Funding: The American Recovery and Reinvestment Act of 2009 (“Recovery Act”) provided $7.2 billion in the form of grants and loans to program applicants to, among other things, build broadband infrastructure. All funds were awarded by September 30, 2010. The impact of the funding is unknown at this time. However, the use of funds to compete with the Partnership could adversely effect the Partnerships business.
National Broadband Plan: As required by The American Recovery and Reinvestment Act of 2009 (“Recovery Act”), in 2010, the FCC issued the “National Broadband Plan” (“Plan”). The Plan must seek to ensure that all people of the United States have access to broadband capability and establish benchmarks for meeting that goal. Plan highlights are as follows: 100 million households to have access to affordable 100-megabits-per-second service; anchor institutions in every American community to have access to at least 1 gigabit-per-second broadband service; make 500 megahertz of spectrum newly available for licensed and unlicensed use; move adoption rates to more than 90 percent and ensuring digital literacy of every child by the time he or she leaves high school; make Universal Service Fund support available for tomorrow’s digital infrastructure; promote competition across the broadband ecosystem by ensuring greater transparency, removing barriers to entry, and conducting market-based
analysis with quality data on price, speed, and availability; and enhance safety through a nationwide, wireless, interoperable public safety network for first responders. Management cannot predict what, if any, requirements will be placed on our provision of broadband services or our operation of broadband facilities or what impact the Plan will ultimately have on our business.
As the Internet has matured, it has become the subject of increasing regulatory interest. Congress and federal regulators have adopted a wide range of measures directly or potentially affecting Internet use, including, for example, consumer privacy, copyright protections (which afford copyright owners certain rights against the Partnership that could adversely affect the Partnership’s relationship with a customer accused of violating copyright laws), defamation liability, taxation, obscenity, and unsolicited commercial e-mail. State and local governmental organizations have also adopted Internet-related regulations. These various governmental jurisdictions are also considering additional regulations in these and other areas, such as pricing, service and product quality, and intellectual property ownership. The adoption of new Internet regulations or the adaptation of existing laws to the Internet could adversely affect the Partnership’s business.
Phone Service
The 1996 Telecom Act, which amended the Communications Act, created a more favorable regulatory environment for the Partnership to provide telecommunications services. In particular, it limited the regulatory role of local franchising authorities. Many implementation details remain unresolved, and there are substantial regulatory changes being considered that could impact, in both positive and negative ways, the Partnership’s primary telecommunications competitors and the Partnership’s own entry into the field of phone service. The FCC and state regulatory authorities are considering, for example, whether common carrier regulation traditionally applied to incumbent local exchange carriers should be modified. The FCC has concluded that alternative voice technologies, like certain types of “voice over internet protocol” (“VoIP”), should be regulated only at the federal level, rather than by individual states. While the FCC’s decision appears to be a positive development for VoIP offerings, it is unclear whether and how the FCC will apply certain types of common carrier regulations, such as intercarrier compensation obligations to alternative voice technology. The FCC has already determined that providers of phone services using Internet Protocol technology must comply with some of the traditional phone service requirements, such as providing traditional 911 emergency service obligations (“E911”), making Universal Service Fund contributions obligations, and it has extended requirements for accommodating law enforcement wiretaps to such providers. The FCC decision regarding 911 emergency services implementation caused the Partnership to slow its implementation of VoIP services to its various systems. Our entities that provide VoIP telephony services are not certificated as competitive local exchange carriers in any of the states in which they operate. Rather, we provide VoIP services that are not generally subject to regulation by state or local jurisdictions. Also, the FCC has preempted some state commission regulation of VoIP services, but has stated that its preemption does not extend to state consumer protection requirements. Some states continue to attempt to impose obligations on VoIP service providers, including state universal service fund payment obligations. It is unclear how these regulatory matters ultimately will be resolved and how they will further affect the Partnership’s expansion into phone service.
Pole Attachments
The Communications Act requires most utilities to provide cable systems with access to poles and conduits and simultaneously subjects the rates charged for this access to either federal or state regulation. The Act specifies that significantly higher rates apply if the cable plant is providing telecommunications service, as well as traditional cable service. The FCC has clarified that a cable operator’s favorable pole rates are not endangered by the provision of Internet access, and that determination was upheld by the United States Supreme Court. It remains possible that the underlying pole attachment formula, or its application to Internet and telecommunications offerings, will be modified in a manner that substantially increases the Partnership’s pole attachment costs.
Cable Equipment
The FCC has undertaken several steps to promote competition in the delivery of cable equipment and compatibility with new digital technology. The FCC has expressly ruled that cable customers must be allowed to purchase set-top terminals from third parties and established a multi-year phase-in during which security functions (which would remain in the operator’s exclusive control) would be unbundled from the basic converter functions, which could then be provided by third party vendors. The first phase of implementation has already passed. A prohibition on cable operators leasing digital set-top terminals that integrate security and basic navigation functions went into effect as of July 1, 2007. More recently, the FCC has relaxed the ban on integrated security in set-top-boxes. The FCC has issued an industry-wide waiver permitting cable operator use of particular top boxes that met
its definition of a “low-cost, limited capability” device. Further, the FCC has established an expedited process to encourage other equipment manufacturers to obtain industry-wide waivers.
The FCC has adopted rules implementing an agreement between major cable operators and manufacturers of consumer electronics on “plug and play” specifications for one-way digital televisions. The rules require cable operators to provide “CableCard” security modules and support to customer owned digital televisions and similar devices equipped with built-in set-top terminal functionality. Cable operators must support basic home recording rights and copy protection rules for digital programming content. Multiple FCC proceedings are pending regarding CableCard and digital access to television content, including proceedings regarding Internet TV, “TV Everywhere” applications, multimedia Gateway devices, whether to establish standardized protocols for data and video content delivery, and copyright protection of video and Internet content. The outcome of any of the pending matters could have a substantial impact on the operations of the Partnership. It is unclear how these proceedings will affect the Partnership’s offering of services and the Partnership’s relationship with its customers.
Copyright
Cable systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative and regulatory review and industry negotiation and could adversely affect the Partnership’s ability to obtain desired broadcast programming. Copyright clearances for non-broadcast programming services are arranged through private negotiations. Cable operators also must obtain music rights for locally originated programming and advertising from the major music performing rights organizations. These licensing fees have been the source of litigation in the past, and the Partnership cannot predict with certainty whether license fee disputes may arise in the future.
Digital Millennium Copyright Act
Management regularly receives notices of claimed infringements by our Internet service users. The owners of copyrights and trademarks have been increasingly active to prevent use of the Internet to violate their rights. In many cases, their claims of infringement are based on the acts of customers of an Internet service provider. In some cases, copyright and trademark owners have sought to recover damages from the Internet service provider, as well as or instead of the customer. The law relating to the potential liability of Internet service providers in these circumstances is unsettled. In 1996, Congress adopted the Digital Millennium Copyright Act, which is intended to grant ISPs protection against certain claims of copyright infringement resulting from the actions of customers, provided that the ISP complies with certain requirements. Congress has not adopted similar protections for trademark infringement claims.
Franchise Matters
Cable systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity in exchange for the right to cross public rights-of-way. Cable franchises generally are granted for fixed terms and in many cases include penalties for noncompliance including a right of termination for material violations.
The specific terms and conditions of cable franchises vary materially between jurisdictions. Each franchise generally contains provisions governing cable operations, franchise fees, system construction, maintenance, technical performance, and customer service standards. A number of states subject cable systems to the jurisdiction of centralized state government agencies, such as public utility commissions. Although local franchising authorities have considerable discretion in establishing franchise terms, there are certain federal protections. For example, federal law caps local franchise fees and includes renewal procedures designed to protect incumbent franchisees from arbitrary denials of renewal. Even if a franchise is renewed, however, the local franchising authority may seek to impose new and more onerous requirements as a condition of renewal. Similarly, if a local franchising authority’s consent is required for the purchase or sale of a cable system, the local franchising authority may attempt to impose more burdensome requirements as a condition for providing its consent.
Privacy and Data Security
The Cable Act imposes a number of restrictions on the manner in which cable operators can collect, disclose and retain data about individual system customers and requires cable operators to take such actions as necessary to prevent unauthorized access to such information. The statute also requires that the system operator periodically provide all customers with written information about its policies including the types of information collected; the use of such information; the nature, frequency and purpose of any disclosures; the period of retention; the times and places where a customer may have access to such information; the limitations placed on the cable operator by the Cable Act; and a customer’s enforcement rights. In the event that a cable operator is found to have violated the customer privacy provisions of the Cable Act, it could be required to pay damages, attorneys’ fees and other costs. Certain of these Cable Act requirements have been modified. These modifications impact the circumstances and the manner in which the Partnership discloses certain customer information and future federal legislation may further impact its obligations. Also, many states in which we operate have also enacted customer privacy statutes. These state provisions are in some cases more restrictive than those in federal law.
Other Communications Act Provisions and FCC Regulatory Matters
In addition to the Communications Act provisions and FCC regulations noted above, there are other statutory provisions and FCC regulations affecting the Partnership’s business. The Communications Act and the FCC regulate, for example, and among other things, (1) cable-specific privacy obligations; (2) equal employment opportunity obligations; (3) customer service standards; (4) technical service standards; (5) mandatory blackouts of certain network, syndicated and sports programming; (6) restrictions on political advertising; (7) restrictions on advertising in children’s programming; (8) restrictions on origination cablecasting; (9) restrictions on carriage of lottery programming; (10) sponsorship identification obligations; (11) closed captioning of video programming; (12) licensing of systems and facilities; (13) maintenance of public files; and (14) emergency alert systems. It is possible that Congress or the FCC will expand or modify its regulation of cable systems in the future, and the Managing General Partner cannot predict at this time how that might impact the Partnership’s business.
