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FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
 For the fiscal year ended DECEMBER 31, 2004 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
 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 or organization
    
    (I.R.S. Employer Identification No.)
 AND SUBSIDIARY GUARANTOR: NORTHLAND CABLE NEWS, INC.
(Exact name of registrant as specified in its charter) STATE OF WASHINGTON
    
    91-1638891(State or other jurisdiction of incorporation or organization)
    
    (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 Securities registered pursuant to including Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registered(NONE)
    
    (NONE)
 Securities registered pursuant to Section 12(g) of the Act: 10 1/4% Senior Subordinated Notes due 2007 
  Indicate by check mark whether registrant 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, and has
been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. Yes o No þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes o No þ As of December 31, 2003 the Company had 10,000 shares outstanding, all of which
are held by an affiliate.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT 10.4EXHIBIT 10.5EXHIBIT 31.(A)EXHIBIT 31.(B)EXHIBIT 32.(A)EXHIBIT 32.(B)    Table of Contents  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. 
 PART I 
 ITEM 1. BUSINESS Northland Cable Television, Inc. (the Company), a Washington Corporation, was formed in
October 1985 and owns and operates 31 cable television systems serving small cities, towns, and
rural communities in California, Georgia, South Carolina, North Carolina, Texas and Washington
(collectively the Systems). The Company is a wholly owned subsidiary of Northland
Telecommunications Corporation (NTC), which, together with the Company and its other
affiliates, has specialized in providing cable television and related services in non-urban
markets since 1981. Other subsidiaries of NTC include: NORTHLAND COMMUNICATIONS CORPORATION (NCC)  formed in March 1981 and principally involved
in the ownership and management of cable television systems. NCC is the sole shareholder of
Northland Cable Properties, Inc. NORTHLAND CABLE PROPERTIES, INC. (NCPI)  formed in February 1995 and principally
involved in the direct ownership of local cable television systems. NCPI is the
majority member of Northland Cable Ventures LLC. NORTHLAND CABLE VENTURES LLC (NCV)  formed in June 1998 and principally
involved in the direct ownership of local cable television systems. NCVs
minority member is an LLC principally owned by executives of the Company. NORTHLAND CABLE SERVICES CORPORATION (NCSC)  formed in August 1993 and principally
involved in the support of computer software used in billing and financial record keeping
for, and Internet related services provided by, Northland-affiliated cable systems. Also
provides technical support associated with the build out and upgrade of Northland affiliated
cable systems. Sole shareholder of Cable Ad-Concepts. CABLE AD-CONCEPTS, INC. (CAC)  formed in November 1993 and principally involved in
the sale, development and production of video commercial advertisements that are
cablecast on Northland affiliated cable systems. NORTHLAND MEDIA, INC.  formed in April 1995 as a holding company. Sole shareholder of the
following entity: CORSICANA MEDIA, INC.  purchased in September 1998 from an affiliate and principally
involved in operating an AM radio station serving the community of Corsicana, Texas
and surrounding areas. Since closing its initial acquisition in 1986, the Company has continued to target,
negotiate and complete acquisitions of cable systems and integrate the operation of such systems.
The Company has increased its basic and premium subscribers through strategic acquisitions,
selective system upgrades and extensions of its cable systems. As of December 31, 2004, the total
number of basic subscribers served by the Systems was 79,307, and the Companys penetration rate
(basic subscribers as a percentage of homes passed) was approximately 47%. On March 11 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 Aiken and Port Angeles
systems as discontinued operations. The Company has 74 non-exclusive franchises to operate the Systems. These franchises, which
will expire at various dates through 2022, have been granted by local and county authorities in
the areas in which the Systems operate. While the franchises have defined lives based on the
agreements with the franchising authorities, renewals are routinely granted, and management
expects them to continue to be granted. These franchise agreements are expected to be used by
the Company 2




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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. These assumptions and expectations are supported by managements experience with the
Companys franchising authorities and the franchising authorities of the Companys affiliates.
Franchise fees are paid to the granting governmental authorities. These fees vary between 1% and
5% and are generally based on the respective gross revenues of the Systems in a particular
community. The franchises may be terminated for failure to comply with their respective
conditions. THE SYSTEMS The Companys Systems are divided into four geographical regions. Unless otherwise
indicated, all operating statistical data set forth in the following table and the
region-by-region description of the Systems, which follows, is as of December 31, 2004. AVERAGEMONTHLYPERCENT OF
    
    
    
    
    
    
    
    
    
    REVENUEBASIC
    
    
    
    
    
    BASIC
    
    PREMIUM
    
    
    
    
    
    PER
    
    EBITDAHOMES
    
    SUBSCRIBERS
    
    BASIC
    
    SUBSCRIBERS
    
    SERVICE
    
    PREMIUM
    
    BASIC
    
    MARGINREGION
    
    PASSED(1)
    
    (2)
    
    PENETRATION
    
    (3)
    
    UNITS(4)
    
    PENETRATION
    
    SUBSCRIBER
    
    (5)So. Carolina/No.Carolina/Georgia
    
    
    81,124
    
    
    
    38,745
    
    
    
    47.76
    %
    
    
    48.85
    %
    
    
    16,183
    
    
    
    41.77
    %
    
    $
    53.07
    
    
    
    38.41
    %Washington
    
    
    18,356
    
    
    
    9,342
    
    
    
    50.89
    %
    
    
    11.78
    %
    
    
    3,718
    
    
    
    39.80

    %
    
    $
    48.63
    
    
    
    30.11
    %Texas
    
    
    48,867
    
    
    
    21,458
    
    
    
    43.91
    %
    
    
    27.06
    %
    
    
    8,433
    
    
    
    39.30
    %
    
    $
    49.47
    
    
    
    33.38
    %California
    
    
    19,674
    
    
    
    9,762
    
    
    
    49.62
    %
    
    
    12.31
    %
    
    
    5,323
    
    
    
    54.53
    %
    
    $
    48.20
    
    
    
    29.89
    %Total Systems
    
    
    168,021
    
    
    
    79,307
    
    
    
    47.20
    %
    
    
    100.00
    %
    
    
    33,657
    
    
    
    42.44
    %
    
    $
    50.96
    
    
    
    35.20
    %
   (1)
    Homes passed refers to estimates of the number of dwelling units in a particular
community that can be connected to the distribution system without any further extension of
principal transmission lines. Such estimates are based upon a variety of sources, including
billing records, house counts, city directories and other local sources.(2)
    The number of basic subscribers has been computed by adding the actual number of subscribers
for all non-bulk accounts and the equivalent subscribers for all bulk accounts. The number of
such equivalent subscribers has been calculated by dividing aggregate basic service revenue
for bulk accounts by the full basic service rate for the community in which the account is
located.(3)
    Percentage of all basic subscribers based on an aggregate of all Systems.(4)
    Premium service units represent the number of subscriptions to premium channels.(5)
    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. (See reconciliation of
EBITDA to operating income (loss) included in the Results of Operations section of Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations). The South Carolina/North Carolina/Georgia Region. The South Carolina/North Carolina/Georgia
Region consists of seven headends serving 38,745 subscribers. Three headends, located in
Greenwood and Clemson, South Carolina and Statesboro, Georgia, serve 34,697 subscribers or 89.5%
of the total subscribers in the region. The region is currently operated from four primary local
offices located in Greenwood and Clemson, South Carolina, Statesboro, Georgia and Highlands,
North Carolina. Clemson, South Carolina. The Clemson area systems serve 11,772 subscribers from two headends. The
Clemson system, which is home to Clemson University, is the largest system, serving 11,619
subscribers or approximately 98.7%. 3




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Approximately 63% of the Clemson systems plant has a channel capacity of 450 MHz or better. The
Company currently offers digital television service in the Clemson system and began offering
high-speed Internet services to certain areas in 2003. Additionally, the Clemson area systems
have a strong advertising sales effort, and their principal office and headend sites are owned by
the Company. Greenwood, South Carolina. The Greenwood system serves 15,758 subscribers from three headends,
with 14,174 or approximately 90% of the systems total basic subscribers being served by the
largest headend. The Greenwood system has a minimum of 450 MHz channel capacity. Approximately
60% of the systems plant has a channel capacity of 550 MHz. Although this system employed fiber
optic technology, the Company has constructed an expansion of the fiber optic backbone designed
to support 860 MHz capacity. Additionally, a fiber optic backbone interconnect was constructed
to the Saluda and Edgefield systems for system upgrades and connection, which was completed
during 2003. The Company currently offers digital television service in the Greenwood system and
began offering high-speed Internet services to certain areas during 2003. The Greenwood area has
a diversified industrial base consisting of local, national and foreign manufacturing companies
covering such diverse industries such as pharmaceuticals, photo film textiles, industrial
robotics, gardening seeds and prefabricated homes. The Company owns its office and headend site. Statesboro, Georgia. The Statesboro system serves 8,904 subscribers from a single headend al of
which are served by plant with 450 MHz channel capacity. The Company currently offers digital
television service in the Statesboro system and began offering high-speed Internet services to
certain areas during 2003. The Statesboro system has a strong advertising sales effort and its
office and headend site are owned by the Company. Statesboro is home to Georgia Southern
University. Highlands, North Carolina. The Highlands system serves 2,311 subscribers from a single headend.
Approximately 24% of the systems plant has a channel capacity of 330 MHz channel capacity and 76%
has a channel capacity of 450 MHz. The system currently utilizes and plans to expand a fiber
backbone designed to ultimately support 860 MHz capacity. Highlands is located on a plateau of
the Blue Ridge Mountains where Georgia, North Carolina and South Carolina meet. The Highlands
area has long been a vacation destination for affluent families from many Southern cities. The
area is encircled by 200,000 acres of the End National Forest. One of the main attractions of
Highlands is the areas exclusive golf clubs. The system experiences seasonality in its
subscriber base, the areas low season (winter) and high season (summer) fluctuate by
approximately 700 basic subscribers. The Washington Region. The Washington region consists only of the Moses Lake, Washington
system, as the Companys system serving Port Angeles, Washington was sold during 2003. Moses Lake, Washington. The Moses Lake area systems serve 9,342 subscribers from three headends.
The Moses Lake headend serves 64% of the subscribers. Additionally, the Moses Lake headend has a
channel capacity of 450 MHz and a fiber optic backbone designed to support a 750 MHz capacity.
The Company currently offers digital television service throughout the Moses Lake system and
offers high-speed Internet services to certain areas. The office, three headend sites and a
microwave site are owned by the Company. The three headends are interconnected via microwave for
the delivery of certain off-air broadcast signals imported from the Seattle and Spokane,
Washington markets. Each system maintains a separate headend facility for reception and
distribution of satellite signals. The Othello system currently has a channel capacity of 450
MHz and a majority of the Ephrata system has a channel capacity minimum of 400 MHz . The Texas Region. The Texas Region is characterized by smaller systems, with 15 headends
serving 21,458 subscribers. Seven headends currently serve 83% of the subscribers. Additionally,
the Companys management structure allows it to achieve operating efficiencies, as only five
local offices are required to service the region. Stephenville, Texas. The Stephenville area systems serve 4,696 subscribers from a cluster of four
headends. Stephenville is home to Tarleton State College, an affiliate of Texas A&M University.
All of the subscribers are currently served by plant with 450 MHz or better channel capacity. The
Company currently offers digital television service in the Stephenville system. The office and
three of the headend sites are owned by the Company. Mexia, Texas. The Mexia area systems serve 8,773 subscribers from a cluster of nine headends,
with the two largest headends, Mexia and Crockett, serving 58% of the subscribers. Approximately
98% of the systems plant has a channel capacity of at least 400 MHz, with the Mexia headend
utilizing a fiber optic backbone. The Company offers digital television service in the Mexia.
The Mexia area has a diversified economy with Nucor Steel, Inc. as a major employer. Marble Falls, Texas. The Marble Falls area systems serve 6,907 subscribers from a cluster of
three headends. Approximately 83% of the subscribers in the area are served from a single
headend. The combination office and headend site in Marble Falls is owned by the Company. Over
the next two to three years the remaining systems in the Marble Falls 4




