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UNITED STATES
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period endedSeptember 30, 2003
or
[ ] 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.
| STATE OF WASHINGTON | 91-1311836 | |
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
AND SUBSIDIARY GUARANTOR:
NORTHLAND CABLE NEWS, INC.
| STATE OF WASHINGTON | 91-1638891 | |
| (State or other jurisdiction of incorporation) | (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.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
Yes [ ] No [X]
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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)
| September 30, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| ASSETS | ||||||||||
| Current Assets: | ||||||||||
| Cash and cash equivalents | $ | 4,290,861 | $ | 1,538,002 | ||||||
| Due from Parent and affiliates | 733,820 | 796,464 | ||||||||
| System sale receivable | 4,156,191 | — | ||||||||
| Accounts receivable | 1,709,115 | 2,047,900 | ||||||||
| Prepaid expenses | 659,062 | 392,271 | ||||||||
| Total current assets | 11,549,049 | 4,774,637 | ||||||||
| Investment in Cable Television Properties: | ||||||||||
| Property and equipment, net of accumulated depreciation of $58,280,163 and $52,255,286, respectively | 42,239,321 | 44,152,208 | ||||||||
| Franchise agreements, net of accumulated amortization of $38,923,291 | 39,493,670 | 39,487,137 | ||||||||
| Goodwill, net of accumulated amortization of $2,407,104 | 3,937,329 | 3,937,329 | ||||||||
| Total investment in cable television properties | 85,670,320 | 87,576,674 | ||||||||
| Loan fees, net of accumulated amortization of $2,419,043 and $2,650,564, respectively | 1,799,543 | 3,188,581 | ||||||||
| Other intangible assets, net of accumulated amortization of $3,192,816 and $3,140,381, respectively | 84,174 | 136,608 | ||||||||
| Assets of discontinued operations | — | 25,504,853 | ||||||||
| Total assets | $ | 99,103,086 | $ | 121,181,353 | ||||||
| LIABILITIES AND SHAREHOLDER’S DEFICIT | ||||||||||
| Current Liabilities: | ||||||||||
| Accounts payable | $ | 63,737 | $ | 528,645 | ||||||
| Accrued expenses | 7,619,816 | 4,705,722 | ||||||||
| Converter deposits | 123,516 | 116,027 | ||||||||
| Subscriber prepayments | 1,370,794 | 1,629,235 | ||||||||
| Due to affiliates | 73,813 | 228,220 | ||||||||
| Current portion of notes payable | 2,100,000 | 2,775,920 | ||||||||
| Interest rate swap agreements | — | 120,377 | ||||||||
| Liabilities of discontinued operations | — | 1,443,610 | ||||||||
| Total current liabilities | 11,351,676 | 11,547,756 | ||||||||
| Notes payable, net of current portion | 113,251,534 | 165,255,262 | ||||||||
| Deferred tax liabilities | 173,355 | — | ||||||||
| Total liabilities | 124,776,565 | 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 | (38,032,856 | ) | (67,981,042 | ) | ||||||
| Total shareholder’s deficit | (25,673,479 | ) | (55,621,665 | ) | ||||||
| Total liabilities and shareholder’s deficit | $ | 99,103,086 | $ | 121,181,353 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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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 nine months ended September 30, | ||||||||||
| 2003 | 2002 | |||||||||
| Service revenues | $ | 37,242,399 | $ | 36,661,583 | ||||||
| Expenses: | ||||||||||
| Cable system operations (including $98,560 and $187,369, net paid to affiliates in 2003 and 2002, respectively), exclusive of depreciation and amortization shown below | 14,332,665 | 13,956,781 | ||||||||
| General and administrative (including $1,325,224, net paid to affiliates in 2003, and $59,234, net received from affiliates 2002) | 6,891,779 | 5,271,495 | ||||||||
| Management fees paid to Parent | 1,862,452 | 1,833,078 | ||||||||
| Depreciation and amortization | 6,643,558 | 6,557,855 | ||||||||
| Total operating expenses | 29,730,454 | 27,619,209 | ||||||||
| Income from operations | 7,511,945 | 9,042,374 | ||||||||
| Other income (expense): | ||||||||||
| Interest expense, net | (8,396,406 | ) | (7,140,067 | ) | ||||||
| Interest income and other, net | 23,528 | 46,119 | ||||||||
| Loss on disposal of assets | (50,079 | ) | (259,297 | ) | ||||||
| (8,422,957 | ) | (7,353,245 | ) | |||||||
| (Loss) income from continuing operations before income tax expense | (911,012 | ) | 1,689,129 | |||||||