ITEM 1A.
ITEM 1A. RISK FACTORS
The Partnership’s business is subject to extensive governmental legislation and regulation, which could adversely affect its business.
Regulation of the cable industry has increased cable operators’ administrative and operational expenses and limited their revenues. Cable operators are subject to, among other things:
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rules governing the provision of cable equipment and compatibility with new digital technologies;
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rules and regulations relating to subscriber privacy;
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limited rate regulation;
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requirements governing when a cable system must carry a particular broadcast station and when it must obtain consent to carry a broadcast station;
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rules for franchise renewals and transfers; and
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other requirements covering a variety of operational areas such as equal employment opportunity, technical standards and customer service requirements.
Additionally, many aspects of these regulations are currently the subject of judicial, administrative and legislative proceedings. There are ongoing efforts to amend or expand the federal, state and local regulation of the Partnership’s cable systems, which may compound the regulatory risks already faced.
The Partnership’s cable systems are operated under franchises that are subject to non-renewal or termination. The failure to renew a franchise in one or more key markets could adversely affect the Partnership’s business.
The Partnership’s cable systems generally operate pursuant to franchises, permits and similar authorizations issued by a state or local governmental authority controlling the public rights-of-way. Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with significant provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Local franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal. In some instances, franchises have not been renewed at expiration, and the Partnership has operated under temporary operating agreements while
negotiating renewal terms with the local franchising authorities. In some states in which the Partnership operates, such extensions are obtained from the respective state agency.
The Partnership may not be able to comply with all significant provisions of the Partnership’s franchise agreements. Additionally, although historically the Partnership has renewed its franchises without incurring significant costs, there can be no assurances that the Partnership will be able to renew, or to renew as favorably, its franchises in the future. A termination of or a sustained failure to renew a franchise in one or more key markets could adversely affect the Partnership’s business in the affected geographic area.
The Partnership’s cable systems are operated under franchises that are non-exclusive. Accordingly, local franchising authorities can grant additional franchises and create competition in market areas where none existed previously, resulting in overbuilds, which could adversely affect results of operations.
The Partnership’s cable systems are operated under non-exclusive franchises granted by local franchising authorities. Consequently, local franchising authorities can grant additional franchises to competitors in the same geographic area or operate their own cable systems. In addition, certain telephone companies are seeking and in some instances have already obtained authority to operate in local communities. As a result, competing operators may build systems in areas in which the Partnership holds franchises. In some cases municipal utilities may legally compete with the Partnership without obtaining a franchise from the local franchising authority.
Different legislative proposals recently have been introduced in the United States Congress and in some state legislatures that would greatly streamline cable franchising and transform the established regulatory framework for incumbent cable systems and potential competitors. This legislation is intended to facilitate entry by new competitors, particularly local telephone companies. Such legislation has already passed in many states and legislation is pending in several more. Although currently enacted legislation and various legislative proposals provide some regulatory relief for incumbent cable operators, current legislation and pending proposals are generally viewed as being more favorable to new entrants due to a number of varying factors, including efforts to withhold streamlined cable franchising from incumbents until after the expiration of their existing franchises and the potential for new entrants to serve only the higher-income areas of a particular community. To the extent incumbent cable operators are not able to avail themselves of this streamlined process, such operators may continue to be subject to more onerous franchise requirements at the local level than new entrants. The FCC has initiated proceedings to determine whether local franchising authorities are impeding the deployment of competitive cable services through unreasonable franchising requirements and whether such impediments should be preempted, and has passed general guidelines regarding cable franchise renewal standards. At this time, management is not able to determine what impact such proceeding may have on the Partnership.
Further regulation of the cable industry could cause the Partnership to delay or cancel service or programming enhancements or impair the Partnership’s ability to raise rates to cover its increasing costs, resulting in reductions to net income.
Currently, rate regulation is strictly limited to the basic service tier and associated equipment and installation activities in areas where the local franchising authority has asserted regulatory authority and where the cable operator lacks “effective competition.” However, the Federal Communications Commission (“FCC”) and the U.S. Congress continue to be concerned that cable rate increases are excessive. It is possible that either the FCC or the U.S. Congress will again restrict the ability of cable system operators to implement rate increases. Should this occur, it would impede the Partnership’s ability to raise its rates. If the Partnership is unable to raise its rates in response to increasing costs, its income would decrease.
There has been considerable legislative and regulatory interest in requiring cable operators to offer historically bundled programming services on an ala carte basis or to at least offer a separately available child-friendly “Family Tier.” It is possible that new marketing restrictions could be adopted in the future. Such restrictions could adversely affect the Partnership’s operations by disrupting its preferred marketing practices.
Actions by pole owners might subject the Partnership to significantly increased pole attachment costs.
Pole attachments are cable wires that are attached to poles. Cable system attachments to public utility poles historically have been regulated at the federal or state level, generally resulting in favorable pole attachment rates for attachments used to provide cable service. Despite the existing regulatory regime, utility pole owners in many areas are attempting to raise pole attachment fees and impose additional costs on cable operators and others. In addition, the favorable pole attachment rates afforded cable operators under federal law can be increased by utility companies if the operator provides telecommunications services, as well as cable service, over cable wires attached to utility
poles. Any significant increased costs could have a material adverse impact on the Partnership’s profitability and discourage system upgrades and the introduction of new products and services.
The Partnership may be required to provide access to its networks to other Internet service providers, which could significantly increase competition and adversely affect the Partnership’s ability to provide new products and services.
A number of companies, including independent Internet service providers, or ISPs, have requested local authorities and the FCC to require cable operators to provide nondiscriminatory access to cable’s broadband infrastructure, so that these companies may deliver Internet services directly to customers over cable facilities. In a June 2005 ruling, commonly referred to as Brand X, the Supreme Court upheld an FCC decision (and overruled a conflicting Ninth Circuit opinion) making it less likely that any nondiscriminatory “open access” requirements (which are generally associated with common carrier regulation of “telecommunications services”) would be imposed on the cable industry by local, state or federal authorities. However, the nature of any legislative or regulatory response remains uncertain in light of the FCC’s current ongoing proceedings regarding “network neutrality” regulations. It’s possible that “net neutrality” restrictions might be placed on broadband network owners that would, for example, place limitations on the Partnership’s ability to charge content providers whose services require a large amount of network capacity. The imposition of this or other such requirements could materially affect the Partnership’s business.
If the Partnership were required to allocate a portion of its bandwidth capacity to other Internet service providers, management believes that it would impair the Partnership’s ability to use its bandwidth in ways that would generate maximum revenues.
Changes in channel carriage regulations could impose significant additional costs on the Partnership.
Cable operators also face significant regulation of their channel carriage. They currently can be required to devote substantial capacity to the carriage of programming that they may not carry voluntarily, including certain local broadcast signals, local public, educational and government access programming, and unaffiliated commercial leased access programming. Additional government-mandated broadcast carriage of unwanted programming could disrupt existing programming commitments, interfere with the Partnership’s preferred use of limited channel capacity and limit the Partnership’s ability to offer services that would maximize customer appeal and revenue potential. Carriage burdens have increased, particularly where cable systems carry both the analog and digital versions of necessary local broadcast primary digital signals (dual carriage) and carry multiple program streams included within a single digital broadcast transmission (multicast carriage). Broadcaster’s require payment for carriage of certain local signals. This carriage and financial burden could continue to increase as broadcaster’s demand increased retransmission fees and additional carriage.
Offering voice communications service may subject the Partnership to additional regulatory burdens, causing it to incur additional costs.
The regulatory requirements applicable to VoIP service are unclear, although the FCC has declared that certain VoIP services are not subject to traditional state public utility regulation. The full extent of the FCC preemption of VoIP services is not yet resolved. Expanding the Partnership’s offering of these services may require the Partnership to obtain certain authorizations, including federal, state and local licenses. The Partnership may not be able to obtain such authorizations, or conditions could be imposed upon such licenses or authorizations that may not be favorable to the Partnership. Furthermore, telecommunications companies generally are subject to significant regulation, such as participating in the intercarrier compensation regime, and it may be difficult or costly for the Partnership to comply with such regulations were it to be determined that they applied to VoIP. The FCC has already determined that VoIP providers must comply with traditional 911 emergency service obligations (“E911”), has imposed a specific timeframe for VoIP providers to accommodate law enforcement wiretaps, and is considering regulating VoIP in other ways. In addition, pole attachment rates are higher for providers of telecommunications services than for providers of cable service. If there were to be a determination that VoIP services are subject to these higher rates, the Partnership’s pole attachment costs could increase significantly, which could adversely affect its financial condition and results of operations.
Because there is no public market for the Partnership’s units of limited partnership interest, limited partners may not be able to sell their units.
There is no established trading market for the units of limited partnership interest. There can be no assurance as to:
•
the liquidity of any trading market that may develop;
•
the ability of holders to sell their units; or
•
the price at which the holders would be able to sell their units.
Northland Communications Corporation, the managing general partner, is responsible for conducting the Partnership’s business and managing its operations. Affiliates of the managing general partner may have conflicts of interest and limited fiduciary duties, which may permit the managing general partner to favor its own interests to the Partnership’s detriment.