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area are scheduled to be upgraded to 400 MHz or 550 MHz capacity. The Company currently offers
digital television service in the Marble Falls system and began offering high-speed Internet
services to certain areas during 2003. The Marble Falls region is a popular outdoor recreation
and retirement area for families from nearby Austin and San Antonio. Navasota, Texas.The remaining headend in the Texas region, located in the Navasota, serves
1,082 subscribers, with all of the subscribers served by plant with 400 MHz capacity or better. The California Region. The California Region serves 9,762 subscribers from six headends,
which are operated from three offices located in Yreka, Oakhurst and Mount Shasta, California.
Three headends serve 8,788 subscribers or 90% of the total subscribers in the region. Oakhurst, California. The Oakhurst, California area is one of the entrances to Yosemite National
Park. The Oakhurst area systems serve 3,168 subscribers from a cluster of five headends. The
Oakhurst headend serves 69% of the subscribers in the area. Approximately 83% of the systems
plant has a channel capacity of at least 400 MHz. The Company currently offers digital
television service in the Oakhurst system. Yreka, California. The Yreka, California system, located near Mt. Shasta National Park, serves
2,798 subscribers from a single headend. Yreka is the county seat of Siskiyou County. The Yreka
system currently has a minimum plant capacity of 450 MHz. The Company currently offers digital
television service in the Yreka system and began offering high-speed Internet services to certain
areas in 2004. The Yreka office and headend sites are owned by the Company. Mount Shasta, California. The Mount Shasta, California system, serves 3,796 subscribers from a
primary headend and is located in close proximity to the Companys Yreka system. The system sits
at the base of 14,162 foot Mt. Shasta, which attracts tourists year round with skiing, hiking and
golf courses nearby. The communities of Mount Shasta, Dunsmuir and Weed are connected by fiber
optic backbone and the community of McCloud is connected via AML microwave. Approximately 63% of
the plant has 450 MHz capacity with the remaining plant having 550 MHz capacity. The Company
currently offers digital television service in the Mount Shasta system and began offering
high-speed Internet services during 2003. The Mount Shasta area has a strong economic base.
Forestry, forest services and tourism are the major industries. As of December 31, 2004, the Company had approximately 205 full-time employees and 12
part-time employees. 11 of the Companys employees at its Moses Lake, Washington system are
represented by a labor union. The Company considers its relations with its employees to be good. The Companys cable television business generally is not considered seasonal. Its business
is not dependent upon a single customer or a few customers, the loss of any one or more of which
would have a material adverse effect on its business. No customer accounts for 10% or more of
revenues. No material portion of the Companys business is subject to re-negotiation of profits
or termination of contracts or subcontracts at the election of any governmental unit, except that
franchise agreements may be terminated or modified by the franchising authorities as noted above.
During the last year, the Company did not engage in any research and development activities. Company revenues are derived primarily from monthly payments received from cable television
subscribers. Subscribers are divided into five categories: basic subscribers, expanded basic
subscribers, premium subscribers, digital subscribers, and Internet subscribers. Basic
subscribers are households that subscribe to the basic level of service, which generally
provides access to the three major television networks (ABC, NBC and CBS), a few independent
local stations, PBS (the Public Broadcasting System) and certain satellite programming services,
such as ESPN, CNN or The Discovery Channel. Expanded basic subscribers are households that
subscribe to an additional level of programming service, the content of which varies from system
to system. Premium subscribers are households that subscribe to one or more pay channels in
addition to the basic service. These pay channels include such services as Showtime, Home Box
Office, Cinemax, The Movie Channel, Encore and Starz. Digital subscribers are those who
subscribe to digitally delivered video and audio services where offered. Internet Subscribers
are those who subscribe to the Companys high speed Internet service, which is offered via a
cable modem. COMPETITION Cable television systems currently experience competition from several sources, including
broadcast television, cable overbuilds, direct broadcast satellite services, private cable and
multichannel multipoint distribution service systems, and most recently, a new category of
wireless service recently authorized by the FCC known as Multichannel Video Distribution and Data
Service, or MVDDS. Cable television systems are also in competition in various degrees with
other communications and entertainment media, including motion pictures, home video cassette
recorders, DVDs, Internet data 5




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delivery, Internet video delivery and telecommunications companies. The following provides a
summary description of these sources of competition. Broadcast Television Cable television systems have traditionally competed with broadcast television, which
consists of television signals that the viewer is able to receive directly on his television
without charge using an off-air antenna. The extent of this competition is dependent in part
upon the quality and quantity of signals available by antenna reception as compared to the
services provided by the local cable system. Accordingly, cable operators find it less difficult
to obtain higher penetration rates in rural areas (where signals available off-air are limited)
than in metropolitan areas where numerous, high quality off-air signals are often available
without the aid of cable television systems. The recent licensing of digital spectrum by the FCC
will provide incumbent broadcast licenses with the ability to deliver high definition television
pictures and multiple digital-quality program streams, as well as advanced digital services such
as subscription video. Overbuilds Cable television franchises are not exclusive. More than one cable television system may be
built in the same area. This is known as an overbuild. Overbuilds have the potential to result
in loss of revenues to the operator of the original cable television system. Generally, an
overbuilder is required to obtain franchises from the local governmental authorities, although in
some instances, the overbuilder could be the local government itself and no franchise is
required. An overbuilder would obtain programming contracts from entertainment programmers and,
in most cases, would build a complete cable system such as headends, trunk lines and drops to
individual subscribers homes throughout the franchise areas. Companies with considerable resources have entered the business. These companies include
public utilities to whose poles the Companys cables are attached. Federal law allows telephone
companies to provide a wide variety of services that are competitive with the Companys services,
including video and Internet services within and outside their telephone service areas. Several
telephone companies have begun seeking cable television franchises from local governmental
authorities and are constructing cable television systems. The Company cannot predict at this
time the extent of the competition that will emerge in areas served by the Companys cable
television systems. The entry of telephone companies, public and private utilities and local
governments as direct competitors, however, is likely to continue over the next several years and
could adversely affect the profitability and market value of the Companys systems. Direct Broadcast Satellite Service High powered direct-to-home satellites have made possible the wide-scale delivery of
programming to individuals throughout the United States using small roof-top or wall-mounted
antennas. The two leading DBS providers have experienced dramatic growth over the last several
years. Companies offering direct broadcast satellite service use video compression technology to
increase channel capacity of their systems to more than 100 channels and to provide packages of
movies, satellite networks and other program services which are competitive to those of cable
television systems. DBS companies historically faced significant legal and technological
impediments to providing popular local broadcast programming to their customers. Federal
legislation has reduced this competitive disadvantage, and has reduced the compulsory copyright
fees paid by DBS companies and allowed them to continue offering distant network signals to rural
customers. The availability of low or no cost DBS equipment, delivery of local signals in some
markets and exclusivity with respect to certain sports programming has increased DBSs market
share over recent years. The impact of DBS services on the Companys market share within its
service areas cannot be precisely determined but is estimated to have taken away a significant
number of subscribers. Satellite carriers are attempting to expand their service offerings to
include, among other things, high-speed Internet services and are entering joint marketing
arrangements with local telecommunications providers. Satellite Master Antenna Television Additional competition is provided by private cable television systems, known as satellite
master antenna television (SMATV), serving multi-unit dwellings such as condominiums, apartment
complexes, and private residential communities. These private cable systems may enter into
exclusive agreements with apartment owners and homeowners associations, although some states have
enacted laws to provide cable system access to these facilities. Operators of private cable,
which do not cross public rights of way, are largely free from the federal, state and local
regulatory requirements 6




