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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q/A
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the quarterly period endedMarch 31, 2003 | ||
| or | ||
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the transition period from to |
Commission file number333-43157
NORTHLAND CABLE TELEVISION, INC.
(Exact name of registrant as specified in its charter)
| STATE OF WASHINGTON (State or other jurisdiction of incorporation) | 91-1311836 (I.R.S. Employer Identification No.) |
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
(Exact name of registrant as specified in its charter)
| STATE OF WASHINGTON (State or other jurisdiction of incorporation) | 91-1638891 (I.R.S. Employer Identification No.) | |
| 101 STEWART STREET, SUITE 700 SEATTLE, WASHINGTON | 98101 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (206) 621-1351
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx Noo
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
Yeso Nox
This filing contains 17 pages. Exhibits index appears on page 14.
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PART 1 — FINANCIAL INFORMATION
ITEM 1. Financial Statements
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS — (UNAUDITED)
| March 31, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 5,646,898 | $ | 1,538,002 | |||||||
| Due from Parent and affiliates | 1,045,845 | 796,464 | |||||||||
| System sale receivable | 4,083,000 | — | |||||||||
| Accounts receivable | 1,681,010 | 2,047,900 | |||||||||
| Prepaid expenses | 498,075 | 392,271 | |||||||||
| Total current assets | 12,954,828 | 4,774,637 | |||||||||
| Investment in Cable Television Properties: | |||||||||||
| Property and equipment, net of accumulated depreciation of $54,413,063 and $52,255,286, respectively | 43,066,553 | 44,152,208 | |||||||||
| Franchise agreements, net of accumulated amortization of $38,923,291 | 39,487,137 | 39,487,137 | |||||||||
| Goodwill, net of accumulated amortization of $2,407,104 | 3,937,329 | 3,937,329 | |||||||||
| Total investment in cable television properties | 86,491,019 | 87,576,674 | |||||||||
| Loan fees, net of accumulated amortization of $2,195,910 and $2,650,564, respectively | 2,022,676 | 3,188,581 | |||||||||
| Other intangible assets, net of accumulated amortization of $3,158,865 and $3,140,381, respectively | 118,124 | 136,608 | |||||||||
| Assets from discontinued operations | — | 25,504,853 | |||||||||
| Total assets | $ | 101,586,647 | $ | 121,181,353 | |||||||
| LIABILITIES AND SHAREHOLDER’S DEFICIT | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 79,787 | $ | 528,645 | |||||||
| Accrued expenses | 7,716,930 | 4,705,722 | |||||||||
| Converter deposits | 116,610 | 116,027 | |||||||||
| Subscriber prepayments | 1,402,105 | 1,629,235 | |||||||||
| Due to affiliates | 217,611 | 228,220 | |||||||||
| Current portion of notes payable | 3,062,500 | 2,775,920 | |||||||||
| Income tax payable | 500,000 | — | |||||||||
| Interest rate swap agreements | — | 120,377 | |||||||||
| Liabilities from discontinued operations | — | 1,443,610 | |||||||||
| Total current liabilities | 13,095,543 | 11,547,756 | |||||||||
| Notes payable, net of current portion | 113,164,034 | 165,255,262 | |||||||||
| Deferred tax liabilities | 81,422 | — | |||||||||
| Total liabilities | 126,340,999 | 176,803,018 | |||||||||
| Shareholder’s Deficit: | |||||||||||
| Common stock (par value $1.00 per share, authorized 50,000 shares; 10,000 shares issued and outstanding) and additional paid-in capital | 12,359,377 | 12,359,377 | |||||||||
| Accumulated deficit | (37,113,729 | ) | (67,981,042 | ) | |||||||
| Total shareholder’s deficit | (24,754,352 | ) | (55,621,665 | ) | |||||||
| Total liabilities and shareholder’s deficit | $ | 101,586,647 | $ | 121,181,353 | |||||||
The accompanying notes are an integral part of these consolidated balance sheets.
