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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q


x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934


For the quarterly period ended March 31, 2004

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: 333-43157

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  o Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes  o     No  x




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TABLE OF CONTENTS  PART 1  FINANCIAL INFORMATIONITEM 1. Financial StatementsNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. Quantitative and Qualitative Disclosures About Market RiskITEM 4. Controls and ProceduresPART II  OTHER INFORMATIONITEM 1 Legal proceedingsITEM 2 Changes in securitiesITEM 3 Defaults upon senior securitiesITEM 4 Submission of matters to a vote of security holdersITEM 5 Other informationITEM 6 Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT 31.(A)EXHIBIT 31.(B)EXHIBIT 32.(A)EXHIBIT 32.(B)    Table of Contents  
 PART 1  FINANCIAL INFORMATION 
 ITEM 1. Financial Statements NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS  (UNAUDITED) March 31,
    
    December 31,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    6,205,560
    
    
    $
    2,134,254Due from Parent and affiliates
    
    
    1,111,931
    
    
    
    653,029Accounts receivable
    
    
    1,331,193
    
    
    
    1,663,699System sale receivable  current
    
    
    
    
    
    
    4,279,968Prepaid expenses
    
    
    498,952
    
    
    
    464,934Total current assets
    
    
    9,147,636
    
    
    
    9,195,884Investment in Cable Television Properties:Property and equipment, net of accumulated
depreciation of $61,854,564 and $60,525,405,
respectively
    
    
    41,691,235
    
    
    
    42,223,109Franchise agreements, net of accumulated amortization
of $38,923,291
    
    
    39,493,670
    
    
    
    39,493,670Goodwill, net of accumulated amortization
of $2,407,104
    
    
    3,937,329
    
    
    
    3,937,329Other intangible assets, net of accumulated amortization
of $3,212,264 and $3,205,791, respectively
    
    
    64,723
    
    
    
    71,197Total investment in cable television properties
    
    
    85,186,957
    
    
    
    85,725,305System sale receivable
    
    
    433,200
    
    
    
    Loan fees, net of accumulated amortization of $2,413,925
and $2,307,604, respectively
    
    
    1,666,962
    
    
    
    1,727,629Total assets
    
    $
    96,434,755
    
    
    $
    96,648,818LIABILITIES
AND SHAREHOLDERS DEFICITCurrent Liabilities:Accounts payable
    
    $
    58,707
    
    
    $
    700,984Subscriber prepayments
    
    
    1,558,524
    
    
    
    1,401,200Accrued expenses
    
    
    6,896,212
    
    
    
    5,034,606Converter deposits
    
    
    105,550
    
    
    
    107,101Due to affiliates
    
    
    60,910
    
    
    
    96,847Current portion of notes payable
    
    
    2,950,000
    
    
    
    2,800,000Total current liabilities
    
    
    11,629,903
    
    
    
    10,140,738Notes payable, net of current portion
    
    
    112,350,000
    
    
    
    113,200,000Deferred tax liabilities
    
    
    459,194
    
    
    
    152,194Total liabilities
    
    
    124,439,097
    
    
    
    123,492,932Shareholder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
    
    
    
    12,359,377Accumulated deficit
    
    
    (40,363,719
    )
    
    
    (39,203,491
    )Total shareholders deficit
    
    
    (28,004,342
    )
    
    
    (26,844,114
    )Total liabilities and shareholders deficit
    
    $
    96,434,755
    
    
    $
    96,648,818
 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  (UNAUDITED) For the three months ended March 31,2004
    
    2003Service revenues
    
    $
    12,523,682
    
    
    $
    12,405,755Expenses:Cable system operations (including
$8,055 and $69,995, net paid to affiliates
in 2004 and 2003, respectively), exclusive of
depreciation and amortization shown below
    
    
    5,186,153
    
    
    
    5,032,126General and administrative (including
$625,825 and $461,045 net paid to affiliates in
2004 and 2003, respectively)
    
    
    2,288,034
    
    
    
    1,947,332Management fees paid to Parent
    
    
    626,184
    
    
    
    620,288Depreciation and amortization
    
    
    2,302,168
    
    
    
    2,177,256Loss (gain) on disposal of assets
    
    
    99,057
    
    
    