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imposed on franchised cable television operators. In addition, some SMATV operators are
developing and/or offering packages of telephony, data and video services to private residential
and commercial developments. Mulitchannel Multipoint Distribution Service Systems Cable television systems also compete with wireless program distribution services such as
multichannel, multipoint distribution service systems (MMDSS) commonly called wireless cable,
which are licensed to serve specific areas. MMDSS uses low-power microwave frequencies to
transmit television programming over-the-air to paying subscribers. This industry is less capital
intensive than the cable television industry, and it is therefore more practical to construct
systems using this technology in areas of lower subscriber penetration. High-Speed Internet Services Some of our cable systems are currently offering high-speed Internet services to
subscribers. These systems compete with a number of other companies, many of whom have
substantial resources, such as existing Internet service providers (ISPs) and
telecommunications companies. The deployment of digital subscriber line (DSL) technology allows
Internet access over telephone lines and transmission rates far in excess of conventional modems.
Many local telephone companies are seeking to provide Internet services without regard to their
present service boundaries. Further, the FCC has recently reduced the regulatory burden on local
telephone companies by, for example, reducing their obligation to provide Internet on a wholesale
basis to competitors. A number of cable operators have reached agreements with unaffiliated ISPs to grant them
access to their cable facilities for the purpose of providing competitive Internet services. The
Company has not entered into any such access arrangement. However, we cannot provide any
assurance that regulatory authorities will not impose open access or similar requirements on us
as part of an industry-wide requirement. These requirements could adversely affect our results of
operations. REGULATION AND LEGISLATION Summary The following summary addresses key regulatory issues and legislation affecting the cable
television industry. Other existing federal legislation and regulations, copyright licensing and,
in many jurisdictions, state and local franchise requirements are currently the subject of a
variety of judicial proceedings, legislative hearings and administrative and legislative
proposals, which could change, in varying degrees, the manner in which cable television systems
operate. Neither the outcome of these proceedings nor their impact upon the cable television
industry or the Company can be predicted at this time. Further, our high-speed Internet service,
while not currently regulated, may be subject to regulation in the future. The Company expects to adapt its business to adjust to the changes that may be required
under any scenario of regulation. At this time, the Company cannot assess the effects, if any,
that present regulation may have on the Companys operations and potential appreciation of its
systems. There can be no assurance that the final form of regulation will not have a material
adverse impact on the Companys operations. The operation of a cable system is extensively regulated at the federal, local, and, in some
instances, state levels. The Communications Act of 1934, Cable Communications Policy Act of
1984, the Cable Television Consumer Protection and Competition Act of 1992 (the 1992 Cable
Act), and the 1996 Telecommunications Act (the 1996 Telecom Act, and, collectively, the Cable
Act) are the primary legislation providing for cable regulation and collectively establish a
national policy to guide the development and regulation of cable television systems. The Federal
Communications Commission (FCC) has principal responsibility for implementing the policies of
the Cable Act. Many aspects of such regulation are currently the subject of judicial proceedings
and administrative or legislative proposals. Legislation and regulations continue to change, and
the Company cannot predict the impact of future developments on the cable television industry.
Future regulatory and legislative changes could adversely affect the Companys operations. Among
the more substantial areas regarding our business are the following: 7




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Cable Rate Regulation The 1992 Cable Act imposed an extensive rate regulation regime on the cable television
industry, which limited the ability of cable companies to increase subscriber fees. Under that
prior regime, all cable systems were subject to rate regulation, unless they face effective
competition in their local franchise area. Federal law now defines effective competition on a
community-specific basis as requiring satisfaction of conditions rarely satisfied in the current
marketplace. The FCC itself historically administered rate regulation of cable programming service tiers,
which represent the expanded level of non-basic and non-premium, programming services. The
1996 Telecom Act, however, provided special rate relief for small cable operators offering cable
programming service tiers. The elimination of cable programming service tier regulation afforded
the Company substantially greater pricing flexibility. Although the FCC established the underlying regulatory scheme, local government units,
commonly referred to as local franchising authorities (LFAs), are primarily responsible for
administering the regulation of the lowest level of cable service called the basic service tier.
The basic service tier typically contains local broadcast stations and public, educational, and
government access channels. LFAs also have primary responsibility for regulating cable equipment
rates. Under federal law, charges for various types of cable equipment must be unbundled from
each other and from monthly charges for programming services. Before a local franchising
authority begins basic service rate regulation, it must certify to the FCC that it will follow
applicable federal rules. Many local franchising authorities have voluntarily declined to
exercise their authority to regulate basic service rates, although they may do so in the future.
Under the FCCs rate rules, premium cable services offered on a per-channel or per-program basis
remain unregulated, as do affirmatively marketed packages consisting entirely of new programming
products. In a particular effort to ease the regulatory burden on small cable systems, the FCC created
special rate regulations applicable for systems with fewer than 15,000 subscribers owned by an
operator with fewer than 400,000 subscribers. The special rate regulations allow for a
simplified cost-of-service showing. Almost all of the Companys systems are eligible for these
simplified cost-of-service rules. As of December 31, 2003, several LFAs governing certain of the Companys systems have
properly certified to regulate basic tier rates. However, in accordance with certain notice
requirements under the 1992 Cable Act, other communities may certify and regulate rates. It is,
therefore, possible that additional localities served by the systems may choose to certify and
regulate rates in the future. Certain legislators, however, have called for new rate
regulations. Should this occur, all rate deregulation, including that applicable to small
operators like the Company, could be jeopardized. Cable Entry Into Telecommunications The 1996 Telecom Act creates a more favorable environment for the Company to provide
telecommunications services beyond traditional video delivery. It provides that no state or local
laws or regulations may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. A cable operator is authorized under the
1996 Telecom Act to provide telecommunications services without obtaining a separate local
franchise. States are authorized, however, to impose competitively neutral requirements
regarding universal service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public rights-of-way and
may require reasonable, competitively neutral compensation for management of the public
rights-of-way when cable operators provide telecommunications service. The favorable pole attachment rates afforded cable operators under federal law can be
gradually increased by utility companies owning the poles, beginning in 2001, if the operator
provides telecommunications service, as well as cable service, over its plant. The FCC has
adopted rules, upheld by the courts, that regulate the rates and terms under which utilities must
grant access to their poles. (These regulations do not control the rates and terms under which
electrical cooperatives may decide to grant cable operators access to their poles.) The
utilities have a history of aggressively litigating the various aspects of the FCCs pole
attachment rulemakings, and despite recent favorable court decisions, we expect the utilities to
continue to raise additional issues regarding pole attachments. An adverse decision regarding
pole rates or terms of our agreements could potentially increase our pole attachment costs. High-Speed Internet Service Since its introduction, some local governments and various competitors have sought to impose
regulatory requirements on certain aspects of ISP services. Thus, a few local governments have
sought to impose regulation on cable provision of Internet services, and in each case, the court
has invalidated each such regulation. Similarly, the FCC has refused to classify high-speed
cable data services as a telecommunications service, but rather has classified it as an
interstate 8




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##### Table of Contents



information service. As such, high-speed cable services are currently free from local
regulation. Despite the FCC rulings, several localities have sought judicial review of the FCCs
decision. In addition, the FCC may always consider whether to impose any regulatory
requirements, whether LFAs should be able to impose any fees or other regulations, such as
customer service standards. Further, several LFAs have sued other cable operators seeking
payment of franchise fees on cable Internet services. Currently, the FCC has ruled that such
fees are not allowable. The matter has been addressed by at least one appellate court which has
similarly ruled that Internet services are not subject to LFAs franchise fees. Some local franchising authorities have unsuccessfully tried to impose mandatory Internet
access or open access requirements as part of cable franchise renewals or transfers. In AT&T
Corp v. City of Portland, No. 99-35609 (9th Cir., June 22, 2000), the federal Court of Appeals
for the Ninth Circuit ruled that an LFA may not impose open access requirements as a condition
of transfer of the franchise. The court held that Internet services were not cable services
subject to local regulations, but that Internet services had characteristics of both information
services and telecommunications services. The potential regulatory state and federal
implications of this rationale are unclear, given the various regulatory requirements for the
provision of telecommunications services. In addition to the Ninth Circuit ruling, there have
been several other court rulings that have rejected local imposition of open access conditions
on cable-provided Internet access relying on various other grounds, for example, a cable
companys free speech rights under the First Amendment. Other local authorities have imposed or
may impose mandatory Internet access requirements on cable operators. These developments could
burden the capacity of cable systems and complicate any plans the Company may have to develop for
providing Internet service. Telephone Entry Into Cable Television The 1996 Telecom Act allows telephone companies to compete directly with cable operators by
repealing the historic telephone company/cable cross-ownership ban. Local exchange carriers,
including the regional telephone companies, can now compete with cable operators both inside and
outside their telephone service areas with certain regulatory safeguards. Because of their
resources, local exchange carriers could be formidable competitors to traditional cable
operators. Various local exchange carriers currently are providing video programming services
within their telephone service areas through a variety of distribution methods, including both
the deployment of broadband wire facilities, the use of wireless transmission, and through the
resale of bundled packages that include satellite video services. Electric Utility Entry Into Telecommunications/Cable Television The 1996 Telecomm Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, including cable television, notwithstanding the Public
Utility Holding Company Act. Electric utilities must establish separate subsidiaries, known as
exempt telecommunications companies and must apply to the FCC for operating authority. Like
telephone companies, electric utilities have substantial resources at their disposal, and could
be formidable competitors to traditional cable systems. Several of these utilities have been
granted broad authority by the FCC to engage in activities, which could include the provision of
video programming. Additional Ownership Restrictions The 1996 Telecomm Act eliminates statutory restrictions on broadcast/cable cross-ownership,
including broadcast network/cable restrictions, but leaves in place existing FCC regulations
prohibiting local cross-ownership between co-located television stations and cable systems. The
1996 Cable Act leaves in place existing restrictions on cable cross-ownership with satellite
master antenna television and multichannel multipoint distribution service facilities, but lifts
those restrictions where the cable operator is subject to effective competition. FCC regulations
permit cable operators to own and operate satellite master antenna television systems within
their franchise area, provided that their operation is consistent with local cable franchise
requirements. Must Carry/Retransmission Consent The 1992 Cable Act contains broadcast signal carriage requirements that require cable
operators to carry most commercial and non-commercial broadcast stations without compensation to
the cable operator. Once every three years, local commercial television broadcast stations may
elect between must carry status or retransmission consent status. Under the latter, local
broadcast stations may negotiate the terms of carriage, which may include the payment of fees or
require the carriage of other programming content. As broadcasters transition from analog to
digital transmission technologies, the FCC is considering whether to require cable companies to
simultaneously carry both analog and digital signals of a single broadcaster, and once digital
carriage is required of broadcasters, whether cable companies may be required to carry 9




