Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the period endedMarch 31, 2010
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 Number:0-18307
Northland Cable Properties Eight Limited Partnership
| Washington | 91-1423516 | |
| (State of Organization) | (I.R.S. Employer Identification No.) | |
| 101 Stewart Street, Suite 700, Seattle, Washington | 98101 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
(206) 623-1351
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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.
Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
TABLE OF CONTENTS
Table of Contents
PART 1 — FINANCIAL INFORMATION
ITEM 1. Financial Statements
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS — (UNAUDITED)
(Prepared by the Managing General Partner)
CONDENSED BALANCE SHEETS — (UNAUDITED)
(Prepared by the Managing General Partner)
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| ASSETS | ||||||||
| Cash | $ | 296,830 | $ | 447,488 | ||||
| Accounts receivable, net of allowance of $4,000 | 91,763 | 89,501 | ||||||
| Due from affiliates | 30,826 | 33,044 | ||||||
| Prepaid expenses | 111,218 | 58,685 | ||||||
| Property and equipment, net of accumulated depreciation of $9,708,630 and $9,596,125, respectively | 2,577,443 | 2,486,602 | ||||||
| Franchise agreements, net of accumulated amortization of $1,907,136 | 3,152,204 | 3,152,204 | ||||||
| Loan fees, net of accumulated amortization of $93,296 and $92,182, respectively | 12,084 | 443 | ||||||
| Total assets | $ | 6,272,368 | $ | 6,267,967 | ||||
| LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT) | ||||||||
| Accounts payable and accrued expenses | $ | 259,356 | $ | 326,485 | ||||
| Due from General Partner and affiliates | 25,678 | 18,173 | ||||||
| Deposits | 9,450 | 6,400 | ||||||
| Subscriber prepayments | 197,236 | 195,280 | ||||||
| Term loan | 1,378,376 | 1,453,376 | ||||||
| Total liabilities | 1,870,096 | 1,999,714 | ||||||
| Partners’ capital (deficit): | ||||||||
| General Partner: | ||||||||
| Contributed capital, net | 1,000 | 1,000 | ||||||
| Accumulated deficit | (37,014 | ) | (38,354 | ) | ||||
| (36,014 | ) | (37,354 | ) | |||||
| Limited Partners: | ||||||||
| Contributed capital, net (19,087 units) | 8,102,518 | 8,102,518 | ||||||
| Accumulated deficit | (3,664,232 | ) | (3,796,911 | ) | ||||
| 4,438,286 | 4,305,607 | |||||||
| Total partners’ capital | 4,402,272 | 4,268,253 | ||||||
| Total liabilities and partners’ capital | $ | 6,272,368 | $ | 6,267,967 | ||||
The accompanying notes are an integral part of these statements.
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS — (UNAUDITED)
(Prepared by the Managing General Partner)
CONDENSED STATEMENTS OF OPERATIONS — (UNAUDITED)
(Prepared by the Managing General Partner)
| For the three months ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| Service revenues | $ | 1,011,368 | $ | 982,953 | ||||
| Expenses: | ||||||||
| Cable system operations / cost of revenue (including $10,143 and $10,687 to affiliates in 2010 and 2009, respectively), excluding depreciation shown below | 102,691 | 101,020 | ||||||
| General and administrative (including $111,235 and $110,241 to affiliates in 2010 and 2009, respectively) | 254,106 | 238,610 | ||||||
| Programming / cost of revenue (including $5,428 and $3,816 to affiliates in 2010 and 2009, respectively) | 380,412 | 376,097 | ||||||
| Depreciation / cost of revenue | 124,505 | 120,892 | ||||||
| Gain on disposal of assets | — | (561 | ) | |||||
| 861,714 | 836,058 | |||||||
| Income from operations | 149,654 | 146,895 | ||||||
| Other income (expense): | ||||||||
| Interest expense and amortization of loan fees | (11,481 | ) | (11,342 | ) | ||||
| Interest income and other, net | (4,154 | ) | (3,138 | ) | ||||
| (15,635 | ) | (14,480 | ) | |||||
| Net income | $ | 134,019 | $ | 132,415 | ||||
| Allocation of net income: | ||||||||
| General Partner (1%) | $ | 1,340 | $ | 1,324 | ||||
| Limited Partners (99%) | $ | 132,679 | $ | 131,091 | ||||
| Net income per limited partnership unit: | ||||||||
| (19,087 units) | $ | 6.95 | $ | 6.87 | ||||
The accompanying notes are an integral part of these statements.