    (174
    )Total operating expenses
    
    
    10,501,596
    
    
    
    9,776,828Income from operations
    
    
    2,022,086
    
    
    
    2,628,927Other income (expense):Interest expense and amortization of loan fees
    
    
    (2,897,809
    )
    
    
    (2,722,424
    )Other, net
    
    
    24,905
    
    
    
    7,279(2,872,904
    )
    
    
    (2,715,145
    )Loss from continuing operations before income
tax expense
    
    
    (850,818
    )
    
    
    (86,218
    )Income tax expense
    
    
    (309,410
    )
    
    
    (88,832
    )Loss from continuing operations
    
    
    (1,160,228
    )
    
    
    (175,050
    )Discontinued operations (note 4)Income from operations of Aiken and Port
Angeles Systems, net of tax of $500,000 in 2003
(including gain on sale of systems of $31,525,585
in 2003)
    
    
    
    
    
    
    31,042,363Net (loss) income
    
    
    (1,160,228
    )
    
    
    30,867,313
 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 three months ended March 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (1,160,228
    )
    
    $
    30,867,313Adjustments to reconcile net (loss) income to
cash provided by operating activities:Depreciation and amortization
    
    
    2,302,168
    
    
    
    2,595,054Unrealized gain on interest rate swap agreements
    
    
    
    
    
    
    (120,377
    )Amortization of loan fees
    
    
    135,071
    
    
    
    170,140(Gain) loss on disposal of assets
    
    
    99,057
    
    
    
    (31,525,759
    )Deferred income taxes
    
    
    307,000
    
    
    
    81,422Other
    
    
    14,705
    
    
    
    (Increase) decrease in operating assets:Accounts receivable
    
    
    332,506
    
    
    
    366,890Prepaid expenses
    
    
    (34,018
    )
    
    
    (105,805
    )Due from Parent and affiliates
    
    
    (458,902
    )
    
    
    (249,381
    )Increase (decrease) in operating liabilitiesAccounts payable and accrued expenses
    
    
    1,219,329
    
    
    
    1,570,943Due to affiliates
    
    
    (35,937
    )
    
    
    (10,609
    )Converter deposits
    
    
    (1,551
    )
    
    
    581Subscriber prepayments
    
    
    157,324
    
    
    
    (227,130
    )Net cash provided by operating activities
    
    
    2,876,524
    
    
    
    3,413,282CASH FLOWS FROM INVESTING ACTIVITIES:Investment in cable television properties
    
    
    (1,877,582
    )
    
    
    (1,073,540
    )Proceeds from sale of cable system, net
    
    
    3,846,768
    
    
    
    53,445,107Proceeds from disposal of assets
    
    
    
    
    
    
    600Net cash provided by investing activities
    
    
    1,969,186
    
    
    
    52,372,167CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on borrowings
    
    
    (700,000
    )
    
    
    (51,804,648
    )Loan fees
    
    
    (74,404
    )
    
    
    Net cash used in financing activities
    
    
    (774,404
    )
    
    
    (51,804,648
    )INCREASE IN CASH
    
    
    4,071,306
    
    
    
    3,980,801CASH, beginning of period
    
    
    2,134,254
    
    
    
    1,666,097CASH, end of period
    
    $
    6,205,560
    
    
    $
    5,646,898SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    206,189
    
    
    $
    982,009Cash paid during the period for state income taxes
    
    $
    2,410
    
    
    $
    7,410
 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004
(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 full presentation of the consolidated
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 Companys consolidated financial
position at March 31, 2004, its consolidated statements of operations for
the three months ended March 31, 2004 and 2003 and its consolidated
statements of cash flows for the three months ended March 31, 2004.
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, 2003. 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, which served
approximately 21,850 subscribers. This filing and the accompanying
financial statements present the results of operations and the sale of the
Port Angeles and Aiken systems as discontinued operations. 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.