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multiple digital program streams that each broadcaster may have the capability to transmit
(commonly referred to as Digital Must Carry). If the FCC requires Digital Must Carry, the
Company will have less freedom to allocate the usable spectrum of the cable plant, which in turn,
would diminish our ability to provide those services to our subscribers that we believe they
would be most likely to purchase, such as advanced video services, Internet services and,
perhaps, telecommunications services. As a result, Digital Must Carry could diminish our ability
to attract and retain subscribers. It is not possible to predict whether the FCC will require
Digital Must Carry. To date, the Company has been able to reach mutually acceptable arrangements
with all of the broadcasters who elected retransmission consent. Access Channels Local franchising authorities can include franchise provisions requiring cable operators to
set aside certain channels for public, educational and governmental access programming. Federal
law also requires cable systems to designate a portion of their channel capacity, up to 15% in
some cases, for commercial leased access by unaffiliated third parties. The FCC has adopted rules
regulating the terms, conditions and maximum rates a cable operator may charge for commercial
leased access use. While, in the Companys experience to date, requests for commercial leased
access carriages have been relatively limited, it is always possible that demand could increase
or the revisions could be made to the above requirements that would place further burdens on the
channel capacity of our cable systems. Access to Programming To spur the development of independent cable programmers and competition to incumbent cable
operators, the Act precludes cable operators, satellite services in which they have an
attributable interest, and satellite broadcast programming vendors from hindering the
distribution of satellite delivered programming by any multi-channel video program distributor.
This prohibition prevents satellite delivered programming vendors from favoring their cable
operators over new competitors and requires these programmers to sell their programming to other
multi-channel video distributors. These rules do not apply to cable programmers who are not
affiliated with cable operators or programmers who deliver their service by terrestrial means
(rather than by satellite). Recent mergers and acquisitions in the industry may make vertical
integration of cable operators and programming more difficult in the future. At this time, it is
not possible to predict what facts or circumstances may impact the Companys ability to have
continued access to the programming it currently carries or that might become available in the
future. Multiple Dwelling Unit Inside Wiring; Subscriber Access; Satellite Dish Installations The FCC has established rules that regulate how an incumbent cable operator, upon expiration
of a multiple dwelling units (MDU) service contract, sells, abandons, or removes home run
wiring that was installed by the cable operator in a MDU building. While these inside wiring
rules are expected to assist building owners in their attempts to replace existing cable
operators with new programming providers who are willing to pay the building owner a higher fee,
where this fee is permissible, the FCC has also declined to prohibit exclusive or to cap
perpetual arrangements held by incumbent cable operators with MDU owners. However, in certain
states, local access laws prohibit exclusive arrangements with MDUs. Further, with limited
exceptions, existing federal and FCC regulation prohibit any state or local law or regulations,
or private covenant, private contract, lease provision, homeowners association rule or similar
restriction, impairing the installation, maintenance or use of certain video reception antennas
satellite dishes on property within the exclusive control of a tenant or property owner. Other Regulations of the Federal Communications Commission In addition to the FCC regulations noted above, there are other FCC regulations covering
such areas as the following: equal employment opportunity, set top box regulations, subscriber
privacy, programming practices, including, among other things, syndicated program exclusivity,
network program nonduplication, local sports blackouts, indecent programming, lottery
programming, political programming, sponsorship identification, childrens programming
advertisements, closed captioning, registration of cable systems and facilities licensing,
maintenance of various records and public inspection files, aeronautical frequency usage, lockbox
availability, antenna structure notification, tower marking and lighting, consumer protection and
customer service standards, technical standards, consumer electronics equipment compatibility,
and emergency alert systems. 10




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Enforcement The FCC has the authority to enforce its regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate certain transmission
facilities used in connection with cable operations. Copyright Cable television systems are subject to federal copyright licensing covering carriage of
television and radio broadcast signals. In exchange for filing certain reports and contributing a
percentage of their revenues to a federal copyright royalty pool, cable operators can obtain
blanket permission to retransmit copyrighted material included in broadcast signals. The possible
modification or elimination of this compulsory copyright license is the subject of continuing
legislative review and could adversely affect the Companys ability to obtain desired broadcast
programming. The outcome of this legislative activity cannot be predicted. Copyright clearances
for nonbroadcast programming services are arranged through private negotiations. In addition, cable operators distribute locally originated programming and advertising that
use music controlled by one of the three principal music performing rights organizations: the
American Society of Composers, Authors and Publishers (ASCAP), Broadcast Music, Inc. (BMI), and
SESAC, Inc., originally known as the Society of European Stage Authors and Composers. The cable
industry has had a long series of negotiations and adjudications with these organizations, and we
cannot predict with certainty whether license fee disputes may arise in the future. State and Local Franchise Regulation Cable television systems generally are operated pursuant to nonexclusive franchises granted
by a municipality or other state or local government entity in order to cross public
rights-of-way. Cable franchises generally are granted for fixed terms and in many cases include
monetary penalties for non-compliance and may be terminable if the franchisee fails to comply
with material provisions. The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise may contain provisions governing cable operations, service rates,
franchising fees, system construction and maintenance obligations, system channel capacity,
design and technical performance, customer service standards, and indemnification protections. A
number of states subject cable systems to the jurisdiction of centralized state governmental
agencies, some of which impose regulation of a character similar to that of a public utility.
Although local franchising authorities have considerable discretion in establishing franchise
terms, local franchising authorities cannot demand franchise fees exceeding 5% of the systems
gross revenues derived from cable television services, cannot dictate the particular technology
used by the system, cannot specify video programming other than identifying broad categories of
programming and cannot require cable operators to provide any telecommunications service or
facilities, (other than institutional networks under certain circumstances), as a condition of an
initial cable franchise grant, franchise renewal, or franchise transfer. Federal law contains renewal procedures designed to protect incumbent franchisees against
arbitrary denials of renewal. Even if a franchise is renewed, the local franchising authority may
seek to impose new and more onerous requirements such as significant upgrades in facilities and
service or increased franchise fees as a condition of renewal. Similarly, if a local franchising
authoritys consent is required for the purchase or sale of a cable system or franchise, the
local franchising authority may attempt to impose more burdensome or onerous franchise
requirements in connection with a request for consent. Historically, most of the Companys
franchises have been            renewed and transfer consents granted. 11




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ITEM 2. PROPERTIES The Companys cable television systems are located in and around Stephenville, Marble
Falls, Mexia and Navasota, Texas; Moses Lake, Washington; Clemson and Greenwood, South Carolina;
Highlands, North Carolina; Statesboro, Georgia; and Yreka, Mount Shasta and Oakhurst, California. 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 $433,000 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. A cable television system consists of three principal operating components. The first
component, known as the headend, receives television, radio and information signals generally by
means of special antennas and satellite earth stations. The second component, the distribution
network, which originates at the headend and extends throughout the systems service area,
consists of microwave relays, coaxial or fiber optic cables and associated electronic equipment
placed on utility poles or buried underground. The third component of the system is a drop
cable, which extends from the distribution network into each customers home and connects the
distribution system to the customers television set. An additional component used in certain
systems is the home terminal device, or converter, that expands channel capacity to permit
reception of more than twelve channels of programming on a non-cable ready television set. The Companys principal physical assets consist of cable television systems, including
signal-receiving, encoding and decoding apparatus, headends, distribution systems and subscriber
house drop equipment for each of its systems. The signal receiving apparatus typically includes a
tower, antennas, ancillary electronic equipment and earth stations for reception of satellite
signals. Headends, consisting of associated electronic equipment necessary for the reception,
amplification and modulation of signals, typically are located near the receiving devices. The
Companys distribution systems consist primarily of coaxial cable and related electronic
equipment. As upgrades are completed, the systems will generally incorporate fiber optic cable.
Subscriber equipment consists of traps, house drops and, in some cases, converters. The Company
owns its distribution systems, various office fixtures, test equipment and certain service
vehicles. The physical components of the systems require maintenance and periodic upgrading to
keep pace with technological advances. The Companys cables are generally attached to utility poles under pole rental agreements with
local public utilities, although in some areas the distribution cable is buried in trenches or
placed in underground ducts. The FCC regulates most pole attachment rates under the federal Pole
Attachment Act although in certain cases attachment rates are regulated by state law. The Company owns or leases parcels of real property for signal reception sites (antenna towers
and headends), microwave complexes and business offices. The Company believes that its
properties, both owned and leased, are in good condition and are suitable and adequate for the
Companys business operations as presently conducted. 12




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ITEM 3. 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None. 13




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) There is no established public trading market for the Companys common equity. (b) The Company has one common equity holder as of December 31, 2004. (c) During 2004, the Company did not pay cash dividends and has no intentions of paying cash
dividends in the foreseeable future, due to restrictions in its loan agreements. 
 ITEM 6. SELECTED FINANCIAL DATA The data set forth below should be read in conjunction with Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations and the consolidated financial
statements included in Item 8. Financial Statements and Supplementary Data. For the years ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001 (1)
    
    
    2000 (1)SUMMARY OF OPERATIONS:Revenue
    
    $
    50,469,380
    
    
    $
    49,630,146
    
    
    $
    48,784,362
    
    
    $
    50,039,588
    
    
    $
    48,452,897Operating income
    
    
    8,184,031
    
    
    
    9,665,640
    
    
    
    11,804,492
    
    
    
    17,803,587
    
    
    
    5,110,991(Loss) income from continuing operations
    
    
    (4,347,973
    )
    
    
    (1,965,428
    )
    
    
    1,892,299
    
    
    
    1,937,116
    
    
    
    (13,392,013
    )Income (loss) from discontinued operations (2)
    
    
    
    
    
    
    30,742,979
    
    
    
    (423,649
    )
    
    
    (3,801,834
    )
    
    
    (876,430
    )Net income (loss)
    
    
    (4,347,973
    )
    
    
    28,777,551
    
    
    
    1,468,650
    
    
    
    (1,864,718
    )
    
    
    (14,268,443
    )
   (1)
    
    As of December 31, 2001, the Company discontinued amortization of its franchise
agreements and goodwill in accordance with SFAS No. 142. Amortization of these items
attributable to continuing operations was $8,128,664 and $8,012,500 for the years ended
December 31, 2001 and 2000, respectively.(2)
    
    On March 11 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 results of operations and the sale of these systems
are presented as discontinued operations in this filing and the accompanying financial
statements. As of December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000BALANCE SHEET DATA:Total assets
    
    $
    89,827,798
    
    
    $
    96,648,818
    
    
    $
    121,181,353
    
    
    $
    125,926,194
    
    
    $
    135,997,674Notes payable
    
    
    113,060,000
    
    
    
    116,000,000
    
    
    
    168,031,182
    
    
    
    171,031,182
    
    
    
    182,540,000Total liabilities
    
    
    121,019,885
    
    
    