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NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME — (UNAUDITED)
| For the three months ended March 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
| Service revenues | $ | 12,405,755 | $ | 12,133,311 | ||||||||
| Expenses: | ||||||||||||
| Cable system operations (including $69,995 and $57,343, net paid to affiliates in 2003 and 2002, respectively), exclusive of depreciation and amortization shown below | 4,822,356 | 4,604,446 | ||||||||||
| General and administrative (including $600,056, net paid to affiliates in 2003, and $36,547, net received from affiliates 2002) | 2,157,102 | 1,671,177 | ||||||||||
| Management fees paid to Parent | 620,288 | 606,596 | ||||||||||
| Depreciation and amortization | 2,177,256 | 2,169,393 | ||||||||||
| Total operating expenses | 9,777,002 | 9,051,612 | ||||||||||
| Income from operations | 2,628,753 | 3,081,699 | ||||||||||
| Other income (expense): | ||||||||||||
| Interest expense | (2,842,801 | ) | (3,134,238 | ) | ||||||||
| Interest income and other, net | (131 | ) | 4,825 | |||||||||
| Unrealized gain on interest rate swap agreements | 120,377 | 968,175 | ||||||||||
| Gain (loss) on disposal of assets | 174 | (5,824 | ) | |||||||||
| (2,722,381 | ) | (2,167,062 | ) | |||||||||
| Income from continuing operations before income tax expense | (93,628 | ) | 914,637 | |||||||||
| Income tax expense | (81,422 | ) | — | |||||||||
| Income from continuing operations | (175,050 | ) | 914,637 | |||||||||
| Discontinued operations (note 4) | ||||||||||||
| Income (loss) from operations of Aiken and Port Angeles Systems, net of tax (including gain on sales of systems of $31,525,585 in 2003) | 31,042,363 | (425,349 | ) | |||||||||
| Net income | 30,867,313 | 489,288 | ||||||||||
| Other comprehensive loss: | ||||||||||||
| Reclassification of accumulated other comprehensive income to unrealized gain on interest rate swaps | — | (104,000 | ) | |||||||||
| Other comprehensive loss | — | (104,000 | ) | |||||||||
| Total comprehensive income | $ | 30,867,313 | $ | 385,288 | ||||||||
The accompanying notes are an integral part of these consolidated balance sheets.
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NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — (UNAUDITED)
| For the three months ended March 31, | ||||||||||
| 2003 | 2002 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
| Net income | $ | 30,867,313 | $ | 489,288 | ||||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 2,595,054 | 2,636,755 | ||||||||
| Unrealized gain on interest rate swap agreements | (120,377 | ) | (968,175 | ) | ||||||
| Amortization of loan costs | 170,140 | 167,996 | ||||||||
| (Gain) loss on disposal of assets | (31,525,759 | ) | 5,824 | |||||||
| Deferred income taxes | 81,422 | |||||||||
| (Increase) decrease in operating assets: | ||||||||||
| Accounts receivable | 366,890 | (53,796 | ) | |||||||
| Prepaid expenses | (105,805 | ) | (24,545 | ) | ||||||
| Due from Parent and affiliates | (249,381 | ) | (617,294 | ) | ||||||
| Increase (decrease) in operating liabilities | ||||||||||
| Accounts payable and accrued expenses | 1,570,943 | 1,239,295 | ||||||||
| Due to affiliates | (10,609 | ) | 552,923 | |||||||
| Converter deposits | 581 | (209 | ) | |||||||
| Subscriber prepayments | (227,130 | ) | 379,372 | |||||||
| Net cash provided by operating activities | 3,413,282 | 3,807,434 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
| Investment in cable television properties | (1,073,540 | ) | (1,594,614 | ) | ||||||
| Proceeds from sale of cable system | 53,445,107 | 226,088 | ||||||||
| Proceeds from disposal of assets | 600 | 5,550 | ||||||||
| Net cash provided by (used in) investing activities | 52,372,167 | (1,362,976 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
| Proceeds from notes payable | — | — | ||||||||
| Principal payments on borrowings | (51,804,648 | ) | — | |||||||
| Loan fees and other costs incurred | — | (6,426 | ) | |||||||
| Net cash used in financing activities | (51,804,648 | ) | (6,426 | ) | ||||||
| INCREASE IN CASH | 3,980,801 | 2,438,032 | ||||||||
| CASH, beginning of period | 1,666,097 | 2,724,099 | ||||||||
| CASH, end of period | $ | 5,646,898 | $ | 5,162,131 | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||
| Cash paid during the period for interest | $ | 982,009 | $ | 1,727,177 | ||||||
| Cash paid during the period for state income taxes | $ | 7,410 | $ | 4,881 | ||||||
The accompanying notes are an integral part of these consolidated statements.