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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 as follows: 2004 (9 months)
    
    
    369,0002005
    
    
    492,0002006
    
    
    492,0002007
    
    
    314,000$
    1,667,000
 Other intangibles are being amortized using the straight-line method.
Future amortization of these other intangibles is expected to be as
follows: 2004 (9 months)
    
    
    19,0002005
    
    
    26,0002006
    
    
    20,000$
    65,000
 (3) Amended and Restated Senior Credit Facility In November 2003, the Company amended and restated its existing senior
credit facility (the Amended and Restated Senior Credit Facility). The
amendment and restatement resulted in the elimination of the lending
syndicate and the assumption of the credit facility by one of the
syndicate members. Accordingly, the Company wrote off remaining deferred
loan fee costs during the fourth quarter of 2003, which resulted in a
loss on extinguishment of debt of approximately $257,000. The Company
also capitalized loan fee costs of approximately $292,000 during the
fourth quarter of 2003, which were paid to the lender in connection with
the transaction. 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, 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. Remaining annual maturities of the
Amended and Restated Senior Credit Facility are as follows: PrincipalPayments2004 (9 months)
    
    $
    2,100,0002005
    
    
    3,400,0002006
    
    
    9,800,000Total
    
    $
    15,300,000
 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 March 31, 2004, the Company was out of compliance with its Fixed
Charge Ratio covenant, however, appropriate waivers have been obtained
from the Companys lender. Management believes that it is probable that
the Company will be in compliance with its loan covenants throughout the
remainder of 2004. As of the date of this filing, the Amended and Restated Senior Credit
Facility had an outstanding balance of $15,300,000, and applicable
interest rates are as follows; $12,000,000 at a LIBOR based interest rate
of 4.88%, $2,300,000 at a LIBOR based interest rate of 4.86%, and
$1,000,000 at a LIBOR based interest rate of 4.86%. These interest rates
expire during the second quarter of 2004, at which time, new rates will
be established. These rates also include a margin paid to the Companys
lender, as discussed above. (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. Substantially all of the proceeds
were used to pay down amounts outstanding under the Companys Senior
Credit Facility. The sales price was adjusted at closing for the
proration of certain revenues and expenses and approximately $575,000 was
to be held in escrow and released to the Company one year from the
closing of the transaction, subject to general representations and
warranties. In March of 2004, the Company received notice from the buyer
of the Port Angeles system of certain claims, which were made under the
hold back agreement provisions of the purchase and sale agreement.
Management believes that such claims are unsubstantiated and intends to
vigorously contest such claims. However, approximately $435,000 of the
original escrow proceeds will remain in escrow until such claims are
resolved. The Company has filed a lawsuit against the buyer of the Port
Angeles System for recovery of the remaining escrow proceeds and
unspecified damages. The escrow proceeds in excess of the claims were
released to the Company in March of 2004. 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. Substantially all of the proceeds were used to
pay down amounts outstanding under the Companys Senior Credit Facility.
The sales price was adjusted at closing for the proration of certain
revenues and expenses and approximately $3.7 million was held in escrow
and released, in full, to the Company in March of 2004. The revenue, expenses and other items attributable to the operations of
the Aiken and Port Angeles systems during the first quarter of 2003,
through the date the respective systems were sold, have been reported as
discontinued operations in the accompanying statements of operations, and
include the following:




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For the three months endedMarch 31, 2003Service revenues
    
    $
    3,079,389Expenses (income):Cable system operations (including $6,289, net paid to affiliates)
    
    
    1,254,073General and administrative (including $152,093 paid to affiliates)
    
    
    525,281Management fees paid to Parent
    
    
    153,637Depreciation and amortization
    
    
    417,798Gain on disposal of assets
    
    
    (31,525,585
    )Total operating expenses (income), net
    
    
    (29,174,796
    )Income from operations
    
    
    32,254,185Other expense:Interest expense and amortization of loan fees
    
    
    (711,822
    )(711,822
    )Income from operations before income tax expense
    
    
    31,542,363Income tax expense
    
    
    (500,000
    )Net income
    
    
    31,042,363
 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 and Port Angeles systems.