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF CASH FLOWS — (UNAUDITED)
(Prepared by the Managing General Partner)
CONDENSED STATEMENTS OF CASH FLOWS — (UNAUDITED)
(Prepared by the Managing General Partner)
| For the three months ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | 134,019 | $ | 132,415 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
| Depreciation | 124,505 | 120,892 | ||||||
| Amortization of loan fees | 1,114 | 439 | ||||||
| Gain on sale of assets | (561 | ) | ||||||
| (Increase) decrease in operating assets: | ||||||||
| Accounts receivable | (2,262 | ) | 5,843 | |||||
| Due from affiliates | 2,219 | (3,646 | ) | |||||
| Prepaid expenses | (52,533 | ) | (24,265 | ) | ||||
| Increase (decrease) in operating liabilities: | ||||||||
| Accounts payable and accrued expenses | (67,130 | ) | (24,872 | ) | ||||
| Due to General Partner and affiliates | 7,505 | 5,191 | ||||||
| Subscriber prepayments and deposits | 5,006 | (9,761 | ) | |||||
| Net cash provided by operating activities | 152,443 | 201,675 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (215,346 | ) | (100,016 | ) | ||||
| Proceeds from sale of assets | — | 1,000 | ||||||
| Net cash used in investing activities | (215,346 | ) | (99,016 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Principal payments on borrowings | (75,000 | ) | (65,000 | ) | ||||
| Loan fees | (12,755 | ) | — | |||||
| Net cash used in financing activities | (87,755 | ) | (65,000 | ) | ||||
| (DECREASE) INCREASE IN CASH | (150,658 | ) | 37,659 | |||||
| CASH, beginning of period | 447,488 | 489,846 | ||||||
| CASH, end of period | $ | 296,830 | $ | 527,505 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for interest | $ | 10,375 | $ | 10,786 | ||||
The accompanying notes are an integral part of these statements.
Table of Contents
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation
These unaudited financial statements are being filed in conformity with Rule 10-01 of Regulation S-X regarding interim financial statement disclosure and do not contain all of the necessary footnote disclosures required for a full presentation of the balance sheets, statements of operations and statements of cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, these statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Partnership’s financial position at March 31, 2010, its statements of operations for the three months ended March 31, 2010 and 2009, and its statements of cash flows for the three months ended March 31, 2010 and 2009. 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 Partnership’s Annual Report on Form 10-K for the year ended December 31, 2009.
(2) Intangible Assets
The Partnership does not amortize intangible assets determined to have indefinite lives. The Partnership has determined that its franchises meet the definition of indefinite lived assets. The Partnership tests these assets for impairment on an annual basis during the fourth quarter using financial information as of September 30th, or on an interim basis if an event occurs or circumstances change that would indicate the assets might be impaired.
Loan fees are being amortized using the straight-line method, which approximates the effective interest rate method. Future amortization of loan fees is expected to be approximately as follows:
| 2010 (9 months) | 3,021 | |||
| 2011 | 4,028 | |||
| 2012 | 4,028 | |||
| 2013 (3 Months) | 1,007 | |||
| $ | 12,084 | |||
(3) Term Loan
On February 3, 2010, the Partnership and its existing lender agreed to amend its credit agreement so as to extend the maturity date to March 31, 2013, modify the principal repayment schedule, and modify certain other covenants and provisions of the credit agreement. Interest rates are based on the Adjusted LIBOR Rate, plus a margin of 3.0 percent per annum. The term loan is collateralized by a first lien position on all present and future assets of the Partnership. Principal payments plus interest are due quarterly. In connection with the credit amendment, the Partnership paid $12,755 in additional loan fees, which are being amortized over the extended term of the loan. As of March 31, 2010, the balance of the term loan agreement was $1,378,376.