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NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
| (1) | Basis of Presentation |
Interim Financial Reporting
These unaudited condensed consolidated financial statements are being filed in conformity with Rule 10-01 of Regulation S-X regarding interim financial statement disclosures and do not contain all of the necessary footnote disclosures required for a fair presentation of the consolidated balance sheets, statements of operations and comprehensive income and statements of cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, this data includes all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s consolidated financial position at March 31, 2003, its consolidated statements of operations and comprehensive income for the three months ended March 31, 2003 and 2002 and its consolidated statements of cash flows for the three months ended March 31, 2003 and 2002. Results of operations for these periods are not necessarily indicative of results to be expected for the full year. These financial statements and notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
On March 11, 2003 and March 31, 2003, the Company sold the operating assets and franchise rights of its cable systems in and around Port Angeles, Washington and Aiken, South Carolina, respectively. The accompanying financial statements have been restated to report the discontinued operations of the Company, effected for this sale.
Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” (“SFAS No. 143”) which addresses financial accounting and reporting for obligations associated with the reporting of obligations associated with the retirement of tangible long-lived assets and associated asset retirement obligations (“ARO”). Under the scope of this pronouncement, the Company has ARO associated with removal of equipment from poles and headend sites that are leased from third parties. Based on management’s analyses, the Company has concluded that for the reasons mentioned below, it is not able to reasonably estimate the fair values of the ARO. First, to operate the cable television network, the Company will always need to have equipment deployed at these poles and headend sites. Additionally, the Company has not historically incurred any ARO and, given the length of time in the future when any potential obligations might exist, management believes that estimating any probability at this time is not practicable. As a result, upon adoption of SFAS No. 143 the Company did not record any ARO associated with the obligation to remove the equipment.
| (2) | Intangible Assets |
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortize goodwill or any other intangible assets determined to have indefinite lives. The Company has determined that its franchises meet the definition of indefinite lived assets. The Company tests these assets for impairment on an annual basis during the fourth quarter, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value or if the fair value of intangible assets with indefinite lives falls below their carrying value on an annual basis. The book value of the Company’s intangible assets, effecting for the sale of the Aiken System and the Port Angeles System described in note 4, is presented in the following table:
| March 31, 2003 | December 31, 2002 | ||||||||||||||||||||||||
| Gross | Accumulated | Net | Gross | Accumulated | Net | ||||||||||||||||||||
| Carrying | Amortization | Carrying | Carrying | Amortization | Carrying | ||||||||||||||||||||
| Amount | Amount | Amount | Amount | ||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||
| Franchises | $ | 78,410,428 | $ | (38,923,291 | ) | $ | 39,487,137 | $ | 78,410,428 | $ | (38,923,291 | ) | $ | 39,487,137 | |||||||||||
| Goodwill | 6,344,433 | (2,407,104 | ) | 3,937,329 | 6,344,433 | (2,407,104 | ) | 3,937,329 | |||||||||||||||||
| 84,754,861 | (41,330,395 | ) | 43,424,466 | 84,754,861 | (41,330,395 | ) | 43,424,466 | ||||||||||||||||||
| Definite-lived intangible assets: | |||||||||||||||||||||||||
| Loan fees | 4,218,586 | (2,195,910 | ) | 2,022,676 | 5,839,145 | (2,650,564 | ) | 3,188,581 | |||||||||||||||||
| Other intangible assets | 3,276,989 | (3,158,865 | ) | 118,124 | 3,276,989 | (3,140,381 | ) | 136,608 | |||||||||||||||||
| $ | 92,250,436 | $ | (46,685,170 | ) | $ | 45,565,266 | $ | 93,870,995 | $ | (47,121,340 | ) | $ | 46,749,655 | ||||||||||||
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Amortization of loan fees and other intangibles for each of the next five years is expected to be approximately as follows:
| 2003 | $ | 570,000 | ||||||||||||||||||||||
| 2004 | 472,000 | |||||||||||||||||||||||
| 2005 | 472,000 | |||||||||||||||||||||||
| 2006 | 466,000 | |||||||||||||||||||||||
| 2007 | 349,000 | |||||||||||||||||||||||
| $ | 2,329,000 | |||||||||||||||||||||||
| (3) | Notes Payable |
In August of 2000, the Company refinanced its existing senior bank indebtedness. The original indebtedness was repaid with borrowings under the Revised Senior Credit Facility. Amounts outstanding under the Revised Senior Credit Facility mature on September 30, 2007. The Revised Senior Credit Facility is collateralized by a first lien position on all present and future assets and stock of the Company. Interest rates vary based on certain financial covenants; currently 3.58%. Graduated principal and interest payments are due quarterly, beginning September 30, 2003, until maturity on September 30, 2007. The estimated fair value of the revolving credit and term loan facility is equal to its carrying value because of its variable interest rate nature.