| Income tax expense | (183,165 | ) | (8,142 | ) | ||||||
| (Loss) income from continuing operations | (1,094,177 | ) | 1,680,987 | |||||||
| 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 | (613,219 | ) | |||||||
| Net income | 29,948,186 | 1,067,768 | ||||||||
| Other comprehensive loss: | ||||||||||
| Reclassification of accumulated other comprehensive income to unrealized gain on interest rate swaps | — | (268,000 | ) | |||||||
| Other comprehensive loss | — | (268,000 | ) | |||||||
| Total comprehensive income | $ | 29,948,186 | $ | 799,768 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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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 September 30, | ||||||||||
| 2003 | 2002 | |||||||||
| Service revenues | $ | 12,376,798 | $ | 12,183,899 | ||||||
| Expenses: | ||||||||||
| Cable system operations (including $46,505 and $67,236, net paid to affiliates in 2003 and 2002, respectively), exclusive of depreciation and amortization shown below | 4,741,599 | 4,720,248 | ||||||||
| General and administrative (including $599,698 and $80,891 net paid to affiliates in 2003 and 2002, respectively) | 2,507,646 | 1,703,561 | ||||||||
| Management fees paid to Parent | 618,840 | 609,195 | ||||||||
| Depreciation and amortization | 2,245,419 | 2,198,281 | ||||||||
| Total operating expenses | 10,113,504 | 9,231,285 | ||||||||
| Income from operations | 2,263,294 | 2,952,614 | ||||||||
| Other income (expense): | ||||||||||
| Interest expense, net | (2,860,527 | ) | (2,368,047 | ) | ||||||
| Interest income and other, net | 8,406 | 16,995 | ||||||||
| Loss on disposal of assets | (27,452 | ) | (243,421 | ) | ||||||
| (2,879,573 | ) | (2,594,473 | ) | |||||||
| (Loss) income from continuing operations before income tax expense | (616,279 | ) | 358,141 | |||||||
| Income tax expense | (25,391 | ) | (3,262 | ) | ||||||
| (Loss) income from continuing operations | (641,670 | ) | 354,879 | |||||||
| Discontinued operations (note 4) | ||||||||||
| Loss from operations of Aiken and Port Angeles Systems, net of tax | — | (45,960 | ) | |||||||
| Net (loss) income | (641,670 | ) | 308,919 | |||||||
| Other comprehensive loss: | ||||||||||
| Reclassification of accumulated other comprehensive income to unrealized gain on interest rate swaps | — | (59,000 | ) | |||||||
| Other comprehensive loss | — | (59,000 | ) | |||||||
| Total comprehensive (loss) income | $ | (641,670 | ) | $ | 249,919 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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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 nine months ended September 30, | ||||||||||
| 2003 | 2002 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
| Net income | $ | 29,948,186 | $ | 1,067,768 | ||||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 7,061,356 | 7,973,371 | ||||||||
| Unrealized gain on interest rate swap agreements | (120,377 | ) | (1,981,411 | ) | ||||||
| Amortization of loan costs | 393,273 | 503,987 | ||||||||
| (Gain) loss on disposal of assets | (31,475,506 | ) | 259,297 | |||||||
| Deferred income taxes | 173,355 | — | ||||||||
| (Increase) decrease in operating assets: | ||||||||||
| Accounts receivable | 326,869 | (127,658 | ) | |||||||
| Prepaid expenses | (267,792 | ) | (143,817 | ) | ||||||
| Due from Parent and affiliates | 61,822 | (700,147 | ) | |||||||
| Increase (decrease) in operating liabilities | ||||||||||
| Accounts payable and accrued expenses | 917,971 | 1,428,210 | ||||||||
| Due to affiliates | (156,529 | ) | (80,313 | ) | ||||||
| Converter deposits | 7,489 | (30,303 | ) | |||||||
| Subscriber prepayments | (258,441 | ) | (152,642 | ) | ||||||
| Net cash provided by operating activities | 6,611,676 | 8,016,342 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
| Investment in cable television properties | (4,691,180 | ) | (5,753,630 | ) | ||||||
| Proceeds from sale of cable system, net | 53,376,107 | 999,562 | ||||||||
| Proceeds from disposal of assets | 14,342 | 5,588 | ||||||||
| Franchises and other intangibles | (6,533 | ) | (14,718 | ) | ||||||
| Net cash provided by (used in) investing activities | 48,692,736 | (4,763,198 | ) | |||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