Annual maturities of the term loan after March 31, 2010 are as follows:
| 2010 | 225,000 | |||
| 2011 | 300,000 | |||
| 2012 | 300,000 | |||
| 2013 | 553,376 | |||
| $ | 1,378,376 | |||
Under the terms of the amended loan agreement, the Partnership has agreed to restrictive covenants which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of no more than 2.00 to 1 decreasing over time to 1.75 to 1 and a Cash Flow Coverage Ratio of no less than 1.25 to 1, among other restrictions.
The General Partner submits quarterly debt compliance reports to the Partnership’s creditor under this agreement. As of March 31, 2010, the Partnership was in compliance with the terms of its loan agreement.
Table of Contents
The Partnership follows general accounting standards that require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. Due to the variable interest rate the carrying value of the term loan approximates fair value.
As of March 31, 2010, the balance under the credit facility was $1,378,376 at a LIBOR based interest rate of 3.25%. This interest rate expired April 30, 2010, at which time the rate became 3.27%.
(4) Litigation
The Partnership is party to ordinary and routine litigation proceedings that are incidental to the Partnership’s business. Management believes that the outcome of all pending legal proceedings will not, individually or in the aggregate, have a material adverse effect on the Partnership, its financial statements, prospects or debt service abilities.
(5) Potential Sale of Systems
On July 5, 2007, Northland Cable Properties Eight Limited Partnership (the “Partnership”) executed a purchase and sale agreement to sell the operating assets and franchise rights of its remaining cable systems serving the communities of Aliceville, Alabama and Swainsboro, Georgia to Green River Media and Communications, LLC (“Green River”), an unaffiliated third party. The transaction was expected to close by the end of March, 2008.
The terms of the purchase and sale agreement include a sales price of $8,100,000, which may be adjusted based on subscription revenue generated prior to closing, and require that approximately ten percent of the gross proceeds be placed in escrow to secure compliance with representations and warranties, to be released to the Partnership eighteen months from the closing of the transaction. Net proceeds to be received upon closing are to be used to pay all remaining liabilities of the Partnership, including transaction costs and amounts outstanding under the Partnership’s Term Loan Agreement (with a balance of $1,378,376 as of March 31, 2010) and to make liquidating distributions to the limited and general partners. Limited partners will receive a final distribution eighteen months from the closing date when the escrow proceeds are released.
On December 19, 2007, the Partnership filed with the Security and Exchange Commission a definitive proxy statement to solicit limited partner approval (i) to authorize the sale of substantially all the assets of the Partnership to Green River, or its assignee with the Partnership’s consent, (ii) to authorize the alternative sale of substantially all of the Partnership’s assets to Northland Communications Corporation, its general partner, or one or more affiliates of Northland Communications Corporation, if the Green River transaction was not consummated by March 31, 2008, or such later date mutually agreed upon by the Partnership and Green River, or in the event that the Green River transaction was otherwise terminated prior to such date (the “Alternative Sale Transaction”), and (iii) to authorize an amendment to the Amended and Restated Agreement of Limited Partnership of the Partnership dated August 10, 1989, to exclude the Alternative Sale Transaction from the independent appraisal procedures that would otherwise be required by the partnership agreement. The purchase agreement that would be entered into with respect to the Alternative Sale Transaction would contain substantially the same terms and conditions as provided in the Green River purchase agreement, except that the general partner’s obligation to close will be subject to the general partner’s ability to secure satisfactory financing. If such condition has not been met within 90 days after the agreement for the Alternative Sale Transaction becomes effective, the general partner would have the right to terminate the alternative purchase agreement without penalty. On February 27, 2008, at the special meeting of limited partners of the Partnership, limited partners voted to approve the three matters discussed above.