Under the revolving credit and term loan agreement, the Company has agreed to restrictive covenants which require the maintenance of certain ratios, including a Pro Forma Debt Service ratio of not less than 1.25 to 1.0 and a Leverage Ratio of no greater than 6.00 to 1.0, among other restrictions. The Company submits quarterly debt compliance reports to its creditor under this arrangement. As of March 31, 2003, the Company was in compliance with the terms of the loan agreement.
As of the date of this filing, the balance under the credit facility is $16,226,534, and applicable interest rates are as follows: $15,726,534 at a LIBOR based interest rate of 3.58%, which expires July 22, 2003 and $500,000 at a LIBOR based rate of 3.58%, which expires May 22, 2003. The above rates include a margin paid to the lender based on overall leverage, and may increase or decrease as the Company’s leverage fluctuates.
| (4) | System Sales |
On March 11, 2003, the Company sold the operating assets and franchise rights of its cable system in and around the community of Port Angeles, Washington (the “Port Angeles System”). The Port Angeles System was sold at a price of approximately $11,375,000 of which the Company received approximately $10,800,000 at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $575,000 is being held in escrow and will be released to the Company one year from the closing of the transaction, subject to general representations and warranties. Historically, the Company has entered into similarly structured transactions, and collected the amount held in escrow. Substantially all of the proceeds were used to pay down amounts outstanding under the Company’s Senior Credit Facility.
On March 31, 2003, the Company sold the operating assets and franchise rights of its cable system in and around the community of Aiken, South Carolina (the “Aiken System”). The Aiken System was sold at a price of approximately $46.3 million of which the Company received approximately $42.6 million at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $3.7 million is being held in escrow and will be released to the Company one year from the closing of the transaction, subject to general representations and warranties. Historically, the Company has entered into similarly structured transactions, and collected the amount held in escrow. Substantially all of the proceeds were used to pay down amounts outstanding under the Company’s Senior Credit Facility.
The sales were made pursuant to offers by separate, independent third parties. Based on the offers made, management determined that acceptance of the offers would be in the best economic interest of the Company. The sales were not a result of declining or deteriorating operations nor was it necessary to create liquidity or reduce outstanding debt. It is the opinion of management that the Company could have continued existing operations and met all obligations as they became due.
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The assets and liabilities attributable to the Aiken System and the Port Angeles System as of December 31, 2002 have been reported as assets and liabilities from discontinued operations in the accompanying balance sheets, and consist of the following:
| As of | |||||
| December 31, 2002 | |||||
| Cash and cash equivalents | $ | 128,095 | |||
| Accounts receivable | 636,648 | ||||
| Prepaid expenses | 65,139 | ||||
| Property and equipment, net of accumulated depreciation of $10,905,201 | 10,768,828 | ||||
| Franchise agreements (net of accumulated amortization of $9,356,640) | 13,906,143 | ||||
| Total assets | $ | 25,504,853 | |||
| Accounts payable | 122,112 | ||||
| Accrued expenses | 820,168 | ||||
| Converter deposits | 9,152 | ||||
| Subscriber prepayments | 492,178 | ||||
| Total liabilities | $ | 1,443,610 | |||
In addition, the revenue, expenses and other items attributable to the operations of the Aiken System for the three months ended March 31, 2003 (the date of sale of the system) and 2002 and to the operations of the Port Angeles System for the period from January 1, 2003 to March 11, 2003 (the date of sale of the system) and for the three months ended March 31, 2002 have been reported as discontinued operations in the accompanying statements of operations and comprehensive income, and include the following:
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| 2003 | 2002 | ||||||||
| Service revenues | $ | 3,079,389 | 3,081,497 | ||||||
| Expenses: | |||||||||
| Cable systems operations (including $6,289 and $20,943, net paid to affiliates in 2003 and 2002, respectively) | 1,205,573 | 1,140,394 | |||||||
| General and administrative (including $152,093, net paid to affiliates in 2003 and $17,571, net received from affiliates in 2002) | 573,781 | 458,947 | |||||||
| Management fees paid to Parent | 153,637 | 154,075 | |||||||
| Depreciation and amortization | 417,798 | 467,362 | |||||||
| 2,350,789 | 2,220,778 | ||||||||
| Income from operations | $ | 728,600 | $ | 860,719 | |||||
| Other income (expense): | |||||||||
| Interest expense | (711,822 | ) | (1,286,068 | ) | |||||
| Gain on sale of system | 31,525,585 | — | |||||||
| Income from operation of Aiken and Port Angeles Systems, before income tax expense | 31,542,363 | (425,349 | ) | ||||||
| Income tax expense | (500,000 | ) | — | ||||||
| Income from operations of Aiken and Port Angeles System, net | $ | 31,042,363 | $ | (425,349 | ) | ||||
In accordance with EITF 87-24, Allocation of Interest to Discontinued Operations, the Company allocated interest expense based on the historical weighted average effective interest rate applicable to amounts outstanding under the Revised Senior Credit Facility.