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PART I (continued) 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Continuing Operations  Three Months Ended March 31, 2004 and 2003 Revenues from continuing operations totaled $12.5 million for the three
months ended March 31, 2004, an increase of approximately $100,000 or
0.8% over the same period in 2003. Of the 2004 revenues, $8.6 million
(69%) was derived from basic services, $800,000 (6%) from premium
services, $1.7 million (14%) from expanded basic services, $200,000 (2%)
from digital services, $300,000 (2%) from high-speed Internet services,
$400,000 (3%) from advertising and $500,000 (4%) from other sources. Average monthly revenue from continuing operations per subscriber
increased $2.50 or 5.3% from $46.97 for the three months ended March 31,
2003 to $49.47 for the three months ended March 31, 2004. This increase
is primarily attributable to rate increases implemented during the first
quarter of 2004 and increased revenue from the Companys high speed
Internet product offering, offset by decreased advertising revenue. Cable system operation expenses attributable to continuing operations
increased approximately $200,000, or 4.0% from $5.0 million to $5.2
million for the three months ended March 31, 2004. This increase is
primarily attributable to increased salary and benefit costs, and
increased programming costs as a result of rate increases by certain
programming vendors. General and administrative expenses attributable to continuing operations
increased approximately $400,000, or 21.1% from $1.9 million to $2.3
million for the three months ended March 31, 2004. 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. The increase is
also attributable to more marketing costs, property insurance costs
and printing charges. Management fees attributable to continuing operations for the three
months ended March 31, 2004 remained relatively constant with the same
period in the previous year. Management fees are calculated at 5.0% of
gross revenues. Depreciation and amortization expenses attributable to continuing
operations for the three months ended March 31, 2004 increased
approximately $100,000, or 4.5% from $2.2 million to $2.3 million for the
three months ended March 31, 2004. The increase is attributable to
depreciation of recent purchases related to the upgrade of plant and
equipment, offset by certain assets becoming fully depreciated or
amortized. Interest expense and amortization of loan fees allocated to continuing
operations increased approximately $200,000, or 7.4% from $2.7 million to
$2.9 million for the three months ended March 31, 2004. This increase is
primarily attributable to a $120,000 unrealized gain recognized on the
Companys interest rate swap agreements during the first quarter of 2003.
This amount is included in the interest expense and amortization of loan
fees line item in the accompanying financial statements. In addition,
the Companys loan fee amortization increased by approximately $35,000 as
a result of the costs incurred with the amendment and restatement of the
Companys senior credit facility in November of 2003. 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 and Port Angeles systems. 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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EBITDA from continuing operations decreased approximately $400,000 or
8.3%, from $4.8 million to $4.4 million for the three months ended March
31, 2004, and EBITDA margin decreased from 38.8% to 35.3% for the quarter
ended March 31, 2004. The aforementioned increases in revenues were
offset by increased cable system operations and general and
administrative expenses resulting from rate increases by certain
programming vendors, increased salary and benefit costs and increased
corporate overhead allocations from the Companys Parent, discussed
above. EBITDA represents a non-GAAP measure and is one of the primary measures
used by our management to evaluate performance and to forecast future
results. EBITDA margin represents EBITDA as a percentage of revenue. We
believe EBITDA is useful to assess performance in a manner similar to the
method used by management, and provides a measure that can be used to
analyze, value and compare the companies in the cable television
industry, which may have different depreciation and amortization
policies. A limitation of this measure is that it excludes depreciation
and amortization, which represents the period costs of certain
capitalized tangible and intangible assets, and gains and losses
recognized on the disposal of assets. It is also not intended to be a
performance measure that should be regarded as an alternative either to
operating income (loss) or net income (loss) as an indicator of operating
performance or to the statement of cash flows as a measure of liquidity
and should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted accounting
principles. Our definitions of EBITDA may not be identical to similarly
titled measures reported by other companies. The following represents a
reconciliation of EBITDA to operating income, which is the most directly
comparable GAAP measure: Three Months Ended March 31,2004
    
    2003EBITDA
    
    
    4,423,311
    
    
    
    4,806,009Depreciation and amortization expense
    
    
    (2,302,168
    )
    
    
    (2,177,256
    )(Loss) gain on disposal of assets
    
    
    (99,057
    )
    
    
    174Operating income
    
    
    2,022,086
    
    
    
    2,628,927Interest expense and amortization of loan fees
    
    
    (2,897,809
    )
    
    
    (2,722,424
    )Other, net
    
    
    24,905
    
    
    