Conflicts of interest may arise between management of Northland Communications Corporation, the managing general partner and its affiliates, and the limited partners. As a result of these conflicts, it is possible that the general partner may favor its own interests and the interests of its affiliates over the interests of the Partnership’s unitholders.
Unitholders have limited voting rights and limited ability to influence the Partnership’s operations and activities.
Unitholders have only limited voting rights on matters affecting the Partnership’s operations and activities and, therefore, limited ability to influence management’s decisions regarding the Partnership’s business. Unitholders’ voting rights are further restricted by the partnership agreement provisions providing limited ability of unitholders to call meetings or to acquire information about operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
Furthermore, unitholders did not elect the managing general partner or the board of directors of the managing general partner and there is no process by which unitholders elect the managing general partner or the board of directors of the managing general partner on an annual or other continuing basis. The trading price at which limited partnership units trade may be adversely affected by these circumstances.
The control of the managing general partner may be transferred to a third party without unitholder consent.
The managing general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, the partnership agreement does not restrict the ability of the shareholders of the managing general partner from transferring their respective interests in the managing general partner to a third party. The new controlling parties of the managing general partner would then be in a position to replace the board of directors of the managing general partner with their own choices and to control the decisions taken by the board of directors.
The Partnership does not have its own officers and has a limited number of management employees. The Partnership relies solely on the officers and management employees of the managing general partner and its affiliates to manage the Partnership’s business and affairs.
The Partnership does not have its own officers and has a limited number of management employees. The Partnership relies solely on the officers and management employees of the managing general partner and its affiliates to manage the Partnership’s business and affairs. If the managing general partner were to stop managing the assets of the Partnership, it could be difficult for the Partnership to hire and train the personnel necessary to run the operations of the Partnership.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership’s cable television systems are located in and around Vidalia, Sandersville, Toccoa and Royston, Georgia. The principal physical properties of the Systems consist of system components (including antennas, coaxial cable, electronic amplification and distribution equipment, and customer premises equipment), motor vehicles, miscellaneous hardware, spare parts and real property, including office buildings and headend sites and buildings.
The Partnership’s cable plant passed approximately 27,139 homes as of December 31, 2010. Management believes that the Partnership’s plant passes all areas which are currently economically feasible to service. Future line extensions depend upon the density of homes in the area as well as available capital resources for the construction of new plant. (See Part II. Item 7. Liquidity and Capital Resources.)
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On July 5, 2007, Northland Cable Properties Seven Limited Partnership (the “Partnership”) executed a purchase and sale agreement (the “Agreement”) to sell the operating assets and franchise rights of its remaining cable systems serving the communities of Vidalia, Sandersville and Toccoa, Georgia to Green River Media and Communications, LLC (“Green River”), an unaffiliated third party. The transaction was expected to close by the end of March 2008. To secure their performance under the Agreement, Green River deposited $125,000 into escrow (the “Escrow Deposit”), which such amount intended to be credited to the purchase price at closing. Closing of this transaction would have resulted in the liquidation of the Partnership.
On March 31, 2008, the Partnership notified Green River of its termination the Agreement. Green River disputed the right of the Partnership to terminate the Agreement. The parties reached a final settlement in the first quarter of 2011. As a result of the settlement, the Partnership will receive proceeds and accrued interest of $131,843 of the Escrow Deposit. The escrow proceeds will be recorded in income during the first quarter of 2011.
The Partnership will continue to operate its assets in a manner intended to maximize revenue and cash flow. The Partnership expects to place its operating assets that were the subject of the Agreement back on the market for sale during the first quarter of 2011, although no assurance can be given that such a transaction will be consummated
The Partnership may be party to other ordinary and routine litigation proceedings that are incidental to the Partnership’s business. Management believes that the outcome of such legal proceedings will not, individually or in the aggregate, have a material adverse effect on the Partnership, its financial conditions and prospects.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On February 27, 2008, at the special meeting of limited partners of Northland Cable Properties Seven Limited Partnership, limited partners voted to authorize the Partnership and its managing general partner to sell substantially all of the Partnership’s assets to Green River pursuant to the terms of an asset purchase agreement dated as of July 5, 2007, between the Partnership and Green River. A total of 33,141.50 units, or 95.61 percent of the units voted, were cast in favor of authorizing the Green River transaction, representing 66.74 percent of the total units outstanding and entitled to vote at the meeting.
Limited partners voted to authorize the Partnership and its managing general partner to sell substantially all of the Partnership’s assets to its managing general partner, or one or more of its affiliates, if the Green River transaction was not consummated by March 31, 2008, or such later date mutually agreed upon by the Partnership and Green River, or in the event that the transaction between the Partnership and Green River was otherwise terminated prior to such date. A total of 30,765.84 units, or 88.76 percent of the units voted, were cast in favor of authorizing the alternative transaction between the Partnership and its managing general partner, representing 61.96 percent of the total units outstanding and entitled to vote at the meeting.
On September 25, 2009, a definitive proxy statement on Schedule 14A and an accompanying proxy card were mailed to limited partners of record as of September 2, 2009, in connection with a special meeting that was called for the purpose of considering a proposal to amend the Partnership Agreement, to extend the term of the Partnership from December 31, 2010, to December 31, 2013. The Amendment was approved at that special meeting of limited partners on November 19, 2009. On November 24, 2009, the Partnership filed with the Secretary of State of the State of Washington an amendment to its Amended and Restated Agreement of Limited Partnership to extend the term of the Partnership from December 31, 2010, to December 31, 2013.
As a result of the Amendment, holders of the units of limited partnership interests of the Partnership may not be able to liquidate their investment in the Partnership until the earlier of December 31, 2013, or upon the dissolution, winding up and termination of the Partnership. Despite the extension of the term of the Partnership, Northland Communications Corporation, the Managing General Partner of the Partnership, remains fully committed to selling the Partnership’s assets and winding up the Partnership as soon as possible, provided that a fair price for the assets can be secured.
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, 2010, is as follows:
Limited Partners:
2,524
General Partners:
(c) On February 15, 2010, Northland Communications Corporation, the managing general partner, declared a cash distribution on behalf of the Partnership with respect to all outstanding units of limited partnership interest in the amount of $17.50 per $500 unit of limited partnership interest to those entitled to receive a Cash Distribution under the Amended and Restated Agreement of Limited Partners as of March 1, 2010. The cash distribution in the amount of $868,980 was paid on March 11, 2010. The Partnership made cash distributions to the limited partners in amount of $1,241,400 during 2009 and made no cash distributions to the limited partners or to the Managing General Partner during 2008.
(d) The limited partners received in the aggregate in the form of cash distributions $5,218,934 on total initial contributions of $24,893,000, as of December 31, 2010. As of December 31, 2010, the Partnership had repurchased $65,000 in limited partnership units ($500 per unit). Future distributions depend upon results of operations, the Partnership’s working capital needs and the outcome of the potential sale of the Partnership’s assets.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with Item 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
2010 and 2009
Total basic subscribers decreased from 10,616 as of December 31, 2009, to 9,854, as of December 31, 2010. The loss in subscribers is a result of several factors including competition from Direct Broadcast Satellite (DBS) providers, availability of off-air signals in the Partnership’s markets and regional and local economic conditions. In its efforts to address this customer trend, the Partnership is increasing its customer retention efforts and its emphasis on bundling its video and data and phone products.
Revenue from operations totaled $9,565,551 for the year ended December 31, 2010, increasing 1% from $9,503,044 for the year ended December 31, 2009. Revenues for the year ended December 31, 2010, were comprised of the following sources:
Average monthly revenue per subscriber increased $6.74, or approximately 9%, from $71.14 for the year ended December 31, 2009, to $77.88 for the year ended December 31, 2010. This increase is attributable to rate increases implemented throughout the Partnership’s systems during the first quarter of 2010 and increased penetration of new products, specifically, high-speed Internet and telephone services.
The following table displays historical average rate information for various services offered by the Partnership’s systems (amounts per subscriber per month):
Operating expenses, excluding general and administrative, programming expenses, depreciation expenses, loss on impairment of franchise agreement and loss on disposal of assets totaled $929,974 for the year ended December 31, 2010, representing an increase of approximately 3% from $906,103 for the year ended December 31, 2009. This increase is primarily attributable to increased operating salaries, system maintenance and vehicle operating expenses offset by a decrease in pole rental expense. Employee wages, which represent the largest component of operating expenses, are reviewed annually, and in most cases, increased based on cost of living adjustments and other factors. Therefore, assuming the number of operating and regional employees remains constant, management expects increases in operating expenses in the future.
General and administrative expenses totaled $2,647,937 for the year ended December 31, 2010, representing an increase of approximately 5% from $2,534,782 for the year ended December 31, 2009. The increase is primarily attributable to increases in administrative salaries and marketing expenses offset by decreases in administrative overhead and travel expense.
Programming expenses totaled $3,757,443 for the year ended December 31, 2010, an increase of 6% from $3,558,244 for the year ended December 31, 2009. The increase is attributable to higher costs charged by various
video program suppliers, retransmission fees for carriage of certain local broadcast signals and costs associated with the increased penetration of high-speed Internet and telephone services, offset by decreased basic subscribers from 10,616 as of December 31, 2009, to 9,854 as of December 31, 2010. Rate increases from video program suppliers, and increases in the number of customers to the Partnership’s high-speed Internet and telephone services, will contribute to the trend of increased programming costs in the future.
Depreciation expense totaled $1,230,389 for the year ended December 31, 2010, representing an increase of approximately 2% from $1,210,034 for the year ended December 31, 2009. This is attributable to certain assets becoming fully depreciated, offset by depreciation of recent purchases related to the upgrade of plant and equipment.