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PART I (continued)
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Continuing Operations — Three Months Ended March 31, 2003 and 2002
Revenues totaled $12.4 million for the three months ended March 31, 2003 an increase of approximately $300,000 or 2.5% over the same period in 2002. Of these revenues, $8.5 million (68%) was derived from basic services, $900,000 (7%) from premium services, $1.6 million (13%) from expanded basic services, $200,000 (2%) from digital services, $600,000 (5%) from advertising and $600,000 (5%) from other sources.
Average monthly revenue per subscriber increased $2.33 or 5.2% from $44.64 for the three months ended March 31, 2002 to $46.97 for the three months ended March 31, 2003. This increase is primarily attributable to rate increases implemented during the first quarter of 2002, increased revenue from higher penetration of new product tiers and a 10% increase in advertising revenue.
Cable system operation expenses increased approximately $200,000 or 4.3% from $4.6 million to $4.8 million for the three months ended March 31, 2003. Programming costs, which represent the primary component of cable system operation expenses, increased $200,000 or 5.9% as a result of rate increases by certain programming vendors as well as the launch of new analog programming services and the launch of digital programming services.
General and administrative expenses increased approximately $500,000 or 29.4% from $1.7 million to $2.2 million for the three months ended March 31, 2003. This increase is primarily attributable to increases in corporate overhead allocations by the Company’s Parent, which had been reduced in prior periods, to the extent that allocation of these costs would have resulted in non-compliance with the Company’s debt covenants. Corporate overhead expenses for the quarter represent actual costs incurred by the Company’s parent for the period that are attributable to the operations of the Company. The Company has no obligation or liability to its Parent for past reductions in corporate overhead charges.
Management fees for the three months ended March 31, 2003 increased approximately 2.3% over the same period in the previous year. Management fees are calculated at 5.0% of gross revenues.
Depreciation and amortization expenses for the three months ended March 31, 2003 remained relatively constant with the same period in 2002.
Interest expense decreased approximately $300,000 or 9.7%, from $3.1 million to $2.8 million for the three months ended March 31, 2003. This is primarily attributable to the fact that the Company’s effective interest rate applicable to the Revised Senior Credit Facility decreased from 9.51% for the three months ended March 31, 2002 to 5.02% for the three months ended March 31, 2003.
In accordance with EITF 87-24, Allocation of Interest to Discontinued Operations, the Company allocated interest expense based on the historical weighted average effective interest rate applicable to amounts outstanding under the Revised Senior Credit Facility.
The Company has elected not to designate its interest rate swap agreements as hedges under SFAS No. 133. Interest rate swap agreements in place as of December 31, 2002 expired during the first quarter of 2003, and the Company has elected not to enter into any new agreements. Accordingly, the Company recorded a debit to eliminate the liability on its balance sheet, and a corresponding credit in its statement of operations of approximately $120,000.
Liquidity and Capital Resources
The cable television business generally requires substantial capital for the construction, expansion and maintenance of the signal distribution system. In addition, the Company has pursued a business strategy, which includes selective acquisitions. The Company has financed these expenditures through a combination of cash flow from operations, borrowings under the revolving credit and term loan facility provided by a variety of banks and
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the issuance of senior subordinated notes. The Company’s required principal payments for the remainder of 2003 are approximately $1.75 million. The Company anticipates that cash flow from operations will be sufficient to service its debt through December 31, 2003. The Company believes that cash flow from operations will be adequate to meet the Company’s long-term liquidity requirements prior to the maturity of its long-term indebtedness, although no assurance can be given in this regard.