    123,492,932
    
    
    
    176,803,018
    
    
    
    182,748,509
    
    
    
    192,022,121Shareholders deficit
    
    
    (31,192,087
    )
    
    
    (26,844,114
    )
    
    
    (55,621,665
    )
    
    
    (56,822,315
    )
    
    
    (56,024,447
    )
 14




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##### Table of Contents



For the quarters endedDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,
    
    
    December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2004
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2003
    
    
    2003Revenue
    
    $
    12,563,313
    
    
    $
    12,714,480
    
    
    $
    12,667,905
    
    
    $
    12,523,682
    
    
    $
    12,387,748
    
    
    $
    12,376,798
    
    
    $
    12,459,845
    
    
    $
    12,405,755Operating income
    
    
    2,070,606
    
    
    
    2,050,005
    
    
    
    2,041,334
    
    
    
    2,022,086
    
    
    
    2,203,778
    
    
    
    2,235,842
    
    
    
    2,597,093
    
    
    
    2,628,927(Loss) income from
continuing operations
    
    
    (1,105,104
    )
    
    
    (1,033,544
    )
    
    
    (1,049,097
    )
    
    
    (1,160,228
    )
    
    
    (871,160
    )
    
    
    (641,760
    )
    
    
    (277,458
    )
    
    
    (175,050
    )(Loss) income from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (299,384
    )
    
    
    
    
    
    
    
    
    
    
    31,042,363Net (loss) income
    
    
    (1,105,104
    )
    
    
    (1,033,544
    )
    
    
    (1,049,097
    )
    
    
    (1,160,228
    )
    
    
    (1,170,544
    )
    
    
    (641,760
    )
    
    
    (277,458
    )
    
    
    30,867,313
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 2004 and 2003 Basic subscribers attributable to continuing operations decreased 5,289 or 6%, from 84,596 as of
December 31, 2003 to 79,307 as of December 31, 2004. The loss in subscribers is a result of
several factors including competition from DBS providers, availability of off-air signals in the
Companys markets and regional and local economic conditions. To reverse this customer trend,
the Company is increasing its customer retention efforts and its emphasis on bundling its video
and data products. Revenues attributable to continuing operations increased $0.9 million or 2%, from $49.6 million
to $50.5 million in 2004. Average monthly revenue attributable to continuing operations per basic
subscriber increased $3.29 or 7%, from $47.67 to $50.96 for the year ended December 31, 2004.
This increase is attributable to rate increases implemented in a majority of the Companys
systems during the year and increased penetration of new product tiers, specifically, high-speed
Internet services, offset by the aforementioned decrease in total subscribers and decreased
advertising revenue. Cable system operations expense attributable to continuing operations, which includes costs
related to programming, technical personnel, repairs and maintenance and advertising sales,
increased approximately $0.8 million or 4%, from $20.1 million to $20.9 million for the year
ended December 31, 2004. Cable system operations expenses as a percentage of revenues increased
from 40% to 41% for the year ended December 31, 2004. Such increase is primarily attributable to
annual wage and benefit increases and higher programming costs resulting from rate increases by
certain programming vendors and the launch of new services in various systems, offset by
decreased advertising expenses. General and administrative expenses attributable to continuing operations, which include on-site
office and customer service personnel costs, increased approximately $0.8 million or 10% from
$8.4 million to $9.2 million for the year ended December 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 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. This increase is also
attributable to increased salary and benefit costs, bad debt expense and marketing costs. Management fees from continuing operations remained relatively constant with 2003 management fees
of $2.5 million. Management fees are calculated at 5.0% of gross revenues. 15




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Depreciation and amortization expense attributable to continuing operations increased
approximately 3%, from $8.9 million to $9.2 million in 2004. The increase is attributable to
depreciation of recent purchases related to the upgrade and of plant and equipment, offset
by certain assets becoming fully depreciated or amortized. Interest expense and amortization of loan fees attributable to continuing operations increased
approximately $0.4 million or 4%, from $11.2 million to $11.6 million for the year ended December
31, 2004. The increase is attributable to increased loan fee expense, offset by, decreased
interest expense as a result of lower average outstanding indebtedness due to principal payments
made during 2004, and lower interest rates applicable to the Companys Senior Credit Facility
during 2004 compared to 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 Companys Senior Credit Facility and approximately $51.8 million
in principal payments, which were applied to the Senior Credit Facility as a result of the sale
of the Aiken and Port Angeles systems. 2003 and 2002 Basic subscribers attributable to continuing operations decreased 1,831 or 2%, from 86,427 as of
December 31, 2002 to 84,596 as of December 31, 2003. Revenues attributable to continuing
operations increased $0.8 million or 2%, from $48.8 million to $49.6 million in 2003. Average
monthly revenue attributable to continuing operations per basic subscriber increased $1.89 or 4%,
from $45.78 to $47.67 for the year ended December 31, 2003. This increase is attributable to
rate increases implemented in a majority of the Companys systems during the year and increased
penetration of new product tiers, specifically, high-speed Internet services. Cable system operations expense attributable to continuing operations, which includes costs
related to programming, technical personnel, repairs and maintenance and advertising sales,
increased approximately $0.8 million or 4%, from $19.3 million to $20.1 million for the year
ended December 31, 2003. Cable system operation expenses as a percentage of revenues were
approximately 40% for the years ended December 31, 2003 and 2002. General and administrative expenses attributable to continuing operations, which include on-site
office and customer service personnel costs, increased approximately $2.2 million or 35% from
$6.2 million to $8.4 million for the year ended December 31, 2003. This increase is primarily
attributable to increases in corporate overhead allocations by the Companys Parent. These
corporate overhead allocations had been reduced, 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. This increase is also attributable to
increased salary and benefit costs, bad debt expense and marketing costs. Management fees from continuing operations increased from $2.4 million to $2.5 million for the
year ended December 31, 2003. Such increase was directly attributable to the revenue increases
discussed above. Management fees are calculated at 5.0% of gross revenues. Depreciation and amortization expense attributable to continuing operations increased
approximately 1%, from $8.8 million to $8.9 million in 2003. The increase is attributable to
depreciation of recent purchases related to the upgrade and of plant and equipment, offset
by certain assets becoming fully depreciated or amortized. Interest expense and amortization of loan fees attributable to continuing operations increased
approximately $1.3 million or 13.1%, from $9.9 million to $11.2 million for the year ended
December 31, 2003. This increase is primarily attributable to a $2.1 million unrealized gain
recognized on the Companys interest rate swap agreements in 2002. This amount is included in
the interest expense and amortization of loan fees line item in the accompanying financial
statements. This is offset by a $650,000 reduction in interest expense allocated to continuing
operations. The decreased interest expense is attributable to lower average outstanding
indebtedness due to principal payments made during the third quarter of 2003, and lower interest
rates applicable to the Companys Senior Credit Facility during 2003 compared to 2002. 16




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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 Companys Senior Credit Facility and approximately $51.8 million
in principal payments, which were applied to the Senior Credit Facility as a result of the sale
of the Aiken and Port Angeles systems. EBITDA EBITDA from continuing operations decreased approximately $0.8 million or 4%, from $18.6
million to $17.8 million for the year ended December 31, 2004, and EBITDA margin decreased from
38% to 35% for the year ended December 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 and increased corporate overhead allocations
from the Companys Parent, discussed above. EBITDA from continuing operations decreased approximately $2.2 million or 11%, from $20.8
million to $18.6 million for the year ended December 31, 2003, and EBITDA margin decreased from
43% to 38% for the year ended December 31, 2003. 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 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 (loss), which is the most directly comparable GAAP measure: 17




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2004
    

    
    2003
    
    
    2002EBITDA:EBITDA
    
    $
    17,773,350
    
    
    $
    18,616,212
    
    
    $
    20,812,151Depreciation and amortization expense
    
    
    (9,210,654
    )
    
    
    (8,949,926
    )
    
    
    (8,778,383
    )Loss on disposal of assets
    
    
    (378,665
    )
    
    
    (646
    )
    
    
    (229,276
    )Income from operations
    
    
    8,184,031
    
    
    
    9,665,640
    
    
    
    11,804,492Interest expense and amortization of
loan fees
    
    
    (11,601,797
    )
    
    
    (11,218,849
    )
    
    
    (9,935,420
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (257,391
    )
    
    
    Other, net
    
    
    (70,190
    )
    
    
    29,469
    
    
    
    33,800Loss from continuing operations before
income tax expense
    
    
    (3,487,956
    )
    
    
    (1,781,131
    )
    
    
    1,902,872Income tax expense
    
    
    (860,017
    )
    
    
    (184,297
    )
    
    
    (10,573
    )(Loss) income from continuing operations
    
    
    (4,347,973
    )
    
    
    (1,965,428
    )
    
    
    1,892,299EBITDA MARGIN:EBITDA
    
    $
    17,773,350
    
    
    $
    18,616,212
    
    
    $
    20,812,151Service Revenues
    
    $
    50,469,380
    
    
    $
    49,630,146
    
    
    $
    48,784,362EBITDA Margin
    
    
    35.2
    %
    
    
    37.5
    %
    
    
    42.7
    %
 LIQUIDITY AND CAPITAL RESOURCES The cable television business generally requires substantial capital for the construction,
expansion, improvement and maintenance of the signal distribution system. In addition, the
Company has pursued, and intends to pursue, a business strategy, which includes selective
acquisitions. The Company has financed these expenditures through a combination of cash flow from
operations, proceeds from system sales and borrowings under the Companys credit facilities. For
the years ended December 31, 2004, 2003 and 2002, the Companys cash provided from operations was
$6.9 million, $6.4 million and $9.1 million, respectively, all of which were sufficient to meet
the Companys debt service obligations and capital expenditure requirements for the respective
periods, excluding acquisitions. Based on amounts outstanding as of December 31, 2004, the
Companys debt service obligations including interest, for the years ended December 31, 2005 and
2006 are expected to be approximately $14.4 million and $20.3 million, respectively. The Company
believes that cash flow from operations will be adequate to meet the Companys long-term
liquidity requirements, excluding acquisitions, prior to the maturity of its long-term
indebtedness, although no assurance can be given in this regard. 2004 Cash provided by operating activities was $6.9 million for the year ended December 31, 2004.
Adjustments to the $4.3 million net loss for the period to reconcile to net cash provided by
operating activities consisted primarily of deprecation and amortization of $9.2 million,
amortization of loan fees of $0.6 million and deferred income tax expense of $0.8 million. Cash used in investing activities was $5.0 million for the year ended December 31, 2004, and
consisted primarily of capital expenditures of $9.0 million, offset by proceeds from the sale of
systems of $4.0 million. Cash used in financing activities was $3.1 million for the year ended December 31, 2004, and
consisted of $2.9 million in principal payments on notes payable and payment of additional loan
fees of $0.1 million. 18