On March 31, 2008, the Partnership notified Green River of its termination of the asset purchase agreement dated as of July 5, 2007 between the Partnership and Green River (“the Agreement”). Green River disputed the right of the Partnership to terminate the Agreement and filed a motion in the District Court, City and County of Denver, seeking injunctive relief. Green River’s motion for preliminary injunction was granted by the court.
On September 9, 2008, the District Court, for the City and County of Denver upheld the preliminary injunction enjoining the Partnership from terminating the Agreement. The Partnership appealed the initial injunction order of the District Court as originally entered and as subsequently modified. On May 13, 2010 the Colorado Court of Appeals reversed the opinion of the District Court and remanded the case with instructions to vacate the preliminary injunction. It is uncertain whether Green River will seek reconsideration or appeal the decision of the appellate court. The timing and ultimate disposition of this litigation cannot be determined at this time.
Fees for legal and accounting activities in connection with the aforementioned purchase and sale transaction amounted to $4,283 and $580 for the three months ended March 31, 2010 and 2009, respectively, and have been expensed as incurred within interest income and other in the accompanying statement of operations.
Table of Contents
(6) Fair Value of Assets
We measure certain financial assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the inputs used to determine fair value. These levels are:
| • | Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. | ||
| • | Level 2 — quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active. | ||
| • | Level 3 — significant inputs are unobservable for the asset or liability. |
The following table summarizes the balances of assets measured at fair value on a recurring basis at March 31, 2010.
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Cash | $ | 296,830 | $ | 296,830 | $ | — | $ | — | ||||||||
The following table summarizes the balances of assets measured at fair value on a recurring basis at December 31, 2009.
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Cash | $ | 447,488 | $ | 447,488 | $ | — | $ | — | ||||||||
The Partnership follows the provisions of FASB ASC 820Fair Value Measurements and Disclosures. The carrying values of cash and the variable rate term loan approximate fair value.
(7) Accounting Pronouncements Issued Not Yet Adopted
In September 2009, the FASB ratified Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables (EITF 08-1)). ASU 2009-13 superseded EITF 00-21 and addresses criteria for separating the consideration in multiple-element arrangements. ASU 2009-13 will require companies to allocate the overall consideration to each deliverable by using a best estimate of the selling price of individual deliverables in the arrangement in the absence of vendor-specific objective evidence or other third-party evidence of the selling price. ASU 2009-13 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and early adoption will be permitted. Management is currently evaluating the potential impact, if any, of the adoption of ASU 2009-13 on the Partnership’s results of operations and financial condition.
Table of Contents
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, 2010 and 2009
Total basic subscribers decreased from 4,957 as of March 31, 2009 to 4,654 as of March 31, 2010. The loss in subscribers is a result of several factors including competition from Direct Broadcast Satellite (DBS) providers, availability of off-air signals in the Partnership’s markets and regional and local economic conditions. To address this customer trend, the Partnership is increasing its customer retention efforts and its emphasis on bundling its video, data and phone products.
Revenue totaled $1,011,368 for the three months ended March 31, 2010, an increase of 3% from $982,953 for the three months ended March 31, 2009. Revenues for the three months ended March 31, 2010 were comprised of the following sources:
| • | $718,342 (71%) from basic and expanded video services | ||
| • | $174,052 (17%) from high speed internet services | ||
| • | $35,075 (3%) from premium video services | ||
| • | $11,321 (2%) from telephony services | ||
| • | $10,596 (1%) from advertising | ||
| • | $18,085 (2%) from late fees | ||
| • | $43,897 (4%) from other sources |
Average monthly revenue per subscriber increased $6.01 or approximately 9% from $66.75 for three months ended March 31, 2009 to $72.76 for the three months ended March 31, 2010. This increase is attributable to rate increases implemented throughout the Partnership’s systems during the first quarter of 2010 and increased penetration of new products, specifically, high-speed Internet services. This increase in average monthly revenue per subscriber was offset by the aforementioned decrease in basic subscribers.