Net cash provided by operating activities was $3.4 million for the three months ended March 31, 2003. Adjustments to the $30.9 million net income for the period to reconcile to net cash provided by operating activities consisted primarily of a gain of $31.5 million related to the sales of the Aiken System and the Port Angeles System, offset by $2.6 million of depreciation and amortization and increases in operating liabilities of approximately $900,000.
Net cash used in investing activities was $52.4 million for the three months ended March 31, 2003, and consisted of $53.4 million of proceeds from the sales of the Aiken System and the Port Angeles System, offset by $1.1 million in capital expenditures.
Net cash used in financing activities consisted of $51.8 million in principal prepayments on the Revised Senior Credit Facility, as a result of the sale of the Aiken System and the Port Angeles System.
EBITDA decreased approximately $500,000 or 9.4%, from $5.3 million to $4.8 million for the three months ended March 31, 2003, and EBITDA margin decreased from 43.2% to 38.7%. The aforementioned increases in revenues were offset by increased administrative overhead charges and operating expenses as a result of rate increases by certain programming vendors and the launch of new programming services, discussed above.
Free cash flow increased $364,000, or 157%, from $635,000 to $999,000 for the three months ended March 31, 2003. This increase is attributable to declining interest expense and capital expenditures, offset by the aforementioned decline in EBITDA.
EBITDA represents income from operations excluding the effect of depreciation and amortization expense. EBITDA margin represents EBITDA as a percentage of revenue. Free cash flow represents income from operations, excluding the effects of depreciation and amortization, less interest expense and capital expenditures. EBITDA and free cash flow are commonly used to analyze companies on the basis of leverage and liquidity. However, they are not measures determined under generally accepted accounting principles, or GAAP, in the United States and may not be comparable to similarly titled measures reported by other companies. EBITDA and free cash flow should not be construed as a substitute for operating income or as better measure of liquidity than cash flow from operating activities, which are determined in accordance with GAAP. We have presented EBITDA and free cash flow to provide additional information with respect to our ability to meet future debt service, capital expenditure and working capital requirements. A reconciliation of net cash provided by operating activities to EBITDA and free cash flow follows:
| For the three months | ||||||||
| ended March 31, | ||||||||
| 2003 | 2002 | |||||||
| Net cash provided by operating activities | 3,413,282 | 3,807,434 | ||||||
| Interest expense, excluding amortization of loan fees | 2,733,907 | 3,021,064 | ||||||
| Changes in certain assets and liabilities and other, net | (1,341,180 | ) | (1,577,406 | ) | ||||
| EBITDA | 4,806,009 | 5,251,092 | ||||||
| Interest expense, excluding amortization of loan fees | (2,733,907 | ) | (3,021,064 | ) | ||||
| Capital expenditures | (1,073,540 | ) | (1,594,614 | ) | ||||
| Free cash flow | 998,562 | 635,414 | ||||||
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Revised Senior Credit Facility
In August of 2000, the Company refinanced its existing senior bank indebtedness. The original indebtedness was repaid with borrowings under the Revised Senior Credit Facility. Amounts outstanding under the Revised Senior Credit Facility mature on September 30, 2007. The Revised Senior Credit Facility is collateralized by a first lien position on all present and future assets and stock of the Company. Interest rates vary based on certain financial covenants; currently 3.58%. Graduated principal and interest payments are due quarterly, beginning September 30, 2003, until maturity on September 30, 2007. The estimated fair value of the revolving credit and term loan facility is equal to its carrying value because of its variable interest rate nature.
As of the date of this filing, the balance under the credit facility is $16,226,534, and applicable interest rates are as follows: $15,726,534 at a LIBOR based interest rate of 3.58% expiring July 22, 2003 and $500,000 at a LIBOR based rate of 3.58% expiring May 22, 2003. The above rates include a margin paid to the lender based on overall leverage, and may increase or decrease as the Company’s leverage fluctuates.