| Principal payments on borrowings | (52,679,648 | ) | (2,000,000 | ) | ||||||
| Net cash used in financing activities | (52,679,648 | ) | (2,000,000 | ) | ||||||
| INCREASE IN CASH | 2,624,764 | 1,253,144 | ||||||||
| CASH, beginning of period | 1,666,097 | 2,724,099 | ||||||||
| CASH, end of period | $ | 4,290,861 | $ | 3,977,243 | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||
| Cash paid during the period for interest | $ | 6,458,094 | $ | 9,700,616 | ||||||
| Cash paid during the period for state income taxes | $ | 9,810 | $ | 9,363 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 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 September 30, 2003, its consolidated statements of operations and comprehensive income for the nine and three months ended September 30, 2003 and 2002 and its consolidated statements of cash flows for the nine months ended September 30, 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 retirement of tangible long lived assets and associated asset retirement obligations (“ARO”). Under the scope of this pronouncement, the Company has ARO associated with the 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.
Certain prior period amounts have been reclassified to conform to the current period presentation. This includes reclassification of unrealized gains and losses on interest rate swap agreements, which were previously classified as a separate financial statement caption within other income (expense), to the interest expense financial statement caption.
(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. 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:
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| September 30, 2003 | December 31, 2002 | ||||||||||||||||||||||||
| Gross | Net | Gross | Net | ||||||||||||||||||||||
| Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||
| Franchises | $ | 78,416,961 | $ | (38,923,291 | ) | $ | 39,493,670 | $ | 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 | |||||||||||||||||
| 84,761,394 | (41,330,395 | ) | 43,430,999 | 84,754,861 | (41,330,395 | ) | 43,424,466 | ||||||||||||||||||
| Definite-lived intangible assets: | |||||||||||||||||||||||||
| Loan fees | 4,218,586 | (2,419,043 | ) | 1,799,543 | 5,839,145 | (2,650,564 | ) | 3,188,581 | |||||||||||||||||
| Other intangible assets | 3,276,990 | (3,192,816 | ) | 84,174 | 3,276,989 | (3,140,381 | ) | 136,608 | |||||||||||||||||
| $ | 92,256,970 | $ | (46,942,254 | ) | $ | 45,314,716 | $ | 93,870,995 | $ | (47,121,340 | ) | $ | 46,749,655 | ||||||||||||
Amortization of loan fees and other intangibles for each of the next five years is expected to be approximately as follows:
| 2003 | $ | 124,000 | ||
| 2004 | 468,000 | |||
| 2005 | 468,000 | |||
| 2006 | 462,000 | |||
| 2007 | 362,000 | |||
| $ | 1,884,000 | |||
(3) Amended and Restated Senior Credit Facility
On November 13, 2003, the Company amended and restated its existing senior credit facility (the “Amended and Restated Senior Credit Facility”). The Amended and Restated Senior Credit Facility establishes a term loan in the amount of $15,000,000 and a $2,000,000 revolving credit loan, under which the Company borrowed $1,000,000 upon amendment and restatement. The proceeds from the Amended and Restated Senior Credit Facility were used to repay the Company’s existing senior credit facility, with a balance of $15,351,534 at September 30, 2003, to provide working capital and for other general purposes. The Amended and Restated Senior Credit Facility matures on December 31, 2006 and requires the Company to make quarterly principal payments beginning March 31, 2004. The current portion of notes payable included in the accompanying balance sheet as of September 30, 2003 reflects the principal payment requirements of the Amended and Restated Senior Credit Facility. Annual maturities of the Amended and Restated Senior Credit Facility are as follows:
| Principal | |||||
| Payments | |||||
| 2004 | $ | 2,800,000 | |||
| 2005 | 3,400,000 | ||||
| 2006 | 9,800,000 | ||||
| Total | $ | 16,000,000 | |||
The interest rate per annum applicable to the Amended and Restated Senior Credit Facility is a fluctuating rate of interest measured by reference to either: (i) the Index Rate, as defined, plus a borrowing margin of 2.50%; or (ii) the London interbank offered rate (LIBOR), plus a borrowing margin of 3.75%.