Operating expenses, excluding general and administrative, programming, and depreciation expenses, totaled $102,691 for the three months ended March 31, 2010, an increase of approximately 2% from the same period in 2009. The increase is primarily attributable to higher wages offset by a decrease in vehicle operating expense. Employee wages, which represent the largest component of operating expenses, are reviewed annually, and in most cases, increased based on cost of living adjustments and other factors. Therefore, assuming the number of operating and regional employees remains constant, management expects increases in operating expenses in the future.
General and administrative expenses totaled $254,106 for the three months ended March 31, 2010, an increase of approximately 6% from $238,610 for the same period in 2009. This increase is primarily attributable to higher audit fees and copying and printing, offset by a decrease in net bad debt expense.
Programming expenses totaled $380,412 for the three months ended March 31, 2010, representing an increase of $4,315 or approximately 1% over the same period in 2009. The increase is primarily attributable to higher costs charged by various program suppliers and higher costs associated with the increase in high-speed Internet and telephone subscribers, offset by the aforementioned decrease in video subscribers. Rate increases from program suppliers, as well as new fees due to the launch of additional channels, high-speed Internet and telephone services, will contribute to the trend of increased programming costs in the future, assuming that the number of subscribers remains constant.
Depreciation expense totaled $124,505 for the three months ended March 31, 2010, an increase of approximately 3% over the same period in 2009. Depreciation of recent purchases related to the upgrade of plant and equipment were offset by certain assets becoming fully depreciated.
Interest expense and amortization of loan fees totaled 11,481 for the three months ended March 31, 2010, consistent with the same period in 2009.
Interest income and other, net totaled $4,154 and $3,138 for the three months ended March 31, 2010 and 2009, respectively, and consists primarily of costs incurred in connection with the proposed sale of the Partnership’s assets.
Table of Contents
Liquidity and Capital Resources
The Partnership’s primary source of liquidity is cash flow provided by operations. The Partnership generates cash through the monthly billing of subscribers for cable and other services. Based on management’s analysis, the Partnership’s cash flow from operations and cash on hand will be sufficient to cover future operating costs, planned capital expenditures and working capital needs over the next twelve-month period.
Net cash provided by operating activities totaled $152,443 for the three months ended March 31, 2010. Adjustments to the $134,019 net income for the period to reconcile to net cash provided by operating activities consisted primarily of depreciation of $124,505, offset by changes in other operating assets and liabilities of $106,081.
Net cash used in investing activities totaled $215,346 for the three months ended March 31, 2010 and consisted of purchases of property and equipment.
Net cash used in financing activities for the three months ended March 31, 2010 consisted of $75,000 in principal payments on long-term debt and $12,755 in loan fees.
Term Loan
On February 3, 2010, the Partnership and its existing lender agreed to amend its credit agreement so as to extend the maturity date to March 31, 2013, modify the principal repayment schedule, and modify certain other covenants and provisions of the credit agreement. Interest rates are based on the Adjusted LIBOR Rate, plus a margin of 3.0 percent per annum. The term loan is collateralized by a first lien position on all present and future assets of the Partnership. Principal payments plus interest are due quarterly. In connection with the credit amendment, the Partnership paid $12,755 in additional loan fees, which are being amortized over the extended term of the loan. As of March 31, 2010, the balance of the term loan agreement was $1,378,376.