Loss on impairment of franchise agreement totaled $615,000 for the twelve months ended December 31, 2010, and resulted from the write down of the carrying value of the franchise agreements associated with its Toccoa, GA system to its fair value.
Interest income and other expense, net totaled $11,285 and $61,827 for the years ended December 31, 2010, and December 31, 2009, respectively, and consists primarily of costs incurred in connection with the proposed sale of the Partnership’s assets.
In 2010, the Partnership generated income from operations of $371,200 compared to $1,171,960 in 2009. The Partnership has generated positive operating income in each of the last three years, and management anticipates that this trend will continue.
2009 and 2008
Total basic subscribers decreased from 11,414 as of December 31, 2008, to 10,616, as of December 31, 2009. The loss in subscribers is a result of several factors including competition from Direct Broadcast Satellite (DBS) providers, availability of off-air signals in the Partnership’s markets and regional and local economic conditions. In its efforts to address this customer trend, the Partnership is increasing its customer retention efforts and its emphasis on bundling its video and data products.
Revenue from operations totaled $9,503,044 for the year ended December 31, 2009, increasing 6% from $8,961,332 for the year ended December 31, 2008. Revenues for the year ended December 31, 2009, were comprised of the following sources:
Average monthly revenue per subscriber increased $7.54, or approximately 12%, from $63.60 for the year ended December 31, 2008, to $71.14 for the year ended December 31, 2009. This increase is attributable to rate increases implemented throughout the Partnership’s systems during the first quarter of 2009 and increased penetration of new products, specifically, high-speed Internet and telephone services.
Operating expenses, excluding general and administrative and programming expenses, totaled $906,103 for the year ended December 31, 2009, representing a decrease of approximately 6% from $968,102 for the year ended December 31, 2008. This decrease is primarily attributable to a decrease in vehicle operating expenses and increase in the capitalization of certain costs as a result of increases in capital spending levels offset by increases in employee salary costs and pole, duct, and site rentals. Employee wages, which represent the largest component of operating expenses, are reviewed annually, and in most cases, increased based on cost of living adjustments and other factors. Therefore, assuming the number of operating and regional employees remains constant, management expects increases in operating expenses in the future.
General and administrative expenses totaled $2,534,782 for the year ended December 31, 2009, representing an increase of approximately 5% from $2,404,302 for the year ended December 31, 2008. The increase is primarily attributable to increases in billing service fees, bad debt expense, audit and management fees.
Programming expenses totaled $3,558,244 for the year ended December 31, 2009, an increase of 11% from $3,195,907 for the year ended December 31, 2008. The increase is attributable to higher costs charged by various video program suppliers, retransmission fees for carriage of certain local broadcast signals and costs associated with the increased penetration of high-speed Internet and telephone services, offset by decreased basic subscribers from 11,414 as of December 31, 2008, to 10,616 as of December 31, 2009. Rate increases from video program suppliers, and increases in the number of customers to the Partnership’s high-speed Internet and telephone services, will contribute to the trend of increased programming costs in the future.
Depreciation expense totaled $1,210,034 for the year ended December 31, 2009, remaining consistent with the year ended December 31, 2008. This is attributable to certain assets becoming fully depreciated, offset by depreciation of recent purchases related to the upgrade of plant and equipment.
Interest expense and amortization of loan fees decreased from $25,730 in 2008 to zero in 2009. The elimination of interest expense and amortization of loan fees is attributable to the Partnership paying off the outstanding balance on its credit facility on April 29, 2008.
Interest income and other expense, net totaled $61,827 and $180,995 for the years ended December 31, 2009, and December 31, 2008, respectively, and consists primarily of costs incurred in connection with the proposed sale of the Partnership’s assets..
In 2009, the Partnership generated income from operations of $1,171,960 compared to $934,687 in 2008. The Partnership has generated positive operating income in each of the last three years, and management anticipates that this trend will continue.
LIQUIDITY AND CAPITAL RESOURCES
During 2010, the Partnership’s liquidity was generated from cash flow from operations. The Partnership routinely generates cash through the monthly billing of subscribers for cable, Internet and telephone services. During 2010, cash generated from monthly billings was sufficient to meet the Partnership’s needs for working capital and capital expenditures, and management expects the cash generated from these monthly billings will be sufficient to meet the Partnership’s 2011 obligations.
Net cash provided by operating activities totaled $2,235,561 for the year ended December 31, 2010. Adjustments to the $371,200 net income for the period to reconcile to net cash provided by operating activities consisted of depreciation of $1,230,389, loss on sale of assets of $2,323, and loss of impairment of franchise agreement of $615,000, offset by changes in other operating assets and liabilities of $16,649.
Net cash used in investing activities for the year ended December 31, 2010, totaled $1,823,164 and consisted of $1,825,664 in purchases of property and equipment offset by proceeds from the sale of assets of $2,500.
Net cash used in financing activities for the year ended December 31, 2010, consisted of $868,980 in cash distributions to the limited partners.
Obligations and Commitments
In addition to working capital needs for ongoing operations, the Partnership has working capital requirements for minimum operating lease payments. The following table summarizes the contractual obligations as of December 31, 2010, and the anticipated effect of these obligations on the Partnership’s liquidity in future years:
(a)
These contractual obligations do not include accounts payable and accrued liabilities, which are expected to be paid in 2011.
(b)
The Partnership also rents utility poles in its operations. Amounts due under these agreements are not included in the above minimum operating lease payments amounts as pole rentals are based on pole usage and are cancelable on short notice. The Partnership does however anticipate that such rentals will recur. Pole rental expense was $176,835 in 2010.
Capital Expenditures
During 2010, the Partnership paid $1,825,664 in capital expenditures. These expenditures include the continued construction of fiber and quality assurance projects to upgrade the plant providing increased channel capacity in all systems as well as customer premise equipment to receive all communications services provided by the Partnership.
Management has estimated that the Partnership will spend approximately $1,477,000 on capital expenditures in 2011. Planned expenditures include the quality assurance work to maintain reliable video signals and broadband speeds in all systems, potential line extension opportunities, vehicle replacements and the continued deployment of both high-speed Internet and digital telephone services in certain areas of the Partnership’s systems.
POTENTIAL SALE OF SYSTEMS
On July 5, 2007, Northland Cable Properties Seven Limited Partnership (the “Partnership”) executed a purchase and sale agreement (the “Agreement”) to sell the operating assets and franchise rights of its remaining cable systems serving the communities of Vidalia, Sandersville and Toccoa, Georgia to Green River Media and Communications, LLC (“Green River”), an unaffiliated third party. The transaction was expected to close by the end of March 2008. To secure their performance under the Agreement, Green River deposited $125,000 into escrow (the “Escrow Deposit”), which such amount intended to be credited to the purchase price at closing. Closing of this transaction would have resulted in the liquidation of the Partnership.
On March 31, 2008, the Partnership notified Green River of its termination the Agreement. Green River disputed the right of the Partnership to terminate the Agreement. The parties reached a final settlement in the first quarter of 2011. As a result of the settlement, the Partnership will receive proceeds and accrued interest of $131,843 of the Escrow Deposit. The escrow proceeds will be recorded in income during the first quarter of 2011.
The Partnership will continue to operate its assets in a manner intended to maximize revenue and cash flow. The Partnership expects to place its operating assets that were the subject of the Agreement back on the market for sale during the first quarter of 2011, although no assurance can be given that such a transaction will be consummated.
Fees for legal and accounting activities in connection with the aforementioned purchase and sale transaction amounted to $12,495, $59,056, and $187,437 for 2010, 2009 and 2008, respectively, and have been expensed as incurred within interest income and other in the accompanying statement of operations.
CRITICAL ACCOUNTING POLICIES
This discussion and analysis of Northland’s financial condition and results of operations is based on the Partnership’s financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting policies require a more significant amount of management judgment than other accounting policies the Partnership employs.
Revenue Recognition
Cable television and broadband service revenue, including service and maintenance, is recognized in the month service is provided to customers. Advance payments on cable services to be rendered are recorded as subscriber prepayments. Revenues resulting from the sale of local spot advertising are recognized when the related advertisements or commercials appear before the public.
Property and Equipment
Property and equipment are recorded at cost. Costs of additions and substantial improvements, which include materials, labor, and other indirect costs associated with the construction of cable transmission and distribution facilities, are capitalized. Indirect costs include employee salaries and benefits, travel and other costs. These costs are estimated based on historical information and analysis. The Partnership periodically performs evaluations of these estimates as warranted by events or changes in circumstances.
The Partnership also capitalizes costs associated with initial customer video, internet and telephone installations. The costs of disconnecting service or reconnecting service to previously installed locations is expensed in the period incurred. Costs for repairs and maintenance are also charged to operating expense, while equipment replacements, including the replacement of drops, are capitalized.
Intangible Assets
The Partnership does not amortize any other intangible assets determined to have indefinite lives. The Partnership has determined that its franchises meet the definition of indefinite lived assets. The Partnership tests these assets for impairment on an annual basis as of September 30th, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of the assets below their carrying value.
Management believes the franchises have indefinite lives because the franchises are expected to be used by the Partnership for the foreseeable future as determined based on an analysis of all pertinent factors, including changes in legal, regulatory or contractual provisions and effects of obsolescence, demand and competition. In addition, the expected renewal costs the Partnership would otherwise not incur if the franchises were not subject to renewal are not material in relation to the fair value of the franchises. While the franchises have defined lives based on the franchising authority, renewals are routinely granted, and management expects them to continue to be granted. This expectation is supported by management’s experience with the Partnership’s franchising authorities and the franchising authorities of the Partnership’s affiliates.