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Senior Subordinated Notes In November 1997, the Company issued $100 million of 10 -1/4% senior subordinated notes due
November 15, 2007. Proceeds from the offering were utilized to pay transaction costs and reduce
amounts outstanding under the Companys Senior Credit Facility by $95 million. The indenture
pursuant to which the notes were issued will, among other things, limit the ability of the
Company and its subsidiaries to: (i) incur additional indebtedness or issue preferred stock; (ii)
make certain restricted payments as defined in the indenture; (iii) grant liens on assets; (iv)
merge, consolidate or transfer substantially all of their assets; (v) enter into transactions
with certain related parties; (vi) make certain payments affecting subsidiaries; (vii) sell
assets; and (viii) issue capital stock of subsidiaries. Additionally, the Company has agreed to
restrictive covenants, which require the maintenance of certain ratios, including a debt to
annualized operating cash flow ratio of 6.50 to 1. As of December 31, 2004, the Company was in
compliance with the terms of the Notes. Revised 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 amendment and restatement resulted in the
elimination of the lending syndicate and assumption of the credit facility by one of the
syndicate members. Accordingly, the Company wrote off remaining deferred loan costs, which
resulted in a loss on extinguishment of debt of approximately $300,000. The Company also
capitalized loan fees of approximately $300,000, 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. The current portion of notes payable included in the accompanying
balance sheet as of December 31, 2004 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: PrincipalPayments2005
    
    $
    3,400,0002006
    
    
    9,660,000Total
    
    $
    13,060,000
 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 December 31, 2004
the Company was out of compliance with its Minimum Fixed Charge Coverage Ratio, however, an
appropriate waiver has been obtained. In
March of 2005, the Company further amended the Amended and Restated
Senior Credit Facility such that the Company will be allowed to
retain the net proceeds from the sale of the Navasota system, which
are expected to be approximately $1.2 million. In addition, the
amendment establishes a limitation on the maximum amount of annual
capital expenditures to be incurred during 2005 of $5.7 million
and modifies the Minimum Fixed Charge Coverage Ratio requirement
during 2005 as follows: March 31, 2005
    
    0.80 to 1.00June 30, 2005
    
    0.80 to 1.00September 30, 2005
    
    0.80 to 1.00December 31, 2005
    
    0.90 to 1.00 The
Minimum Fixed Charge Coverage Ratio requirements revert back to the
original requirements of 1.00 to 1.00 in 2006. As of the date of this filing, the balance under the Senior credit facility is approximately
$13.1 million and applicable interest rates are as follows: $12.2 million at a LIBOR based
interest rate of 6.22%, and $0.9 million at a LIBOR based interest rate of 6.13%. These rates
expire during 2005 at which time new rates will be established. 19




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Obligations and Commitments In addition to working capital needs for ongoing operations, the Company has capital requirements
for annual maturities and interest payments related to the term loan and required minimum
operating lease payments. The following table summarizes the Companys contractual obligations
as of December 31, 2004 and the anticipated effect of these obligations on its liquidity in
future years: Payments Due By PeriodLess than 1
    
    
    2  3
    
    
    4  5
    
    
    More than 5Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsCredit Facilities
    
    $
    113,060,000
    
    
    $
    3,400,000
    
    
    $
    109,660,000
    
    
    
    
    
    
    
    Minimum operating lease payments
    
    
    335,408
    
    
    
    104,004
    
    
    
    150,321
    
    
    
    79,116
    
    
    
    1,967Total
    
    $
    113,395,408
    
    
    $
    3,504,004
    
    
    $
    109,810,321
    
    
    $
    79,116
    
    
    $
    1,967
   (a)
    
    These contractual obligations do not include accounts payable and accrued
liabilities, which are expected to be paid in 2005.(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.(c)
    
    Note that obligations related to the Companys credit facilities exclude interest
expense. Capital Expenditures For the year ended December 31, 2004, the Company had capital expenditures of approximately $9.0
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) maintenance 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 $4.5 million in capital expenditures for 2005.
Anticipated expenditures for 2005 include costs to be incurred 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. 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. 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 $433,000 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. 20




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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. In September 2004, the Company sold its systems serving the areas of Buffalo and Jewett,
Texas. These systems served approximately 415 basic subscribers and were sold for approximately
$149,000. The net proceeds from this sale were used to repay amounts outstanding under the
Companys Amended and Restated Senior Credit Facility. The transaction did not have a material
impact on the Companys financial statements. SUBSEQUENT EVENTS In February 2005, the Company executed a purchase and sale agreement to sell its system
serving the community of Navasota, Texas, which serves approximately 1,080 subscribers. The
system will be sold for approximately $1,316,100. Under the terms of
an amendment to the Amended and Restated Senior Credit Facility,
which was executed in March of 2005, the Company will be allowed to
retain these net proceeds, which are expected to be approximately
$1.2 million. The pro forma effect of the transaction will not have a material impact
on the Companys financial statements. 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
require a more significant amount of management judgment than other accounting policies the
Company employs. Revenue Recognition Cable television service revenue, including service and maintenance, is recognized in the
month service is provided to customers. Advance payments on cable services to be rendered
are recorded as subscriber prepayments. Revenues resulting from the sale of local spot
advertising are recognized when the related advertisements or commercials appear before the
public. Property and Equipment Property and equipment are recorded at cost. Costs of additions and substantial improvements,
which include materials, labor, and other indirect costs associated with the construction of
cable transmission and distribution facilities, are capitalized. Indirect costs include
employee salaries and benefits, travel and other costs. These costs are estimated based on
historical information and analysis. The Company periodically performs evaluations of these
estimates as warranted by events or changes in circumstances. In accordance with SFAS No. 51, Financial Reporting by Cable Television Companies, the
Company also capitalizes costs associated with initial customer installations. The costs of
disconnecting service or reconnecting service to previously installed locations is expensed
in the period incurred. Costs for repairs and maintenance are also charged to operating
expense, while equipment replacements are capitalized. Intangible Assets Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 required that the Company cease amortization of goodwill and any other
intangible assets determined to have indefinite lives, and established a new method of
testing these assets for impairment on an annual basis or on an interim basis if an event
occurs or circumstances change that would reduce the fair value of a reporting unit below
its carrying value or if the fair value of intangible assets with indefinite lives falls
below their carrying value on an annual basis. The amortization of existing goodwill ceased
on December 31, 2001. The Company determined that its franchise agreements met the
definition of indefinite lived assets due to the history of obtaining franchise renewals,
among other considerations. Accordingly, amortization of these assets ceased on December
31, 2001. The Company tested these intangibles for impairment as of January 1, 2002 and
again during the fourth quarter of each subsequent year and determined that the fair value
of the assets exceeded their carrying value. The Company will continue to test these assets
for impairment annually, or more frequently as warranted by events or changes in
circumstances. 21




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##### Table of Contents



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 and other
factors are minimal. In addition, the level of 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, without substantial cost. This expectation is supported by managements experience
with the Companys franchising authorities and the franchising authorities of the Companys

affiliates. RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS In
November 2004, the EITF ratified its consensus on Issue
No. 03-13, Applying the Conditions in paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued
Operations (EITF 03-13). EITF 03-13 relates to
components of an enterprise that are either disposed of or
classified as held for sale in fiscal periods beginning after
December 15, 2004. EITF 03-13 allows significant events or
circumstances that occur after the balance sheet date but before the
issuance of financials statements to be taken into consideration in
the evaluation of whether a component should be presented as
discontinued or continuing operations, and modifies assessment period
guidance to allow for an assessment period of greater than one year.
The implementation of EITF 03-13 is not expected to have a material
impact on the Companys consolidated financial statements. ECONOMIC CONDITIONS Historically, the effects of inflation have been considered in determining to what extent rates
will be increased for various services provided. It is expected that the future rate of
inflation will continue to be a significant variable in determining rates charged for services
provided, subject to the provisions of the 1996 Telecom Act. Because of the deregulatory nature
of the 1996 Telecom Act, the Company does not expect the future rate of inflation to have a
material adverse impact on operations. TRANSACTIONS WITH RELATED PARTIES Management Fees The Company pays management fees to NTC equal to 5% of NCTVs gross revenues, excluding revenues
from the sale of cable television systems or franchises. Reimbursements NTC provides or causes to be provided certain centralized services to the Company and other
affiliated entities. NTC is entitled to reimbursement from the Company for various expenses
incurred by it or its affiliates on behalf of the Company allocable to its management of the
Company, including travel expenses, pole and site rental, lease payments, legal expenses, billing
expenses, insurance, governmental fees and licenses, headquarters supplies and expenses, pay
television expenses, equipment and vehicle charges, operating salaries and expenses,
administrative salaries and expenses, postage and office maintenance. NTC has historically
assigned its reimbursement rights to NCC. In addition, Northland Cable Service Corporation
(NCSC), an affiliate of the Parent, was formed to provide billing system support to cable systems
owned and managed by the Parent. Further, NCSC provides technical support associated with the
build out and upgrade of Northland affiliated cable systems. Cable Ad Concepts, a subsidiary of
NCSC, assists in the development of local advertising as well as billing for video commercial
advertisements to be cablecast on Northland affiliated cable systems. The amounts billed to the Company are based on costs incurred by affiliates in rendering the
services. The costs of certain services are allocated to the Company, based upon the personnel
time spent by the employees rendering the service. The cost of other services is allocated to the
Company and affiliates based upon relative size and revenue. NTC has, from time to time, reduced
the amount of costs allocated to the Company, to the extent the allocated costs would result in
noncompliance with debt covenants. This reduction in direct costs allocated has been less than
the management fee in all periods presented and that the methods used to allocate services to the
Company are reasonable. The Company reflected $2.5 million, $1.9 million and $0.2 million of
expenses attributable to continuing operations on the accompanying statements of operations for
these services for the years ended December 31, 2004, 2003, and 2002, respectively. The Company has operating management agreements with affiliated entities managed by NCC. Under
the terms of these agreements, the Company or an affiliate serves as the managing agent for
certain cable television systems and is reimbursed for certain operating, administrative, and
programming expenses. The Company paid $0.1 million, $0.2 million and $0.2 million, net,
attributable to continuing operations under the terms of these agreements during 2004, 2003, and
2002, respectively. Certain Business Relationships John E. Iverson, a Director and Assistant Secretary of the Company, is a member of the law firm
of Ryan, Swanson & Cleveland P.L.L.C., which has rendered and is expected to continue to render
legal services to the Company and its affiliates. 22