Annual maturities of the term loan after March 31, 2010 are as follows:
| 2010 | 225,000 | |||
| 2011 | 300,000 | |||
| 2012 | 300,000 | |||
| 2013 | 553,376 | |||
| $ | 1,378,376 | |||
Under the terms of the amended loan agreement, the Partnership has agreed to restrictive covenants which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of no more than 2.00 to 1 decreasing over time to 1.75 to 1 and a Cash Flow Coverage Ratio of no less than 1.25 to 1, among other restrictions.
As of the date of this filing, the balance under the credit facility is $1,378,376 at a LIBOR based interest rate of 3.25%. This interest rate expires April 30, 2010, at which time a new rate will be established.
Obligations and Commitments
In addition to working capital needs for ongoing operations, the Partnership has capital requirements for annual maturities related to the refinanced credit facility and required minimum operating lease payments. The following table summarizes the Partnership’s contractual obligations as of March 31, 2010:
| Payments Due By Period | ||||||||||||||||||||
| Less than | 1 — 3 | 3 — 5 | More than | |||||||||||||||||
| Total | 1 year | Years | years | 5 years | ||||||||||||||||
| Notes payable | 1,378,376 | 225,000 | 1,153,376 | — | — | |||||||||||||||
| Minimum operating lease payments | 30,870 | 7,670 | 2,120 | 2,320 | 18,760 | |||||||||||||||
| Total | $ | 1,409,246 | $ | 232,670 | $ | 1,155,496 | $ | 2,320 | $ | 18,760 | ||||||||||
Table of Contents
| (a) | These contractual obligations do not include accounts payable and accrued liabilities, which are expected to be paid in 2010. | |
| (b) | The Partnership also rents utility poles in its operations. Amounts due under these agreements are not included in the above minimum operating lease payments amounts as pole rentals are based on pole usage and are cancelable on short notice. The Partnership does however anticipate that such rentals will recur. Pole rental expense was $100,755 in 2009. | |
| (c) | Note that obligations related to the Partnership’s term loan exclude interest expense as it cannot be determined given the variable interest rate. Interest expense was $39,068 in 2009. |
Capital Expenditures
During the first three months of 2010, the Partnership paid approximately $215,000 for capital expenditures. These expenditures include the launch of HD (high definition) channels in the Swainsboro, GA system and the continued system upgrade to 625MHz in the Aliceville, AL system expanding the channel capacity.
Due to the potential sale of the Partnership’s assets, the level of capital expenditures that may be incurred by the Partnership during the remainder of 2010 is uncertain. Capital expenditures for the remainder of the year will be dependant on the timing of the potential sale however no assurances can be given that such a sale will take place. Planned expenditures include the continuation of distribution plant capacity upgrades in both systems, potential line extension opportunities, customer premise equipment to provide services, and vehicle replacements.
Critical Accounting Policies
This discussion and analysis of financial condition and results of operations is based on the Partnership’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting policies require a more significant amount of management judgment than other accounting policies the Partnership employs.
Revenue Recognition
Cable television 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 and deferred. Revenues resulting from the sale of local spot advertising are recognized when the related advertisements or commercials appear before the public.
Property and Equipment
Property and equipment are recorded at cost. Costs of additions and substantial improvements, which include materials, labor, and other indirect costs associated with the construction of cable transmission and distribution facilities, are capitalized. Indirect costs include employee salaries and benefits, travel and other costs. These costs are estimated based on historical information and analysis. The Partnership performs evaluations of these estimates as warranted by events or changes in circumstances.
The Partnership capitalizes costs associated with initial customer installations. The costs of disconnecting service or reconnecting service to previously installed locations is expensed in the period incurred. Costs for repairs and maintenance are also charged to operating expense, while equipment replacements, including the replacement of drops, are capitalized.
Intangible Assets
The Partnership does not amortize intangible assets determined to have indefinite lives. The Partnership has determined that its franchises meet the definition of indefinite lived assets. The Partnership tests these assets for impairment on an annual basis during the fourth quarter using financial information as of September 30th, or on an interim basis if an event occurs or circumstances change that would indicate the assets might be impaired.