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The Amended and Restated Senior Credit Facility contains a number of covenants, which among other things, require the Company to comply with specified financial ratios, including maintenance, as tested on a quarterly basis, of: (A) a Maximum Total Leverage Ratio (the ratio of Total Debt to Annualized Operating Cash Flow (as defined)) of not more than 6.50 to 1.00; (B) a Maximum Senior Leverage Ratio (the ratio of Senior Debt to Annualized Operating Cash Flow (as defined)) of not more than 1.00 to 1.00 (C) an Interest Coverage Ratio (the ratio of Operating Cash Flow (as defined) to Total Cash Interest Expense of not less than 1.50 to 1.00 initially; and (D) a Minimum Fixed Charge Coverage Ratio (the ratio of Annualized Operating Cash Flow (as defined) to the Company’s Fixed Charges (as defined) of not less than 1.00 to 1.00. As of September 30, 2003, the Company was in compliance with the covenants required by the Refinanced Credit Facility.
As of the date of this filling, the Amended and Restated Senior Credit Facility had an outstanding balance of $16,000,000 bearing interest at a LIBOR based interest rate of 4.93%. This interest rate expires in February of 2004, at which time a new rate will be established.
(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.
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 sheet, and consist of the following:
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| 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 and the Port Angeles system during the periods presented in this filing have been reported as discontinued operations in the accompanying statements of operations and comprehensive income, and include the following:
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| For the nine months ended September 30, | |||||||||
| 2003 | 2002 | ||||||||
| Service Revenues | $ | 3,079,389 | $ | 9,337,109 | |||||
| Expenses: | |||||||||
| Cable system operations (including $6,289 and $60,976, net paid to affiliates in 2003 and 2002, respectively) | 1,205,573 | 3,472,334 | |||||||
| General and administrative (including $152,093 and $159,808, net paid to affiliates in 2003 and 2002, respectively) | 573,781 | 1,398,602 | |||||||
| Management fees paid to Parent | 153,637 | 466,856 | |||||||
| Depreciation and amortization | 417,798 | 1,415,516 | |||||||
| 2,350,789 | 6,753,308 | ||||||||
| Income from operations | 728,600 | 2,583,801 | |||||||
| Other income (expense): | |||||||||
| Interest expense | (711,822 | ) | (3,197,020 | ) | |||||
| Gain on sale of systems | 31,525,585 | — | |||||||
| Income (loss) from operation of Aiken and Port Angeles Systems, before income tax expense | 31,542,363 | (613,219 | ) | ||||||
| Income tax expense | (500,000 | ) | — | ||||||
| Income (loss) from operations of Aiken and Port Angeles Systems, net | $ | 31,042,363 | $ | (613,219 | ) | ||||
| For the three months | |||||
| ended September 30, 2002 | |||||
| Service Revenues | $ | 3,117,722 | |||
| Expenses: | |||||
| Cable system operations (including $20,045, net paid to affiliates) | 1,176,199 | ||||
| General and administrative (including $146,876, net paid to affiliates) | 447,172 | ||||
| Management fees paid to Parent | 155,886 | ||||
| Depreciation and amortization | 476,695 | ||||
| 2,255,952 | |||||
| Income from operations | 861,770 | ||||
| Other income (expense): | |||||
| Interest expense | (907,730 | ) | |||
| Loss from operations of Aiken and Port Angeles Systems, net | $ | (45,960 | ) | ||
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In accordance with EITF 87-24, Allocation of Interest to Discontinued Operations, the Company allocated interest expense to discontinued operations using the historic weighted average interest rate applicable to the Revised Senior Credit Facility and approximately $51.8 million in principal payments, which were applied to the Revised Senior Credit Facility as a result of the sale of the Aiken System and the Port Angeles System.