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##### Table of Contents



ITEM 7A. 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 $113,000. The Company does not use financial instruments for trading or other speculative purposes. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The audited consolidated financial statements of the Company for the years ended December
31, 2004, 2003 and 2002 are included as a part of this filing (see Item 15 (a) below). 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. 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 annual report on Form 10-K 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 during the
fourth quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 23




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning directors and executive
officers of the Company, none of whom are compensated by the Company for their respective
services to the Company and all but one of whom devotes a substantial amount of his time to the
affairs of affiliated entities other than the Company. Each director holds office until the next
annual meeting of shareholders or until his successor is elected or appointed and qualified. NAME
    
    AGE
    
    POSITIONJohn S. Whetzell
    
    
    63
    
    
    Director, Chairman of the Board and Chief Executive OfficerRichard I. Clark
    
    
    47
    
    
    Director, Executive Vice President, Treasurer and
Assistant SecretaryGary S. Jones
    
    
    47
    
    
    PresidentRichard J. Dyste
    
    
    59
    
    
    Senior Vice President, Technical ServicesR. Gregory Ferrer
    
    
    49
    
    
    Vice President and Assistant TreasurerH. Lee Johnson
    
    
    61
    
    
    Divisional Vice PresidentJohn E. Iverson
    
    
    68
    
    
    Director and SecretaryMatthew J. Cryan
    
    
    40
    
    
    Vice President, Budgets and PlanningRick J. McElwee
    
    
    43
    
    
    Vice President, Controller
 JOHN S. WHETZELL (AGE 63.). Mr. Whetzell is the founder of Northland Communications Corporation,
its Chief Executive Officer and has been a Director since March 1982. Mr. Whetzell became
Chairman of the Board of Directors in December 1984. He also serves as Chief Executive Officer
and Chairman of the Board of Northland Telecommunications Corporation and each of its
subsidiaries. He has been involved with the cable television industry for over 30 years. Between
March 1979 and February 1982 he was in charge of the Ernst & Whinney national cable television
consulting services. Mr. Whetzell first became involved in the cable television industry when he
served as the Chief Economist of the Cable Television Bureau of the Federal Communications
Commission (FCC) from May 1974 to February 1979. He provided economic studies to support the
deregulation of cable television both in federal and state arenas. He participated in the
formulation of accounting standards for the industry and assisted the FCC in negotiating and
developing the pole attachment rate formula for cable television. His undergraduate degree is in
economics from George Washington University, and he has an MBA degree from New York University. JOHN E. IVERSON (AGE 68). Mr. Iverson is the Secretary of Northland Communications Corporation
and has served on the Board of Directors since December 1984. He also is the Secretary and serves
on the Board of Directors of Northland Telecommunications Corporation and each of its
subsidiaries. He is currently a member in the law firm of Ryan, Swanson & Cleveland, P.L.L.C.
He is a member of the Washington State Bar Association and American Bar Association and has been
practicing law for more than 42 years. Mr. Iverson is the past President and a Trustee of the
Pacific Northwest Ballet Association. Mr. Iverson has a Juris Doctor degree from the University
of Washington. RICHARD I. CLARK (AGE 47). Mr. Clark is an original incorporator of Northland Communications
Corporation and serves as Executive Vice President, Assistant Secretary and Assistant Treasurer
of Northland Communications Corporation. He also serves as Vice President, Assistant Secretary
and Treasurer of Northland Telecommunications Corporation. Mr. Clark has served on the Board of
Directors of both Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. In addition to his other responsibilities, Mr. Clark is responsible
for the administration and investor relations activities of Northland, including financial
planning and corporate development. From July 1979 to February 1982, Mr. Clark was employed by
Ernst & Whinney in the area of providing cable television consultation services and has been
involved with the cable television industry for nearly 26 years. He has directed cable
television feasibility studies and on-site market surveys. Mr. Clark has assisted in the design
and maintenance of financial and budget computer models, and he has prepared documents for major
cable television companies in franchising and budgeting projects through the application of these
models. In 1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a Bachelor
of Arts degree in accounting. 24




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GARY S. JONES (AGE 47). Mr. Jones is the President of Northland Telecommunications Corporation
and each of its subsidiaries. Mr. Jones joined Northland in March 1986 and had previously served
as Vice President and Chief Financial Officer for Northland. Mr. Jones is responsible for cash
management, financial reporting and banking relations for Northland and is involved in the
acquisition and financing of new cable systems. Prior to joining Northland, Mr. Jones was
employed as a Certified Public Accountant with Laventhol & Horwath from 1980 to 1986. Mr. Jones
received his Bachelor of Arts degree in Business Administration with a major in accounting from
the University of Washington in 1979. RICHARD J. DYSTE (AGE 59). Mr. Dyste serves as Senior Vice President-Technical Services of
Northland Telecommunications Corporation and each of its subsidiaries. He joined Northland in
April 1986. Mr. Dyste is responsible for planning and advising all Northland cable systems with
regard to technical performance as well as system upgrades and rebuilds. He is a past president
of the Mt. Rainier chapter and a current member of the Society of Cable Telecommunications
Engineers, Inc. Mr. Dyste joined Northland in 1986 as an engineer and served as Operations
Consultant to Northland Communications Corporation from August 1986 until April 1987. From 1977
to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is a graduate of Washington
Technology Institute. H. LEE JOHNSON (AGE 61). Mr. Johnson has served as Divisional Vice President for Northland since
March 1994. He is responsible for the management of systems serving subscribers in Alabama,
Georgia, Mississippi, North Carolina and South Carolina. Prior to his association with Northland
he served as Regional Manager for Warner Communications, managing four cable systems in Georgia
from 1968 to 1973. Mr. Johnson has also served as President of Sunbelt Finance Corporation and
was employed as a System Manager for Statesboro CATV when Northland purchased the system in 1986.
Mr. Johnson has been involved in the cable television industry for over 35 years and is a current
member of the Society of Cable Television Engineers. He is a graduate of Swainsboro Technical
Institute and has attended numerous training seminars, including courses sponsored by Jerrold
Electronics, Scientific Atlanta, The Society of Cable Television Engineers and CATA. R. GREGORY FERRER (AGE 49). Mr. Ferrer joined Northland in March 1984 as Assistant
Controller and currently serves as Vice President and Treasurer of Northland Communications
Corporation. Mr. Ferrer also serves as Vice President and Assistant Treasurer of Northland
Telecommunications Corporation. Mr. Ferrer is responsible for coordinating all of Northlands
property tax filings, insurance requirements and system programming contracts as well as interest
rate management and other treasury functions. Prior to joining Northland, he was a Certified
Public Accountant at Benson & McLaughlin, a local public accounting firm, from 1981 to 1984. Mr.
Ferrer received his Bachelor of Arts in Business Administration from Washington State University
with majors in marketing in 1978 and accounting and finance in 1981. MATTHEW J. CRYAN (AGE 40). Mr. Cryan is Vice President  Budgets and Planning and has been with
Northland since September 1990. Mr. Cryan is responsible for the development of current and
long-term operating budgets for all Northland entities. Additional responsibilities include the
development of financial models used in support of acquisition financing, analytical support for
system and regional managers, financial performance monitoring and reporting and programming
analysis and supervision of all billing related matters of Northland. Prior to joining
Northland, Mr. Cryan was employed as an analyst with NKV Corp., a securities litigation support
firm located in Redmond, Washington. Mr. Cryan graduated from the University of Montana in 1988
with honors and holds a Bachelor of Arts in Business Administration with a major in finance. RICK J. MCELWEE (AGE 43). Mr. McElwee is Vice President and Controller for Northland. He
joined Northland in May 1987 as System Accountant and was promoted to Assistant Controller of
Northland Cable Television, Inc. in 1993. Mr. McElwee became Divisional Controller of Northland
Telecommunications Corporation in 1997 and in January 2001, he was promoted to Vice President and
Controller of Northland Telecommunications Corporation. Mr. McElwee is responsible for managing
all facets of the accounting and financial reporting process for Northland. Prior to joining
Northland, he was employed as an accountant with Pay n Save Stores, Inc., a regional drugstore
chain. Mr. McElwee graduated from Central Washington University in 1985 and holds a Bachelor of
Science in Business Administration with a major in accounting. Audit Committee and Financial Expert. The NCTV board of directors consists of three individuals, whom also serve on the NTC board of
directors. Together, the NTC and the NCTV boards of directors serve as the oversight body for
the Company. The NCTV and NTC boards do not have an audit committee; instead, all members
perform the function of an audit committee. The NCTV and NTC boards of directors also do not
have a financial expert as defined in applicable SEC rules, as it believes that the
background and financial sophistication of its members are sufficient to fulfill the duties of
such financial expert. 25




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##### Table of Contents



Code of Ethics The Company does not currently have a code of ethics. The Company has only 149 employees and
the NTC executives, together with the NTC and NCTV boards manage all oversight functions. With
so few employees, none of which have executive oversight responsibilities, the Company does not
believe that developing and adopting a code of ethics is necessary. NTC also does not have a
code of ethics; but will consider whether adopting a code of ethics is appropriate during the
current fiscal year. 
 ITEM 11. EXECUTIVE COMPENSATION None of the employees of the Company are deemed to be executive officers of the
Company. Services of the executive officers and other employees of NTC are provided to the
Company for which the Company pays NTC a fee pursuant to the Management Agreement and overhead
reimbursements. The executive officers and other employees of NTC who provide services to the
Company are compensated in their capacity as executive officers and employees of NTC and
therefore receive no compensation from the Company. No portion of the management fee paid by the
Company is allocated to specific employees for the services performed by such employees. DIRECTOR COMPENSATION The Company does not currently compensate members of its Board of Directors for their services as
directors. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Security ownership of management as of
December 31, 2004 is as follows: The Company is a wholly owned subsidiary of Northland Telecommunication Corporation, a Washington
corporation. The following table sets forth certain information with respect to the beneficial ownership of
common stock of NTC as of the date of this filing by: (i) each person who is known by the Company
to beneficially own 5% or more of the outstanding shares of common stock of NTC; (ii) each
director of the Company; (iii) each executive officer of the Company; and (iv) the Companys
executive officers and directors as a group. The address of each such person is in care of the
Company, 101 Stewart Street, Suite 700, Seattle, Washington 98101. NUMBER OF
    
    PERCENTAGE OFSHARES BENEFICIALLY
    
    SHARES BENEFICIALLYBENEFICIAL OWNER
    
    OWNED
    
    OWNEDJohn S. Whetzell.
    