ECONOMIC CONDITIONS
Historically, the effects of inflation have been considered in determining to what extent rates will be increased for various services provided. It is expected that the future rate of inflation will continue to be a significant variable in determining rates charged for services provided, subject to the provisions of the 1996 Telecom Act. Because of the deregulatory nature of the 1996 Telecom Act, the Partnership does not expect the future rate of inflation to have a material adverse impact on operations.
TRANSACTIONS WITH MANAGING GENERAL PARTNER AND AFFILIATES
Management Fees
The Managing General Partner receives a fee for managing the Partnership equal to 5% of the gross revenues of the Partnership, excluding revenues from the sale of cable television systems or franchises. Management fees charged to operations by the Managing General Partner were $478,278, $475,152, and $448,067 for 2010, 2009, and 2008, respectively. Management fees are included as a component of general and administrative expenses in the accompanying statements of operations.
Reimbursements
The Managing General Partner provides or causes to be provided certain centralized services to the Partnership and other affiliated entities. The Managing General Partner is entitled to reimbursement from the Partnership for various expenses incurred by it or its affiliates on behalf of the Partnership allocable to its management of the Partnership, including travel expenses, pole and site rental, lease payments, legal expenses, billing expenses, insurance, governmental fees and licenses, headquarters’ supplies and expenses, pay television expenses, equipment and vehicle charges, operating salaries and expenses, administrative salaries and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by the Managing General Partner in rendering the services. The costs of certain services are charged directly to the Partnership, based upon the personnel time spent by the employees rendering the service. The cost of other services is allocated to the Partnership and affiliates based upon relative size and revenue. Management believes that the methods used to allocate costs to the Partnership are reasonable. Amounts charged to operations for these services were $658,394, $621,440, and $637,125 for 2010, 2009, and 2008, respectively.
The Partnership has entered into operating management agreements with certain affiliates managed by the Managing General Partner. Under the terms of these agreements, the Partnership or an affiliate serves as the managing agent for certain cable television systems and is reimbursed for certain operating and administrative expenses. The Partnership received $56,365, $31,641, and $19,723 in 2010, 2009, and 2008, respectively.
Northland Cable Service Corporation (NCSC), an affiliate of the Managing General Partner, was formed to provide billing system support to cable systems owned and managed by the Managing General Partner. In addition, NCSC provides technical support associated with the build out and upgrade of Northland affiliated cable systems as well as support for the Partnership’s high speed Internet and telephone services. In 2010, 2009, and 2008, the Partnership’s operations included $212,074, $206,243, and $138,370, respectively, for these services. Of this amount, $90,647, $118,958, and $90,920 were capitalized in 2010, 2009, and 2008, respectively, related to the build out and upgrade of cable systems. Cable Ad Concepts (CAC), a subsidiary of NCSC, manages the development of local advertising as well as billing for video commercial advertisements to be cablecast on Northland affiliated cable systems. CAC retains all the credit risks associated with the advertising activities and a net fixed percentage of the related revenues are remitted to the Partnership, which are recorded as net advertising revenues. The Partnership’s operations include $147,817, $150,386, and $139,757, in payments received under the terms of this agreement during 2010, 2009, and 2008, respectively.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Partnership is not subject to market risks arising from changes in interest rates as a result of the Partnership paying off the outstanding balance of its credit facility on April 29, 2008.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial statements of the Partnership for the years ended December 31, 2010, 2009 and 2008 are included as a part of this filing (see Item 15 (a) below).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Partnership maintains disclosure controls and procedures designed to ensure that information required to be disclosed in filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Managing General Partner’s Chief Executive Officer and President (Principal Financial and Accounting Officer) have
evaluated these disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K and have determined that such disclosure controls and procedures are effective.
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Partnership. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect transactions; providing reasonable assurance that the transactions are recorded as necessary for preparation of the Partnership’s financial statements; providing reasonable assurance that receipts and expenditures of Partnership assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Partnership assets that could have a material effect on the Partnership’s financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Partnership’s financial statements would be prevented or detected.
Management assessed the effectiveness of the Partnership’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management determined that, as of December 31, 2010, the Partnership’s internal control over financial reporting was effective.
This annual report does not include an attestation report of the Partnership’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Partnership’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit management to provide only management’s report in this annual report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been no change in the Partnership’s internal control over financial reporting during the fourth quarter that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
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.
Certain information regarding the officers and directors of Northland and relating to the Partnership is set forth below.
JOHN S. WHETZELL (AGE 69). Mr. Whetzell is the founder of Northland Communications Corporation, its Chief Executive Officer and has been a Director since March 1982. Mr. Whetzell became Chairman of the Board of Directors in December 1984. He also serves as Chief Executive Officer and Chairman of the Board of Northland Telecommunications Corporation and each of its subsidiaries. He has been involved with the cable television industry for over 31 years. Between March 1979 and February 1982 he was in charge of the Ernst & Whinney national cable television consulting services. Mr. Whetzell first became involved in the cable television industry when he served as the Chief Economist of the Cable Television Bureau of the Federal Communications Commission (FCC) from May 1974 to February 1979. He provided economic studies to support the deregulation of cable television both in federal and state arenas. He participated in the formulation of accounting standards for the industry and assisted the FCC in negotiating and developing the pole attachment rate formula for cable television. His undergraduate degree is in economics from George Washington University, and he has an MBA degree from New York University.
JOHN E. IVERSON (AGE 74). Mr. Iverson is the Secretary of Northland Communications Corporation and has served on the Board of Directors since December 1984. He also is the Secretary and serves on the Board of Directors of Northland Telecommunications Corporation and each of its subsidiaries. Mr. Iverson has a Juris Doctor degree from the University of Washington. He became a member of the Washington State Bar Association in 1962 and retired as a member of the Seattle law firm of Ryan, Swanson & Cleveland, P.L.L.C. in 2009. Mr. Iverson is a Trustee and the past Chairman of the Board of the Pacific Northwest Ballet Association and is a member and the past President of, and past Foundation President for, Seattle Rotary No. 4.
RICHARD I. CLARK (AGE 53). Mr. Clark is an original incorporator of Northland Communications Corporation and serves as Executive Vice President, Assistant Secretary and Assistant Treasurer of Northland Communications Corporation. He also serves as Vice President, Assistant Secretary and Treasurer of Northland Telecommunications Corporation. Mr. Clark has served on the Board of Directors of both Northland Communications Corporation and Northland Telecommunications Corporation since July 1985. In addition to his other responsibilities, Mr. Clark is responsible for the administration and investor relations activities of Northland, including financial planning and corporate development. From July 1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the area of providing cable television consultation services and has been involved with the cable television industry for nearly 29 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 models, and he has prepared documents for major cable television companies in franchising and budgeting projects through the application of these models. In 1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a Bachelor of Arts degree in accounting.
GARY S. JONES (AGE 53). Mr. Jones is the President of Northland Telecommunications Corporation and each of its subsidiaries. Mr. Jones joined Northland in March 1986 and had previously served as Vice President and Chief Financial Officer for Northland. 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 65). Mr. Dyste serves as Senior Vice President-Technical Services of Northland Telecommunications Corporation and each of its subsidiaries. He joined Northland in April 1986. Mr. Dyste is responsible for planning and advising all Northland cable systems with regard to technical performance as well as system upgrades and rebuilds. He is a past president of the Mt. Rainier chapter and a current member of the Society of Cable Telecommunications 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 67). Mr. Johnson has served as Divisional Vice President for Northland since March 1994. He is responsible for the management of systems serving subscribers in Alabama, Georgia, Mississippi, North Carolina and South Carolina. Prior to his association with Northland he served as Regional Manager for Warner Communications, managing four cable systems in Georgia from 1968 to 1973. Mr. Johnson has also served as President of Sunbelt Finance Corporation and was employed as a System Manager for Statesboro CATV when Northland purchased the system in 1986. Mr. Johnson has been involved in the cable television industry for over 37 years and is a current member of the Society of Cable Television Engineers. He is a graduate of Swainsboro Technical Institute and has attended numerous training seminars, including courses sponsored by Jerrold Electronics, Scientific Atlanta, The Society of Cable Television Engineers and CATA.
R. GREGORY FERRER (AGE 55). Mr. Ferrer joined Northland in March 1984 as Assistant Controller and currently serves as Vice President and Treasurer of Northland Communications Corporation. Mr. Ferrer also serves as Vice President and Assistant Treasurer of Northland Telecommunications Corporation. Mr. Ferrer is responsible for coordinating all of Northland’s property tax filings, insurance requirements and system programming contracts as well as interest rate management and other treasury functions. Prior to joining Northland, he was a Certified Public Accountant at Benson & McLaughlin, a public accounting firm, from 1981 to 1984. Mr. Ferrer received his Bachelor of Arts in Business Administration from Washington State University with majors in marketing in 1978 and accounting and finance in 1981.
MATTHEW J. CRYAN (AGE 46). Mr. Cryan is Vice President - Budgets and Planning and has been with Northland since September 1990. Mr. Cryan is responsible for the development of current and long-term operating budgets for all Northland entities. Additional responsibilities include the development of financial models used in support of acquisition financing, analytical support for system and regional managers, financial performance monitoring and reporting and programming analysis and supervision of all billing related matters of Northland. Prior to joining Northland, Mr. Cryan was employed as an analyst with NKV Corp., a securities litigation support firm located in Redmond, Washington. Mr. Cryan graduated from the University of Montana in 1988 with honors and holds a Bachelor of Arts in Business Administration with a major in finance.