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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 - Nine Months Ended September 30, 2003 and 2002
Revenues totaled $37.2 million for the nine months ended September 30, 2003, an increase of approximately $600,000 or 1.6% over the same period in 2002. Of these revenues, $25.5 million (68%) was derived from basic services, $2.5 million (7%) from premium services, $4.8 million (13%) from expanded basic services, $700,000 (2%) from digital services, $1.9 million (5%) from advertising and $1.8 million (5%) from other sources.
Average monthly revenue per subscriber increased $1.95 or 4.3% from $45.51 for the nine months ended September 30, 2002 to $47.46 for the nine months ended September 30, 2003. This increase is primarily attributable to rate increases implemented during the first quarter of 2003 and increases in advertising revenue.
Cable system operation expenses increased approximately $300,000 or 2.1% from $14.0 million to $14.3 million for the nine months ended September 30, 2003. Programming costs, which represent the primary component of cable system operation expenses, increased approximately $300,000 or 2.7% as a result of rate increases by certain programming vendors and additional costs that were incurred as a result of offering additional channels in some of the Company’s systems.
General and administrative expenses increased approximately $1.6 million or 30.2% from $5.3 million to $6.9 million for the nine months ended September 30, 2003. This increase is primarily attributable to increases in corporate overhead allocations by the Company’s Parent. These corporate overhead allocations 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 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 nine months ended September 30, 2003 increased approximately 1.6% over the same period in the previous year. Management fees are calculated at 5.0% of gross revenues.
Depreciation and amortization expenses for the nine months ended September 30, 2003 remained relatively constant with the same period in 2002.
Interest expense allocated to continuing operations increased approximately $1.3 million, or 18.3% from $7.1 million to $8.4 million for the nine months ended September 30, 2003. This increase is primarily attributable to a $1.9 million reduction in the amount of gains recognized on the Company’s interest rate swap agreements, offset by a $600,000 reduction in interest expense on the Company’s Revised Senior Credit Facility due to lower average outstanding indebtedness as a result of required principal repayments and lower interest rates during 2003 as compared to 2002.
In accordance with EITF 87-24, Allocation of Interest to Discontinued Operations, the Company allocated interest expense to discontinued operations using the historic weighted average interest rate applicable to the Revised Senior Credit Facility and approximately $51.8 million in principal payments, which were applied to the Revised Senior Credit Facility as a result of the sale of the Aiken System and the Port Angeles System.
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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.
Results of Continuing Operations - Three Months Ended September 30, 2003 and 2002
Revenues totaled $12.4 million for the three months ended September 30, 2003, an increase of approximately $200,000 or 1.6% over the same period in 2002. Of these revenues, $8.4 million (67%) was derived from basic services, $800,000 (6%) from premium services, $1.6 million (13%) from expanded basic services, $200,000 (2%) from digital services, $700,000 (6%) from advertising and $700,000 (6%) from other sources.
Average monthly revenue per subscriber increased $1.80 or 3.9% from $46.01 for the three months ended September 30, 2002 to $47.81 for the three months ended September 30, 2003. This increase is primarily attributable to rate increases implemented during the first quarter of 2003 and increased advertising revenue.
Cable system operation expenses for the three months ended September 30, 2003 remained relatively constant with the same period in 2002.
General and administrative expenses increased approximately $800,000 or 47.1% from $1.7 million to $2.5 million for the three months ended September 30, 2003. This increase is primarily attributable to increases in corporate overhead allocations by the Company’s Parent. These corporate overhead allocations 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 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 September 30, 2003 increased approximately 1.6% 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 September 30, 2003 remained relatively constant with the same period in 2002.
Interest expense allocated to continuing operations increased approximately $500,000, or 20.8% from $2.4 million to $2.9 million for the three months ended September 30, 2003. This increase is primarily attributable to a $600,000 gain recognized on the Company’s interest rate swap agreements in 2002, offset by a $100,000 reduction in interest expense on the Company’s Revised Senior Credit Facility due to lower average outstanding indebtedness as a result of required principal repayments and lower interest rates during 2003 as compared to 2002.