Management believes the franchises have indefinite lives because the franchises are expected to be used by the Partnership for the foreseeable future as determined based on an analysis of all pertinent factors, including changes in legal, regulatory or contractual provisions and effects of obsolescence, demand and competition. In addition, the level of maintenance
Table of Contents
expenditures required to obtain the future cash flows expected from the franchises is 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 Partnership’s franchising authorities and the franchising authorities of the Partnership’s affiliates.
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk
The Partnership is subject to market risks arising from changes in interest rates. The Partnership’s primary interest rate exposure results from changes in the LIBOR rate, which is used to determine the interest rate applicable to the Partnership’s debt facilities. The Partnership 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 Partnership 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 Partnership’s variable rate obligations would be approximately $14,000.
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
The Partnership maintains disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Chief Executive Officer and President (Principal Financial and Accounting Officer) of the Managing General Partner have evaluated these disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q and have determined that such disclosure controls and procedures are effective.
There has been no change during the most recent quarter in the Partnership’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
Table of Contents
PART II — OTHER INFORMATION
ITEM 1Legal proceedings
On March 31, 2008, the Partnership notified Green River of its termination of the asset purchase agreement dated as of July 5, 2007 between the Partnership and Green River (“the Agreement”). Green River disputed the right of the Partnership to terminate the Agreement and filed a motion in the District Court, City and County of Denver, seeking injunctive relief. Green River’s motion for preliminary injunction was granted by the court.
On September 9, 2008, the District Court, for the City and County of Denver upheld the preliminary injunction enjoining the Partnership from terminating the Agreement. The Partnership appealed the initial injunction order of the District Court as originally entered and as subsequently modified. On May 13, 2010 the Colorado Court of Appeals reversed the opinion of the District Court and remanded the case with instructions to vacate the preliminary injunction. It is uncertain whether Green River will seek reconsideration or appeal the decision of the appellate court. The timing and ultimate disposition of this litigation cannot be determined at this time.
The Partnership is party to ordinary and routine litigation proceedings that are incidental to the Partnership’s business. Management believes that the outcome of all pending legal proceedings will not, individually or in the aggregate, have a material adverse effect on the Partnership, its financial statements, prospects or debt service abilities.
ITEM 1ARisk Factors
There have been no material changes from the Partnership’s risk factors as disclosed in the 2009 Form 10-K.
ITEM 2Changes in securities
None
ITEM 3Defaults upon senior securities
None
ITEM 4Submission of matters to a vote of security holders
None
ITEM 5Other information
None
ITEM 6Exhibits
| (a) | Exhibit Index |
| 31 (a). | Certification of Chief Executive Officer of Northland Communications Corporation, the General Partner, dated May 14, 2010 pursuant to section 302 of the Sarbanes-Oxley Act | |
| 31 (b). | Certification of President (Principal Financial and Accounting Officer) of Northland Communications Corporation, the General Partner, dated May 14, 2010 pursuant to section 302 of the Sarbanes-Oxley Act | |
| 32 (a). | Certification of Chief Executive Officer of Northland Communications Corporation, the General Partner, dated May 14, 2010 pursuant to section 906 of the Sarbanes-Oxley Act | |
| 32 (b). | Certification of President (Principal Financial and Accounting Officer) of Northland Communications Corporation, the General Partner, dated May 14, 2010 pursuant to section 906 of the Sarbanes-Oxley Act |
Table of Contents
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 PROPERTIES EIGHT LIMITED PARTNERSHIP
BY: Northland Communications Corporation,
General Partner
General Partner
| SIGNATURES | CAPACITIES | DATE | ||
/s/ RICHARD I. CLARK | Executive Vice President, Treasurer and Assistant | 05-14-10 | ||
| Richard I. Clark | Secretary | |||
/s/ GARY S. JONES | President | 05-14-10 | ||
| Gary S. Jones |