System Sale
On March 11, 2003, the Company sold the operating assets and franchise rights of its cable system in and around the community of Port Angeles, Washington (the “Port Angeles System”). The Port Angeles System was sold at a price of approximately $11,375,000 of which the Company received approximately $10,800,000 at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $575,000 is being held in escrow and will be released to the Company one year from the closing of the transaction, subject to general representations and warranties. Historically, the Company has entered into similarly structured transactions, and collected on the amount held in escrow. Substantially all of the proceeds were used to pay down amounts outstanding under the Company’s Senior Credit Facility.
On March 31, 2003, the Company sold the operating assets and franchise rights of its cable system in and around the community of Aiken, South Carolina (the “Aiken System”). The Aiken System was sold at a price of approximately $46.3 million of which the Company received approximately $42.6 million at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and approximately $3.7 million is being held in escrow and will be released to the Company one year from the closing of the transaction, subject to general representations and warranties. Historically, the Company has entered into similarly structured transactions, and collected on the amount held in escrow. Substantially all of the proceeds were used to pay down amounts outstanding under the Company’s Senior Credit Facility.
The sales were made pursuant to offers by separate, independent third parties. Based on the offers made, management determined that acceptance of the offers would be in the best economic interest of the Company. The sales were not a result of declining or deteriorating operations nor was it necessary to create liquidity or reduce outstanding debt. It is the opinion of management that the Company could have continued existing operations and met all obligations as they became due.
Obligations and Commitments
| In addition to working capital needs for ongoing operations, the Company has capital requirements for (i) annual maturities and interest payments related to the term loan and (ii) required minimum operating lease payments. The following table summarizes the Company’s contractual obligations, after effecting for the sales of the Aiken System and the Port Angeles System, and the anticipated effect of these obligations on its liquidity in future years: | |
| Expected Maturity Date | ||||||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | ||||||||||||||||||||||
| Debt maturity | $ | 1,750,000 | $ | 5,250,000 | $ | 7,000,000 | $ | 2,226,534 | $ | 100,000,000 | $ | 0 | $ | 116,226,534 | ||||||||||||||
| Interest payments (weighted average interest rate of 9.32% as of March 31, 2003) | 11,726,888 | 10,674,285 | 10,455,010 | 10,289,855 | 9,395,833 | — | 52,541,871 | |||||||||||||||||||||
| Minimum operating lease payments | 91,150 | 74,296 | 55,331 | 44,663 | 37,006 | 53,831 | 356,277 | |||||||||||||||||||||
| Total contractual cash obligations (a) | $ | 13,568,038 | $ | 15,998,581 | $ | 17,510,341 | $ | 12,561,052 | $ | 109,432,839 | $ | 53,831 | $ | 169,124,682 | ||||||||||||||
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| (a) | These contractual obligations do not include accounts payable and accrued liabilities, which are expected to be paid in 2003. |
Capital Expenditures
For the three months ended March 31, 2003, the Company incurred capital expenditures of approximately $1.1 million. Capital expenditures included: (i) continued deployment of new product digital services; (ii) expansion and improvement of cable properties; (iii) additions to plant and equipment, and; (iv) line drops, extensions and installations of cable plant facilities.
The Company plans to invest approximately $4.2 million in capital expenditures for the remainder of 2003. This represents anticipated expenditures for upgrading and rebuilding certain distribution facilities, which will allow for the continued deployment of new products, such as digital and Internet services in selected markets. Furthermore, capital expenditures will involve extensions of distribution facilities to add new subscribers and vehicle replacements.
Recently Issued Accounting Standards
Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” (“SFAS No. 143”) which addresses financial accounting and reporting for obligations associated with the reporting of obligations associated with the retirement of tangible long-lived assets and associated asset retirement obligations (“ARO”). Under the scope of this pronouncement, the Company has ARO associated with removal of equipment from poles and headend sites that are leased from third parties. Based on management's analyses, the Company has concluded that for the reasons mentioned below, it is not able to reasonably estimate the fair values of the ARO. First, to operate the cable television network, the Company will always need to have equipment deployed at these poles and headend sites. Additionally, the Company has not historically incurred any ARO and, given the length of time in the future when any potential obligations might exist, management believes that estimating any probability at this time is not practicable. As a result, upon adoption of SFAS No. 143 the Company did not record any ARO associated with the obligation to remove the equipment.
Critical Accounting Policies
This discussion and analysis of our financial condition and results of operations is based on the Company’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, which have been chosen among alternatives, require a more significant amount of management judgment than other accounting policies the Company employs.
Revenue Recognition- Cable television 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 Company periodically performs evaluations of these estimates as warranted by events or changes in circumstances.