In accordance with EITF 87-24, Allocation of Interest to Discontinued Operations, the Company allocated interest expense to discontinued operations using the historic weighted average interest rate applicable to the Revised Senior Credit Facility and approximately $51.8 million in principal payments, which were applied to the Revised Senior Credit Facility as a result of the sale of the Aiken System and the Port Angeles System.
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.
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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 the issuance of senior subordinated notes. The Company does not have any required principal payments for the remainder of 2003. The Company anticipates that cash flow from operations will be sufficient to service its debt over the next twelve month period.
Net cash provided by operating activities was $6.6 million for the nine months ended September 30, 2003. Adjustments to the $29.9 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 primarily to the sales of the Aiken System and the Port Angeles System, offset by $7.0 million of depreciation and amortization and increases in operating liabilities of approximately $500,000.
Net cash provided by investing activities was $48.7 million for the nine months ended September 30, 2003, and consisted primarily of $53.4 million of net proceeds from the sales of the Aiken System and the Port Angeles System, offset by $4.7 million in capital expenditures.
Net cash used in financing activities consisted of $52.7 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 $1.4 million or 9.0%, from $15.6 million to $14.2 million for the nine months ended September 30, 2003, and EBITDA margin decreased from 42.5% to 38.0%. 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 $200,000, or 18.2%, from $1.1 million to $1.3 million for the nine months ended September 30, 2003. This increase is attributable to the aforementioned decline in EBITDA, offset by declining interest expense and capital expenditures.
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:
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| For the nine months ended | ||||||||
| September 30, | ||||||||
| 2003 | 2002 | |||||||
| Net cash provided by operating activities | 6,611,676 | 8,016,342 | ||||||
| Interest expense, excluding amortization of loan fees | 8,184,756 | 8,783,251 | ||||||
| Changes in certain assets and liabilities, and other, net | (640,929 | ) | (1,199,364 | ) | ||||
| EBITDA | 14,155,503 | 15,600,229 | ||||||
| Interest expense, excluding amortization of loan fees | (8,184,756 | ) | (8,783,251 | ) | ||||
| Capital expenditures | (4,691,180 | ) | (5,753,630 | ) | ||||
| Free cash flow | 1,279,567 | 1,063,348 | ||||||
Amended and Restated Senior Credit Facility
On November 13, 2003, the Company amended and restated its existing senior credit facility (the “Amended and Restated Senior Credit Facility”). The Amended and Restated Senior Credit Facility establishes a term loan in the amount of $15,000,000 and a $2,000,000 revolving credit loan, under which the Company borrowed $1,000,000 upon amendment and restatement. The proceeds from The Amended and Restated Senior Credit Facility were used to repay the Company’s existing senior credit facility, with a balance of $15,351,534 at September 30, 2003, to provide working capital and for other general purposes. The Amended and Restated Senior Credit Facility matures on December 31, 2006 and requires the Company to make quarterly principal payments beginning March 31, 2004. The current portion of notes payable included in the accompanying balance sheet as of September 30, 2003 reflects the principal payment requirements of the Amended and Restated Senior Credit Facility. Annual maturities of the Amended and Restated Senior Credit Facility are as follows:
| Principal | |||||
| Payments | |||||
| 2004 | $ | 2,800,000 | |||
| 2005 | 3,400,000 | ||||
| 2006 | 9,800,000 | ||||
| Total | $ | 16,000,000 | |||
The interest rate per annum applicable to the Amended and Restated Senior Credit Facility is a fluctuating rate of interest measured by reference to either: (i) the Index Rate, as defined, plus a borrowing margin of 2.50%; or (ii) the London interbank offered rate (LIBOR), plus a borrowing margin of 3.75%.