    7,279Loss from continuing operations before
Income tax expense
    
    
    (850,818
    )
    
    
    (86,218
    )Income tax expense
    
    
    (309,410
    )
    
    
    (88,832
    )Loss from continuing operations
    
    
    (1,160,228
    )
    
    
    (175,050
    )
 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 its senior credit facility and the
issuance of senior subordinated notes. The Company anticipates that
cash flow from operations will be adequate to meet its long term
liquidity requirements, prior to the maturity of its senior
subordinated notes, although no assurances can be given in this regard. Net cash provided by operating activities was $2.9 million for the
three months ended March 31, 2004. Adjustments to the $1.2 million net
loss for the period to reconcile to net cash provided by operating
activities consisted primarily of $2.3 million of depreciation and
amortization expense, $307,000 of deferred tax expense, $135,000 of
amortization of loan fees and increases in operating liabilities of
approximately $1.3 million. Net cash provided by investing activities was $2.0 million for the
three months ended March 31, 2004, and consisted primarily of $3.8
million of escrow proceeds that were released to the Company related to
the sales of the Aiken and Port Angeles systems, offset by $1.9
million in capital expenditures.




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Net cash used in financing activities consisted of $700,000 in
scheduled principal payments on the Amended and Restated Senior
Credit Facility and loan fees of $74,000. Amended and Restated Senior Credit Facility In November 2003, the Company amended and restated its existing senior
credit facility (the Amended and Restated Senior Credit Facility). The
amendment and restatement resulted in the elimination of the lending
syndicate and the assumption of the credit facility by one of the
syndicate members. Accordingly, the Company wrote off remaining deferred
loan fee costs, which resulted in a loss on extinguishment of debt of
approximately $292,000. The Company also capitalized loan fee costs of
approximately $257,000, which were paid to the lender in connection with
the transaction. 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, 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. Remaining annual maturities of the
Amended and Restated Senior Credit Facility are as follows: PrincipalPayments2004 (9 months)
    
    $
    2,100,0002005
    
    
    3,400,0002006
    
    
    9,800,000Total
    
    $
    15,300,000
 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 1.00. As
of March 31, 2004, the Company was out of compliance with its Fixed
Charge Ratio covenant, however, appropriate waivers have been obtained
from the Companys lender. As of the date of this filing, the Amended and Restated Senior Credit
Facility had an outstanding balance of $15,300,000, and applicable
interest rates are as follows; $12,000,000 at a LIBOR based interest rate
of 4.88%, $2,300,000 at a LIBOR based interest rate of 4.86%, and
$1,000,000 at a LIBOR based interest rate of 4.86%. These interest rates
expire during the second quarter of 2004, at which time, new rates will
be established. These rates also include a margin paid to the Companys
lender, as discussed above.




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##### Table of Contents



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. Substantially all of the proceeds
were used to pay down amounts outstanding under the Companys Senior
Credit Facility. The sales price was adjusted at closing for the
proration of certain revenues and expenses and approximately $575,000 was
to be held in escrow and released to the Company one year from the
closing of the transaction, subject to general representations and
warranties. In March of 2004, the Company received notice from the buyer
of the Port Angeles system of certain claims, which were made under the
hold back agreement provisions of the purchase and sale agreement.
Management believes that such claims are unsubstantiated and intends to
vigorously contest such claims. However, approximately $435,000 of the
original escrow proceeds will remain in escrow until such claims are
resolved. The Company has filed a lawsuit against the buyer of the Port
Angeles System for recovery of the remaining escrow proceeds and
unspecified damages. The escrow proceeds in excess of the claims were
released to the Company in March of 2004. 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. Substantially all of the proceeds were used to
pay down amounts outstanding under the Companys Senior Credit Facility.
The sales price was adjusted at closing for the proration of certain
revenues and expenses and approximately $3.7 million was held in escrow
and released, in full, to the Company in March of 2004. 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 revenue, expenses and other items attributable to the operations of
the Aiken and Port Angeles systems during the first quarter of 2003,
through the date the respective systems were sold, have been reported as
discontinued operations in the accompanying statements of operations, and
include the following: For the three months endedMarch 31, 2003Service revenues
    
    $
    3,079,389Expenses (income):Cable system operations (including $6,289, net paid to affiliates)
    