RICK J. MCELWEE (AGE 49). Mr. McElwee is Vice President and Controller for Northland. He joined Northland in May 1987 as System Accountant and was promoted to Assistant Controller of Northland Cable Television, Inc. in 1993. Mr. McElwee became Divisional Controller of Northland Telecommunications Corporation in 1997 and in January 2001, he was promoted to Vice President and Controller of Northland Telecommunications Corporation. Mr. McElwee is responsible for managing all facets of the accounting and financial reporting process for Northland. Prior to joining Northland, he was employed as an accountant with Pay n’ Save Stores, Inc., a then regional drugstore chain. Mr. McElwee graduated from Central Washington University in 1985 and holds a Bachelor of Science in Business Administration with a major in accounting.
PAUL MILAN (AGE 49). Mr. Milan is Vice President and General Counsel of Northland Telecommunications Corporation. He joined Northland in September of 2002. Mr. Milan is responsible for the legal affairs of Northland. From 1996 to 2003, he worked as in-house counsel with a number of venture funded start-up companies in the telecommunications arena. From 1994 to 1996, Mr. Milan was a partner in the law firm of Cain McLaughlin P.S. where his practice emphasized commercial litigation, credit transactions and start-up enterprises. From 1990 to 1996, he was an associate attorney with Fountain Rhoades LLC. Mr. Milan is admitted to the bar in Alaska and Washington and received a Bachelor of Arts degree in English Literature in 1984 and a law degree in 1987 from the University of Puget Sound in Tacoma, Washington.
STEVEN M. TANABE (AGE 38). Mr. Tanabe joined Northland as a Financial Analyst in March of 1998 and currently serves as Vice President - Operations. Mr. Tanabe is responsible for maintaining relationships with program suppliers, assisting with negotiation and compliance of programming supplier agreements and website development. Additional responsibilities include the review and development of budget and reporting models and other project management functions. Mr. Tanabe received his Bachelor of Science in Business Administration with a concentration in Finance from the University of Oregon in 1994 and his Masters in Business Administration from Seattle University in 2001.
Audit Committee and Financial Expert.
The Northland board of directors consists of three individuals, whom also serve on the NTC board of directors. Together, the NTC and the Northland boards of directors serve as the oversight body for the Partnership. The Northland and NTC boards do not have a separate audit committee; instead, all members perform the function of an audit committee. The Northland and NTC boards of directors also do not have a “financial expert” as defined in applicable SEC rules, as it believes that the background and financial sophistication of its members are sufficient to fulfill the duties of such “financial expert”.
Code of Ethics
The Partnership does not currently have a code of ethics. The Partnership has only 28 employees and the Northland executives, together with the NTC and Northland boards, manage all oversight functions. With so few employees, none of whom have executive oversight responsibilities, the Partnership does not believe that developing and adopting a code of ethics is necessary. Northland and NTC also do not have a code of ethics; but will consider whether adopting a code of ethics is appropriate.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have executive officers. However, compensation was paid to the Managing General Partner and affiliates during 2010 as indicated in Note 5 to the Notes to Financial Statements-December 31, 2010 (see Items 15 (a) and 13 (a) below).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Note A: Northland has a 1% interest in the Partnership, which increases to 25% interest in the Partnership at such time as the limited partners have received 100% of their aggregate cash contributions plus a preferred return. The natural person who exercises voting and/or investment control over these interests is John S. Whetzell.
(b) CHANGES IN CONTROL. None.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS WITH MANAGEMENT AND OTHERS.
Management Fees
The Managing General Partner receives a fee for managing the Partnership equal to 5% of the gross revenues of the Partnership, excluding revenues from the sale of cable television systems or franchises. Management fees charged to operations by the Managing General Partner were $478,278, $475,152, and $448,067 for 2010, 2009, and 2008, respectively. Management fees are included as a component of general and administrative expenses in the accompanying statements of operations.
Reimbursements
The Managing General Partner provides or causes to be provided certain centralized services to the Partnership and other affiliated entities. The Managing General Partner is entitled to reimbursement from the Partnership for various expenses incurred by it or its affiliates on behalf of the Partnership allocable to its management of the Partnership, including travel expenses, pole and site rental, lease payments, legal expenses, billing expenses, insurance, governmental fees and licenses, headquarters’ supplies and expenses, pay television expenses, equipment and vehicle charges, operating salaries and expenses, administrative salaries and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by the Managing General Partner in rendering the services. The costs of certain services are charged directly to the Partnership, based upon the personnel time spent by the employees rendering the service. The cost of other services is allocated to the Partnership and affiliates based upon relative size and revenue. Management believes that the methods used to allocate costs to the Partnership are reasonable. Amounts charged to operations for these services were $658,394, $621,440, and $637,125 for 2010, 2009, and 2008, respectively.
The Partnership has entered into operating management agreements with certain affiliates managed by the Managing General Partner. Under the terms of these agreements, the Partnership or an affiliate serves as the managing agent for certain cable television systems and is reimbursed for certain operating and administrative expenses. The Partnership received $56,365, $31,641, and $19,723 in 2010, 2009, and 2008, respectively.
Northland Cable Service Corporation (NCSC), an affiliate of the Managing General Partner, was formed to provide billing system support to cable systems owned and managed by the Managing General Partner. In addition, NCSC provides technical support associated with the build out and upgrade of Northland affiliated cable systems as well as support for the Partnership’s high speed Internet and telephone services. In 2010, 2009, and 2008, the Partnership’s operations included $212,074, $206,243, and $138,370, respectively, for these services. Of this amount, $90,647, $118,958, and $90,920 were capitalized in 2010, 2009, and 2008, respectively, related to the build out and upgrade of cable systems. Cable Ad Concepts (CAC), a subsidiary of NCSC, manages the development of local advertising as well as billing for video commercial advertisements to be cablecast on Northland affiliated cable systems. CAC retains all the credit risks associated with the advertising activities and a net fixed percentage of the related revenues are remitted to the Partnership, which are recorded as net advertising revenues. The Partnership’s operations include $147,817, $150,386, and $139,757, in payments received under the terms of this agreement during 2010, 2009, and 2008, respectively.
As disclosed in the Partnership’s Prospectus (which has been incorporated by reference), certain conflicts of interest may arise between the Partnership and the Managing General Partner and its affiliates. Certain conflicts may arise due to the allocation of management time, services and functions between the Partnership and existing and future partnerships as well as other business ventures. The Managing General Partner has sought to minimize these conflicts by allocating costs between systems on a reasonable basis. Each limited partner may have access to the books and non-confidential records of the Partnership. A review of the books will allow a limited partner to assess the reasonableness of these allocations. The Agreement of Limited Partnership provides that any limited partner owning 10% or more of the Partnership units may call a special meeting of the Limited Partners, by giving written notice to the Managing General Partner specifying in general terms the subjects to be considered. In the event of a dispute between the Managing General Partner and Limited Partners, which cannot be otherwise resolved, the Agreement of Limited Partnership provides steps for the removal of a Managing General Partner by the Limited Partners.
(b) CERTAIN BUSINESS RELATIONSHIPS. None.
(c) INDEBTEDNESS OF MANAGEMENT. None.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees for professional services rendered by KPMG LLP for the fiscal years ended December 31, 2010 and 2009 have been allocated by management and are set forth below.
Audit fees for the fiscal years ended December 31, 2010, and 2009 were for professional services rendered for the audits of the Partnership’s financial statements for the respective years and quarterly review of the financial statements included in the Partnership’s Quarterly Reports on Form 10-Q.
Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Board of Director’s of the Managing General Partner’s Parent pre-approves all audit and non-audit services provided by the independent auditors prior to the engagement of the independent auditors with respect to such services.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(c)
EXHIBITS:
4.1
Forms of Amended and Restated Certificate of Agreement of Limited Partnership(1)
10.1
Brenham Franchise (2)
10.1
Amendment to Brenham Franchise (4)
10.3
Washington County Franchise (2)
10.4
Island County Franchise (Amended) (2)
10.5
Bay City Franchise (2)
10.6
Sweeney Franchise (2)
10.7
West Columbia Franchise (2)
10.8
Wharton Franchise (2)
10.9
Tenneco Development Corp. Franchise (3)
10.10
Sequim Franchise (1)
10.11
Clallam County Franchise (1)
10.12
Credit Agreement with National Westminster Bank USA (1)
10.13
First, Second and Third Amendments to Credit Agreement with National Westminster Bank USA (3)
10.14
Amended and Restated Management Agreement with Northland Communications Corporation (3)
10.15
Operating Management Agreement with Northland Cable Television, Inc. (3)
10.16
Assignment and Transfer Agreement with Northland Telecommunications Corporation dated May 24, 1989 (4)
10.17
Agreement of Purchase and Sale with Sagebrush Cable Limited Partnership (5)
10.18
Fourth, Fifth, Sixth and Seventh Amendments to Credit Agreement with National Westminster Bank USA (6)
10.19
Franchise Agreement with the City of Sequim, WA effective as of May 6, 1992 (7)
10.20
Franchise Agreement with Clallam County, WA effective as of May 29, 1992 (7)
10.21
Eighth Amendment to Credit Agreement with National Westminster Bank USA dated as of May 28, 1992 (7)
10.22
Asset Purchase Agreement between Northland Cable Properties Seven Limited Partnership (Buyer) and Country Cable, Inc. (Seller) (8)
10.23
Amendment to Asset Purchase Agreement between Northland Cable Properties Seven Limited Partnership and Country Cable, Inc. dated September 14, 1993 (9)
10.24
Commercial Loan Agreement between Seattle-First National Bank and Northland Cable Properties Seven Limited Partnership dated September 24, 1993 (9)
10.25
Franchise Agreement with Island County, WA dated October 4, 1993 (10)
10.26
Franchise Agreement with Skagit County - Assignment and Assumption Agreement dated September 27, 1993 (10)
10.27
Franchise Agreement with Whatcom County - Assignment and Assumption Agreement dated September 27, 1993 (10)
10.28
Amendment to Commercial Loan Agreement dated March 15, 1994 (10)
10.29
Operating and Management Agreement with Northland Cable Television, Inc. dated November 1, 1994 (11)
10.30
Asset Purchase Agreement between Northland Cable Properties Seven Limited Partnership and Southland Cablevision, Inc. (12)
10.31
Asset Purchase Agreement between Northland Cable Properties Seven Limited Partnership and TCI Cablevision of Georgia, Inc. (12)
10.32
Commercial Loan Agreement between Northland Cable Properties Seven Limited Partnership and Seattle First National Bank dated February 29, 1996 (12)
10.33
Asset purchase agreement between Northland Cable Properties Seven Limited Partnership and Robin Media Group, Inc. (13)
10.34
Commercial Loan Agreement between Northland Cable Properties Seven Limited Partnership and Seattle First National Bank dated December 1, 1997 (13)
10.35
First Amendment to Commercial Loan Agreement between Northland Cable Properties Seven Limited Partnership and Bank of America (fka Seattle First National Bank) dated January 26, 2001 (14)
10.36
Second Amendment to Commercial Loan Agreement between Northland Cable Properties Seven Limited Partnership and Bank of America (fka Seattle First National Bank) dated March 31, 2002 (15)
10.37
Purchase and Sale Agreement between Northland Cable Properties Seven Limited Partnership and Wave Division Networks, LLC dated October 28, 2002 (16)
10.38
Third Amendment to Amended and Restated Credit Agreement between Northland Cable Properties Seven Limited Partnership and Bank of America (fka Seattle First national Bank) dated May 15, 2003 (17)
10.39
Term Loan Agreement between Northland Cable Properties Seven Limited Partnership and CIT Lending Services Corporation dated November 3, 2003 (18)
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.
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
John S. Whetzell
Chief executive officer of registrant; chief executive officer and Chairman of the board of directors of Northland Communications Corporation
2-28-11
/S/ JOHN E. IVERSON
John E. Iverson
Secretary and Director of Northland Communications Corporation
2-28-11
/S/ RICHARD I. CLARK
Richard I. Clark
Director of Northland Communications Corporation
2-28-11
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Northland Cable Properties Seven Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties Seven Limited Partnership (a Washington limited partnership) as of December 31, 2010 and 2009, and the related statements of income, changes in partners’ capital (deficit), and cash flows for each of the years in the three-year period ended December 31, 2010. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northland Cable Properties Seven Limited Partnership as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
(signed) KPMG LLP
Seattle, Washington
February 28, 2011
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Balance Sheets
December 31, 2010 and 2009
See accompanying notes to financial statements.
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Statements of Income
Years ended December 31, 2010, 2009, and 2008
See accompanying notes to financial statements.
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Statements of Changes in Partners’ Capital (Deficit)
Years ended December 31, 2010, 2009, and 2008
See accompanying notes to financial statements.
NORTHLAND CABLE PROPERTIES
SEVEN LIMITED PARTNERSHIP
Statements of Cash Flows
Years ended December 31, 2010, 2009, and 2008
See accompanying notes to financial statements.
(1) Organization and Partners’ Interests
(a) Formation and Business
Northland Cable Properties Seven Limited Partnership (the Partnership), a Washington limited partnership, was formed on April 17, 1987. The Partnership was formed to acquire, develop, and operate cable television systems. The Partnership began operations on September 1, 1987. The Partnership’s systems include a system serving four cities in or around Vidalia, Georgia; a system serving two cities in or around Sandersville, Georgia; and two systems serving several communities in and around Toccoa and Royston, Georgia. The Partnership has 17 nonexclusive franchises to operate the cable systems for periods, which will expire at various dates through 2014.
Northland Communications Corporation (the General Partner or Northland) manages the operations and is the General Partner of the Partnership under the terms of an Amended and Restated Agreement of Limited Partnership which will expire on December 31, 2013. An Amendment to extend the term of the Partnership from December 31, 2010 to December 31, 2013, was approved at a special meeting of the limited partners on November 19, 2009. Certain affiliates of the Partnership also own and operate other cable television systems. In addition, Northland manages cable television systems for another limited partnership for which it serves as General Partner.
The Partnership is subject to certain risks as a cable television, Internet and telephone operator. These include competition from alternative technologies (e.g., satellite), requirements to renew its franchise agreements and availability of capital.
(b) Contributed Capital, Commissions, and Offering Costs
The capitalization of the Partnership is set forth in the accompanying statements of changes in partners’ capital (deficit). No limited partner is obligated to make any additional contribution.
Northland contributed $1,000 to acquire its 1% interest in the Partnership.
(2) Basis of Presentation
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(3) Summary of Significant Accounting Policies
(a) Accounts Receivable
Accounts receivable consist primarily of amounts due from customers for cable television or advertising services provided by the Partnership, and are net of an allowance for doubtful accounts of $11,050 and $11,250 at December 31, 2010 and 2009, respectively. Receivables are stated at net realizable value and are written-off when the Partnership deems specific customer invoices to be uncollectible.
(b) Property and Equipment
Property and equipment are recorded at cost. Costs of additions and substantial improvements, which include materials, labor, and other indirect costs associated with the construction of cable transmission and distribution facilities, are capitalized. Indirect costs include employee salaries and benefits, travel, and other costs. These costs are estimated based on historical information and
analysis. The Partnership performs evaluations of these estimates as warranted by events or changes in circumstances.
The Partnership capitalizes costs associated with initial customer installations. The costs of disconnecting service or reconnecting service to previously installed locations is expensed in the period incurred. Costs for repairs and maintenance are also charged to operating expense, while equipment replacements, including the replacement of drops, are capitalized.
At the time of retirements, sales or other dispositions of property, the original cost and related accumulated depreciation are removed from the respective accounts, and the gains or losses are included in the statements of operations.
Depreciation of property and equipment is calculated using the straight-line method over the following estimated service lives:
Buildings
20 years
Distribution plant
10 years
Other equipment
5-20 years
The Partnership evaluates the depreciation periods of property and equipment to determine whether events or circumstances warrant revised estimates of useful lives.
In accordance with generally accepted accounting standards for long-lived assets, property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated.
(c) Intangible Assets
The Partnership does not amortize intangible assets determined to have indefinite lives. The Partnership has determined that its franchise agreements meet the definition of indefinite lived assets due to the history of obtaining franchise renewals, among other considerations. Accordingly, amortization of these assets ceased on December 31, 2001. The Partnership tests these intangibles for impairment annually as of September 30th, or on an interim basis if an event occurs or circumstances change that would indicate that the assets might be impaired.
The Partnership determined that there are no conditions such as obsolescence, regulatory changes, changes in demand, competition, or other factors that would change their indefinite life determination. The Partnership will continue to test these assets for impairment annually, or more frequently as warranted by events or changes in circumstances.
As part of conducting this test as of September 30, 2010, the Partnership determined that the carrying value of the franchise agreements associated with its Toccoa, GA system exceeded such assets fair value. This is primarily the result of a decrease in estimated future cash flows expected to be generated by the system, which is due to, among other factors, the decline in the number of
subscribers served by the system since it was acquired in December of 1997. As a result, the Partnership recognized an impairment loss of approximately $615,000 during 2010.
(d) Loan Fees
Loan fees were being amortized using the straight-line method, which approximated the effective interest method, over periods of five to six years. The Partnership paid off the balance on its credit facility in April of 2008 at which time the unamortized loan fees of $38,240 were expensed. The unamortized loan fees are reported as a loss on extinguishment of debt in the Partnership’s statement of income.
(e) Self Insurance
The Partnership began self-insuring for aerial and underground plant in 1996. Beginning in 1997, the Partnership began making quarterly contributions into an insurance fund maintained by an affiliate which covers all Northland entities and would defray a portion of any loss should the Partnership be faced with a significant uninsured loss. To the extent the Partnership’s losses exceed the fund’s balance, the Partnership would absorb any such loss. If the Partnership were to sustain a material uninsured loss, such reserves could be insufficient to fully fund such a loss. The cost of replacing such equipment and physical plant could have a material adverse effect on the Partnership, its financial condition and prospects.
Amounts paid to the affiliate, which maintains the fund for the Partnership and its affiliates, are expensed as incurred and are included in the statements of operations. To the extent a loss has been incurred related to risks that are self-insured, the Partnership records an expense for the amount of the loss, net of any amounts to be drawn from the fund. In 2010, 2009, and 2008, the Partnership was required to make contributions and was charged $31,379, $34,659, and $21,480, respectively, by the fund. As of December 31, 2010 and 2009 the fund (related to all Northland entities) had a balance of $687,954, $423,556, respectively. Amounts paid from the fund related to all Northland entities were $53,808, $34,841, and $630,000, in 2010, 2009, and 2008, respectively.