The Amended and Restated Senior Credit Facility contains a number of covenants, which among other things, require the Company to comply with specified financial ratios, including maintenance, as tested on a quarterly basis, of: (A) a Maximum Total Leverage Ratio (the ratio of Total Debt to Annualized Operating Cash Flow (as defined)) of not more than 6.50 to 1.00; (B) a Maximum Senior Leverage Ratio (the ratio of Senior Debt to Annualized Operating Cash Flow (as defined)) of not more than 1.00 to 1.00 (C) an Interest Coverage Ratio (the ratio of Operating Cash Flow (as defined) to Total Cash Interest Expense of not less than 1.50 to 1.00 initially; and (D) a Minimum Fixed Charge Coverage Ratio (the ratio of Annualized Operating Cash Flow (as defined) to the Company’s Fixed Charges (as defined) of not less than 1.00 to
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1.00. As of September 30, 2003, the Company was in compliance with the covenants required by the Refinanced Credit Facility.
As of the date of this filling, the Amended and Restated Senior Credit Facility had an outstanding balance of $16,000,000 bearing interest at a LIBOR based interest rate of 4.93%. This interest rate expires in February of 2004, at which time a new rate will be established.
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 additional borrowings of $648,466 and the revised payment terms of the Amended and Restated Senior Credit Facility and the sales of the Aiken System and the Port Angeles System for the remainder of 2003 and in future years:
| Expected Maturity Date | ||||||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | ||||||||||||||||||||||
| Debt maturity | $ | — | $ | 2,800,000 | $ | 3,400,000 | $ | 9,800,000 | $ | 100,000,000 | $ | — | $ | 116,000,000 | ||||||||||||||
| Interest payments (weighted average interest rate of 9.52% as of September 30, 2003) | 5,326,582 | 10,969,780 | 10,816,950 | 10,491,570 | 10,250,000 | — | 47,854,882 | |||||||||||||||||||||
| Minimum operating lease payments | 20,833 | 74,296 | 55,331 | 44,663 | 37,006 | 53,831 | 285,960 | |||||||||||||||||||||
| Total contractual cash obligations (a) | $ | 5,347,415 | $ | 13,844,076 | $ | 14,272,281 | $ | 20,336,233 | $ | 110,287,006 | $ | 53,831 | $ | 164,140,842 | ||||||||||||||
| (a) | These contractual obligations do not include accounts payable and accrued liabilities, which are expected to be paid in 2003. |
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Capital Expenditures
For the nine months ended September 30, 2003, the Company incurred capital expenditures of approximately $4.7 million. Capital expenditures included: (i) the launch of high-speed data services, (ii) continued deployment of new product digital services; (iii) expansion and improvement of cable properties; (iv) additions to plant and equipment, and; (v) line drops, extensions and installations of cable plant facilities.
The Company plans to invest approximately $2.5 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 high-speed data services in selected markets. Furthermore, capital expenditures will involve extensions of distribution facilities to add new subscribers and vehicle replacements.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 143– 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 retirement of tangible long lived assets and associated asset retirement obligations (“ARO”). Under the scope of this pronouncement, the Company has ARO associated with the 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.
Statement of Financial Accounting Standards No. 149– In April of 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and other hedging activities under SFAS No. 133. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial statements.
Statement of Financial Accounting Standards No. 150- In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which addresses financial accounting and reporting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously many of those financial instruments were classified as equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of the Statement did not have a material impact on the Company’s operating results or financial position.
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.
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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 circumstances change that would reduce the fair value of a reporting unit below its carrying value.
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 $154,000.
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
Based on their evaluation as of the end of the period covered by this report, the Company’s Chief Executive Officer and President (Principal Financial and Accounting Officer) have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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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
| 31(a). | Certification of Chief Executive Officer dated November 14, 2003 pursuant to section 302 of the Sarbanes-Oxley Act | |
| 31(b). | Certification of President (Principal Financial and Accounting Officer) dated November 14, 2003 pursuant to section 302 of the Sarbanes-Oxley Act | |
| 32(a). | Certification of Chief Executive Officer dated November 14, 2003 pursuant to section 906 of the Sarbanes-Oxley Act | |
| 32(b). | Certification of President (Principal Financial and Accounting Officer) dated November 14, 2003 pursuant to section 906 of the Sarbanes-Oxley Act |
(b) Reports on Form 8-K
None
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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 | 11-14-03 | ||
| /s/ GARY S. JONES Gary S. Jones | President | 11-14-03 |