In accordance with SFAS No. 51, “Financial Reporting by Cable Television Companies,” the Company also 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.
Intangible Assets- In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortize goodwill or any other intangible assets determined to have indefinite lives. The Company has determined that its franchises meet the definition of indefinite lived assets. The Company tests these assets for impairment on an annual basis during the fourth quarter, or on an interim basis if an event occurs or
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circumstances change that would reduce the fair value of a reporting unit below its carrying value or if the fair value of intangible assets with indefinite lives falls below their carrying value on an annual basis.
Management believes the franchises have indefinite lives because the franchises are expected to be used by the Company for the foreseeable future and effects of obsolescence, competition and other factors are minimal. In addition, the level of maintenance expenditures required to obtain the future cash flows expected from the franchises are not material in relation to the carrying 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 Company’s franchising authorities and the franchising authorities of the Company’s affiliates.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risks arising from changes in interest rates. The Company’s primary interest rate exposure results from changes in LIBOR or the prime rate, which are used to determine the interest rate applicable to the Company’s debt facilities. The Company has from time to time entered into interest rate swap agreements to partially hedge interest rate exposure. Interest rate swaps have the effect of converting the applicable variable rate obligations to fixed or other variable rate obligations. As of the date of this filing, the Company is not involved in any interest rate swap agreements. The potential loss over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate of all of the Company’s variable rate obligations would be approximately $162,000.
The Company does not use financial instruments for trading or other speculative purposes.
Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Litigation Reform Act of 1995. Statements contained or incorporated by reference in this document that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Reform Act of 1995. Forward-looking statements may be identified by use of forward-looking terminology such as “believe”, “intends”, “may”, “will”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms, variations of those terms or the negative of those terms.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and President (Principal Financial and Accounting Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) of the Exchange Act). Based on and as of the time of such evaluation, the Company’s management, including the Chief Executive Officer and President (Principal Financial and Accounting Officer), concluded that the Company’s disclosure controls and procedures were effective in timely alerting them to material information relating to the Company required to be included in the Company’s reports filed or submitted by it under the Exchange Act. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the time of such evaluation.
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PART II — OTHER INFORMATION
ITEM 1 Legal proceedings
The Company is a party to ordinary and routine litigation proceedings that are incidental to the Company’s business. Management believes that the outcome of all pending legal proceedings will not, individually or in the aggregate, have a material adverse effect on the Company, its financial condition, prospects and debt service ability.
ITEM 2 Changes in securities
None
ITEM 3 Defaults upon senior securities
None
ITEM 4 Submission of matters to a vote of security holders
None
ITEM 5 Other information
None
ITEM 6 Exhibits and Reports on Form 8-K
| (a) | Exhibit Index | |||
| 99(a). | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| 99(b). | Certification of the President Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
| (b) | Reports on Form 8-K | |||
| (i) | Form 8-K filed on January 23, 2003 announcing the execution of purchase and sale agreements to sell the Port Angeles, Washington and the Aiken, South Carolina systems, independently of each other. | |||
| (ii) | Form 8-K filed March 25, 2003 announcing the sale of the Port Angeles, Washington system | |||
| (iii) | Form 8-K filed April 1, 2003 announcing the sale of the Aiken, South Carolina system | |||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
| SIGNATURES | CAPACITIES | DATE | ||||||||||||||||||||||
| /s/ RICHARD I. CLARK Richard I. Clark | Executive Vice President, Treasurer and Assistant Secretary | 5-19-03 | ||||||||||||||||||||||
| /s/ GARY S. JONES Gary S. Jones | President | 5-19-03 |
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CERTIFICATIONS
I, Gary Jones certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Northland Cable Television, Inc., and Subsidiary; | |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| c) | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and board of directors: |
| a) | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and | ||
| b) | Any fraud, whether or not material that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: 5-19-03
| /s/ GARY S. JONES Gary S. Jones President (Principal Financial and Accounting Officer) | ||
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I, John Whetzell certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Northland Cable Television, Inc., and Subsidiary; | |
| 2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; | |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| a) | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | ||
| b) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | ||
| c) | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and board of directors: |
| a) | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weakness in internal controls; and | ||
| b) | Any fraud, whether or not material that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: 5-19-03
| /s/ JOHN S. WHETZELL John S. Whetzell Chief Executive Officer | ||