    
    1,254,073General and administrative (including $152,093 paid to affiliates)
    
    
    525,281Management fees paid to Parent
    
    
    153,637Depreciation and amortization
    
    
    417,798Gain on disposal of assets
    
    
    (31,525,585
    )Total operating expenses (income), net
    
    
    (29,174,796
    )Income from operations
    
    
    32,254,185Other expense:Interest expense and amortization of loan fees
    
    
    (711,822
    )(711,822
    )Income from operations before income tax expense
    
    
    31,542,363Income tax expense
    
    
    (500,000
    )Net income
    
    
    31,042,363




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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 and Port Angeles systems. Obligations and Commitments In addition to working capital needs for ongoing operations, the Company
has capital requirements for (i) annual maturities related to the
Companys credit facilities and (ii) required minimum operating lease
payments. The following table summarizes the Companys contractual
obligations as of March 31, 2004 and the anticipated effect of these
obligations on its liquidity in future years: Payments Due By PeriodLess than
    
    1  3
    
    3  5
    
    More thanTotal
    
    1 year
    
    years
    
    years
    
    5 yearsTerm loan
    
    $
    115,300,000
    
    
    $
    2,950,000
    
    
    $
    112,350,000
    
    
    $
    
    
    
    $
    Minimum operating
lease payments
    
    
    279,103
    
    
    
    73,784
    
    
    
    159,807
    
    
    
    45,512
    
    
    
    Total
    
    $
    115,579,103
    
    
    $
    2,173,784
    
    
    $
    113,359,807
    
    
    $
    45,512
    
    
    $
    
   (a)
    
    These contractual obligations do not include accounts payable and
accrued liabilities, which are expected to be paid in 2004.(b)
    
    The Company also rents utility poles in its operations. Amounts
due under these agreements are not included in the above minimum
operating lease payments as, generally, pole rentals are cancelable on
short notice. The Company does, however, anticipate that such rentals
will recur. Capital Expenditures For the three months ended March 31, 2004, the Company incurred capital
expenditures of approximately $1.9 million. Capital expenditures
included: (i) expansion and improvements of cable properties including
the launch of high-speed Internet services; (ii) additions to plant and
equipment; (iii) improvement of existing equipment; (iv) cable line drops
and extensions and installations of cable plant facilities; and (v)
vehicle replacements. The Company plans to invest approximately $5.3 million in capital
expenditures for the remainder of 2004. This represents anticipated
expenditures for upgrading and rebuilding certain distribution
facilities, continued deployment of high-speed Internet services,
extensions of distribution facilities to add new subscribers and vehicle
replacements. It is expected that cash flow from operations will be
sufficient to fund planned capital expenditures. 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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##### Table of Contents



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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##### Table of Contents



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 Revised Senior Credit
Facility. 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 the Companys variable rate obligations
would be approximately $153,000. 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 The Company 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) 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 in the Companys internal controls over
financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




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##### Table of Contents



PART II  OTHER INFORMATION 
 ITEM 1 Legal proceedings The Company has filed a lawsuit against the buyer of the Port Angeles
System for recovery of the remaining escrow proceeds and unspecified
damages. 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 May 17, 2004 pursuant to section 302 of the
Sarbanes-Oxley Act31
    
    (b).
    
    Certification of President (Principal
Financial and Accounting Officer) dated May 17, 2004 pursuant
to section 302 of the Sarbanes-Oxley Act32
    
    (a).
    
    Certification of Chief Executive Officer
dated May 17, 2004 pursuant to section 906 of the
Sarbanes-Oxley Act32
    
    (b).
    
    Certification of President (Principal
Financial and Accounting Officer) dated May 17, 2004
pursuant to section 906 of the Sarbanes-Oxley Act
 (b) Reports on Form 8-K None




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##### 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 TELEVISION, INC. AND SUBSIDIARY SIGNATURES
    
    CAPACITIES
    
    DATE/s/ RICHARD I. CLARK

Richard I. Clark
    
    Executive Vice President, Treasurer and
Assistant Secretary
    
    5-17-04/s/ GARY S. JONES
    
    President
    
    5-17-04Gary S. Jones