(f) Revenue Recognition
Cable television and broadband service revenue, including service and maintenance, is recognized in the month service is provided to customers. Advance payments on services to be rendered are recorded as subscriber prepayments. Revenues resulting from the sale of local spot advertising are recognized when the related advertisements or commercials appear before the public. Local spot advertising revenues earned in operations were $261,888, $316,278, and $299,613 in 2010, 2009, and 2008, respectively.
(g) Advertising Costs
The Partnership expenses advertising costs as they are incurred. Advertising costs attributable to operations were $75,683, $44,506, and $56,128 in 2010, 2009, and 2008, respectively.
(h) Segment Information
The Partnership manages its business and makes operating decisions at the operating segment level. The Partnership follows general standards of operating segment aggregation, reporting business activities under a single reportable segment, telecommunications services. Additionally, all of its activities take place in the United States of America.
(i) Concentration of Credit Risk
The Partnership is subject to concentrations of credit risk from cash investments on deposit at various financial institutions that at times exceed insured limits by the Federal Deposit Insurance
Corporation. This exposes the Partnership to potential risk of loss in the event the institution becomes insolvent.
(j) Fair Value of Financial Instruments
We measure certain financial assets and financial liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the inputs used to determine fair value. These levels are:
• Level 1 - inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2 - quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active.
• Level 3 - significant inputs are unobservable for the asset or liability.
The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis at December 31, 2010.
The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis at December 31, 2009.
(k) Accounting Pronouncements Issued Not Yet Adopted
In September 2009, the FASB ratified Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1)). ASU 2009-13 superseded EITF 00-21 and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. The Partnership has not adopted ASU 2009-13. Management is currently evaluating the potential impact, if any, of the adoption of ASU 2009-13 on the Partnership’s results of operations and financial condition.
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. ASU 2010-6 is effective for annual reporting
periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. We do not expect the remaining adoption of ASU 2010-06 related to the reconciliation of Level 3 fair value measurements to have a material impact on our financial statements.
(4) Income Allocation
All items of income, loss, deduction, and credit are allocated 99% to the Limited Partners and 1% to the General Partners until the Limited Partners have received aggregate cash distributions in an amount equal to aggregate capital contributions as defined in the limited partnership agreement. Thereafter, the General Partners are allocated 25% and the Limited Partners are allocated 75% of partnership income and losses. Cash distributions from operations will be allocated in accordance with the net income and net loss percentages then in effect. Prior to the General Partners receiving cash distributions from operations for any year, the Limited Partners must receive cash distributions in an amount equal to the lesser of (i) 50% of the Limited Partners’ allocable share of net income for such year or (ii) the federal income tax payable on the Limited Partners’ allocable share of net income using the then highest marginal federal income tax rate applicable to such net income. Any distributions other than from cash flow, such as from the sale or refinancing of a system or upon dissolution of the Partnership, will be determined according to contractual stipulations in the Partnership Agreement.
The Limited Partners’ total initial contributions to capital were $9,568,500 ($500 per partnership unit), offset by offering costs, distributions to limited partners and limited partnership unit repurchases through the end of December 31, 2010. The limited partners have received in aggregate cash distributions of $5,218,934, as of December 31, 2010.
(5) Transactions with General Partner and Affiliates
(a) Management Fees
The General Partner receives a fee for managing the Partnership equal to 5% of the gross revenues of the Partnership, excluding revenues from the sale of cable television systems or franchises. Management fees charged to operations by the General Partner were $478,278, $475,152, and $448,067 for 2010, 2009, and 2008, respectively. Management fees are included as a component of general and administrative expenses in the accompanying statements of operations.
(b) Reimbursements
The General Partner provides or causes to be provided certain centralized services to the Partnership and other affiliated entities. The General Partner is entitled to reimbursement from the Partnership for various expenses incurred by it or its affiliates on behalf of the Partnership allocable to its management of the Partnership, including travel expenses, pole and site rental, lease payments, legal expenses, billing expenses, insurance, governmental fees and licenses, headquarters’ supplies and expenses, pay television expenses, equipment and vehicle charges, operating salaries and expenses, administrative salaries and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by the General Partner in rendering the services. The costs of certain services are charged directly to the Partnership, based upon the personnel time spent by the employees rendering the service. The cost of other services is allocated to the Partnership and affiliates based upon relative size and revenue. Management believes that the methods used to allocate costs to the Partnership are reasonable. Amounts charged to operations for these services were $658,394, $621,440, and $637,125 for 2010, 2009, and 2008, respectively.
The Partnership has entered into operating management agreements with certain affiliates managed by the General Partner. Under the terms of these agreements, the Partnership or an affiliate serves as the managing agent for certain cable television systems and is reimbursed for certain operating and administrative expenses. The Partnership’s operations received $56,365, $31,641, and $19,723 in 2010, 2009, and 2008, respectively.
Northland Cable Service Corporation (NCSC), an affiliate of the General Partner, was formed to provide billing system support to cable systems owned or managed by the General Partner. In addition, NCSC provides technical support associated with the build out and upgrade of Northland affiliated cable systems as well as support for the Partnership’s high speed Internet and telephone services. In 2010, 2009, and 2008, the Partnership’s operations included $212,074, $206,243, and $138,370, respectively, for these services. Of this amount, $90,647, $118,958, and $90,920 were capitalized in 2010, 2009, and 2008, respectively, related to the build out and upgrade of cable systems. Cable Ad Concepts (CAC), a subsidiary of NCSC, manages the development of local advertising as well as billing for video commercial advertisements to be cablecast on Northland affiliated cable systems. CAC retains all the credit risks associated with the advertising activities and a net fixed percentage of the related revenues are remitted to the Partnership, which are recorded as net advertising revenues. The Partnership’s operations include $147,817, $150,386, and $139,757, in payments received under the terms of this agreement during 2010, 2009, and 2008, respectively.
(c) Due from Affiliates
The receivable from the affiliates consists of the following:
(d) Due to General Partner and Affiliates
The payable to the General Partner and affiliates consists of the following:
(6) Property and Equipment
Property and equipment consists of the following:
(7) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consists of the following:
(8) Note Payable
On April 29, 2008, the Partnership paid off the outstanding balance of $529,575 on its credit facility and expensed unamortized loan fees of $38,240. The unamortized loan fees are reported as a loss on extinguishment of debt in the Partnership’s statement of income.
(9) Income Taxes
Income taxes have not been recorded in the accompanying financial statements because they are obligations of the partners. The federal and state income tax returns of the Partnership are prepared and filed by the General Partner.
The tax returns, the qualification of the Partnership as such for tax purposes, and the amount of distributable partnership income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes with respect to the Partnership’s qualification or in changes with respect to the income or loss, the tax liability of the partners would likely be changed accordingly.
There was no taxable income allocated to the Limited Partners in 2010, 2009 and 2008.
The Partnership agreement provides that tax losses may not be allocated to the Limited Partners if such loss allocation would create a deficit in the Limited Partners’ Capital Account. Such excess losses are reallocated to the General Partner (Reallocated Limited Partner Losses). In subsequent years, 100% of the Partnership’s taxable income is allocated to the General Partner until the General Partner has been allocated taxable income in amounts equal to the Reallocated Limited Partner Losses.
The Partnership follows FASB ASC 740 (previously FIN No. 48, Accounting for Uncertainty in Income Taxes), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements. This pronouncement prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a filer’s tax return. FASB ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements for uncertain tax positions. The adoption of the ASC did not have a significant impact on the Partnership. The Partnership had $0 in unrecognized tax benefits as of December 31, 2010 and 2009.
(10) Commitments and Contingencies
(a) Lease Arrangements
The Partnership leases certain office facilities and other sites under leases accounted for as operating leases. Rental expense attributable to operations, related to these leases was $26,872, $26,766 and $26,872 in 2010, 2009, and 2008, respectively. Minimum lease payments through the end of the lease terms are as follows:
The Partnership also rents utility poles in its operations. Generally, pole rentals are based on pole usage and cancelable on short notice, but the Partnership anticipates that such rentals will recur. Rent expense incurred for pole rentals attributable to operations for the years ended December 31, 2010, 2009, and 2008 was $176,835, $207,735, and $154,843, respectively.
(11) Potential Sale of Systems
On July 5, 2007, Northland Cable Properties Seven Limited Partnership (the “Partnership”) executed a purchase and sale agreement (the “Agreement”) to sell the operating assets and franchise rights of its remaining cable systems serving the communities of Vidalia, Sandersville and Toccoa, Georgia to Green River Media and Communications, LLC (“Green River”), an unaffiliated third party. The transaction was expected to close by the end of March 2008. To secure their performance under the Agreement, Green River deposited $125,000 into escrow (the “Escrow Deposit”), which such amount intended to be credited to the purchase price at closing. Closing of this transaction would have resulted in the liquidation of the Partnership.
On March 31, 2008, the Partnership notified Green River of its termination the Agreement. Green River disputed the right of the Partnership to terminate the Agreement. The parties reached a final settlement in the first quarter of 2011. As a result of the settlement, the Partnership will receive proceeds and accrued interest of $131,843 of the Escrow Deposit. The escrow proceeds will be recorded in income during the first quarter of 2011.
The Partnership will continue to operate its assets in a manner intended to maximize revenue and cash flow. The Partnership expects to place its operating assets that were the subject of the Agreement back on the market for sale during the first quarter of 2011, although no assurance can be given that such a transaction will be consummated.
Fees for legal and accounting activities in connection with the aforementioned purchase and sale transaction amounted to $12,495, $59,056, and $187,437 for 2010, 2009 and 2008, respectively, and have been expensed as incurred within interest income and other in the accompanying statement of operations.