    
    1,017,000
    
    
    
    22.44
    %Adele P. Butler.
    
    
    530,000
    
    
    
    11.70
    %Pamela B. McCabe.
    
    
    510,144
    
    
    
    11.26
    %Robert M. Arnold.
    
    
    384,000
    
    
    
    8.47
    %Richard I. Clark.
    
    
    319,000
    
    
    
    7.04
    %Robert A. Mandich.
    
    
    278,400
    
    
    
    6.14
    %Gary S. Jones.
    
    
    66,818
    
    
    
    1.35
    %John E. Iverson.
    
    
    50,000
    
    
    
    1.10
    %Richard J. Dyste.
    
    
    33,714
    
    
    
    *H. Lee Johnson.
    
    
    26,455
    
    
    
    *R. Gregory Ferrer.
    
    
    13,688
    
    
    
    *Matthew J. Cryan.
    
    
    7,998
    
    
    
    *Rick J. McElwee.
    
    
    7,296
    
    
    
    *All executive officers and directors as a group
(nine persons).
    
    
    1,541,949
    
    
    
    34.03
    %
   *
    
    Represents less than 1% of the shares beneficially owned. (b) CHANGES IN CONTROL. NTC has pledged the stock of the Company as collateral pursuant to the
terms of the Companys Amended and Restated Senior Credit Facility. 26




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) TRANSACTIONS WITH MANAGEMENT AND OTHERS. The Company is part of an affiliated group of corporations and limited partnerships controlled,
directly or indirectly, by NTC (the NTC Affiliates). NTC, in turn, is owned by the individuals
and in the percentages set forth in the table above. In addition to the Company, NTC has three
other direct, wholly owned subsidiaries: Northland Communications Corporation (NCC); Northland
Cable Services Corporation (NCSC); and Northland Media, Inc. (NMI). In turn, NCC is the sole
shareholder of Northland Cable Properties, Inc. (NCPI) and is the managing general partner of
Northland Cable Properties Seven Limited Partnership (NCP-7) and Northland Cable Properties
Eight Limited Partnership (NCP-8). NCC is also the managing member of Northland Cable
Networks, LLC (NCN LLC). In addition, NCPI is the majority member and manager of Northland
Cable Ventures, LLC (NCV), NCSC is the sole shareholder of Cable Ad-Concepts, Inc. (CAC) and
NMI is the sole shareholder of Statesboro Media, Inc. and Corsicana Media, Inc. Each of the
Companys directors is also a director of NTC and each of its wholly-owned direct subsidiaries
and certain other NTC Affiliates and the Companys officers are also officers of certain of the
NTC Affiliates. MANAGEMENT AGREEMENT WITH NTC AND AFFILIATES NTC currently supervises all aspects of the business and operations of the Company pursuant to an
Operating Management Agreement between the Company and NTC dated August 23, 1994 (the Management
Agreement). The Management Agreement continues in effect until terminated by either party on
30-days written notice. The Management Agreement provides that NTC shall render or cause to be rendered supervisory
services to the Company, including, among other things supervising and monitoring: (i) the
affairs, management and operations of the Company and its systems; (ii) the accounting and other
financial books and records of the Company and its systems; (iii) the hiring, training and
supervision of the Companys employees; and (iv) the Companys fulfillment of its contractual
obligations in connection with its systems. In return for its management services, NTC receives a
management fee, payable monthly, equal to 5.0% of the Companys gross revenues (the Management
Fee). For the years ended December 31, 2004, 2003 and 2002, the Company paid a Management Fee of
$2.5 million, $2.5 million and $2.4 million, respectively, attributable to continuing operations. NTC provides or causes to be provided certain centralized services to the Company and other
affiliated entities. NTC is entitled to reimbursement from the Company for various expenses
incurred by it or its affiliates on behalf of the Company allocable to its management of the
Company, including travel expenses, pole and site rental, lease payments, legal expenses, billing
expenses, insurance, governmental fees and licenses, headquarters supplies and expenses, pay
television expenses, equipment and vehicle charges, operating salaries and expenses,
administrative salaries and expenses, postage and office maintenance. NTC has historically
assigned its reimbursement rights to NCC. In addition, Northland Cable Service Corporation
(NCSC), an affiliate of the Parent, was formed to provide billing system support to cable systems
owned and managed by the Parent. Further, NCSC provides technical support associated with the
build out and upgrade of Northland affiliated cable systems. Cable Ad Concepts, a subsidiary of
NCSC, assists in the development of local advertising as well as billing for video commercial
advertisements to be cablecast on Northland affiliated cable systems. The amounts billed to the Company are based on costs incurred by affiliates in rendering the
services. The costs of certain services are allocated to the Company, based upon the personnel
time spent by the employees rendering the service. The cost of other services is allocated to the
Company and affiliates based upon relative size and revenue. NTC has, from time to time, reduced
the amount of costs allocated to the Company, to the extent the allocated costs would result in
noncompliance with debt covenants. This reduction in direct costs allocated has been less than
the management fee in all periods presented and that the methods used to allocate services to the
Company are reasonable. and that the methods used to allocate services to the Company are
reasonable. The Company reflected $2.5 million, $1.9 million and $0.2 million of expenses
attributable to continuing operations on the accompanying statements of operations for these
services for the years ended December 31, 2004, 2003, and 2002, respectively. 27




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##### Table of Contents



OPERATING AGREEMENTS WITH AFFILIATES The Company has operating management agreements with affiliated entities managed by NCC. Under
the terms of these agreements, the Company or an affiliate serves as the managing agent for
certain cable television systems and is reimbursed for certain operating, administrative, and
programming expenses. The Company paid $0.1 million, $0.2 million and $0.2 million, net,
attributable to continuing operations under the terms of these agreements during 2004, 2003, and
2002, respectively. (b) CERTAIN BUSINESS RELATIONSHIPS. John E. Iverson, a Director and Assistant Secretary of the
Company, is a member of the law firm of Ryan, Swanson & Cleveland P.L.L.C., which has rendered
and is expected to continue to render legal services to the Company and its affiliates. (c) INDEBTEDNESS OF MANAGEMENT. None. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Aggregate fees for professional services rendered by KPMG LLP for the fiscal years ended
December 31, 2004 and 2003 are set forth below. Year Ended December 31,2004
    
    
    2003Audit fees
    
    $
    93,225
    
    
    $
    71,293Audit-related fees
    
    
    
    
    
    $
    2,405Total
    
    $
    93,225
    
    
    $
    73,698
 Audit fees for the fiscal years ended December 31, 2004 and 2003 were for professional
services rendered for the audits of the Companys financial statements for the respective years
and quarterly review of the financial statements included in the Companys Quarterly Reports on
Form 10-Q. Audit-related fees for the fiscal year ended December 31, 2003 were for assurance and
related services associated with employee benefit plan audits. Policy on Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors The Board of Directors of the Companys Parent pre-approves all audit and non-audit services
provided by the independent auditors prior to the engagement of the independent auditors with
respect to such services. 28




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PART IV 
 ITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SEQUENTIALLYNUMBEREDPAGE(a) FINANCIAL STATEMENTS:Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance SheetsDecember 31, 2004 and 2003
    
    
    F-2Consolidated Statements of Operations and Comprehensive Income (Loss) for the years
ended December 31, 2004, 2003 and 2002
    
    
    F-3Consolidated Statements of Changes in Shareholders Deficit for
the years ended December 31, 2004, 2003 and 2002
    
    
    F-4Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002
    
    
    F-5Notes to Consolidated Financial StatementsDecember 31, 2004 and 2003
    
    
    F-6
 (b) REPORTS ON FORM 8-K :  Form 8-K filed July 2, 2004 discussing the possibility of obtaining a
significant credit facility for the Company.Form 8-K filed October 28, 2004 discussing re-evaluation of refinancing needs. (c) EXHIBITS: 10.4
    
    Purchase and Sale Agreement between
Northland Cable Television, Inc. and Cequel III Communications I, LLC
dated February 2, 2005.10.5
    
    First Amendment to Amended and
Restated Credit Agreement dated March 31, 2005.31(a)
    
    Certification of Chief Executive Officer dated March 31, 2005
pursuant to section 302 of the Sarbanes-Oxley Act31(b)
    
    Certification of President (Principal Financial and Accounting
Officer) dated March 31, 2005 pursuant to section 302 of the
Sarbanes-Oxley Act32(a)
    
    Certification of Chief Executive Officer dated March 31, 2005
pursuant to section 906 of the Sarbanes-Oxley Act32(b)
    
    Certification of President (Principal Financial and Accounting
Officer) dated March 31, 2005 pursuant to section 906 of the
Sarbanes-Oxley Act
 29




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##### Table of Contents



SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. NORTHLAND CABLE TELEVISION, INC.By
    
    /S/ JOHN S. WHETZELLJohn S. Whetzell, Chief Executive OfficerDate:
3-31-05
 Pursuant o the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated. SIGNATURES
    
    CAPACITIES
    
    DATE/S/ JOHN S. WHETZELL
    
    Director, Chairman of the Board and
    
    3-31-05John S. Whetzell
    
    Chief Executive Officer/S/ RICHARD I. CLARK
    
    Director, Executive Vice President, Treasurer
    
    3-31-05Richard I. Clark
    
    and Assistant Secretary/S/ GARY S. JONES
    
    President
    
    3-31-05Gary S. Jones/S/ JOHN E. IVERSON
    
    Director and Secretary
    
    3-31-05John E. Iverson
 30




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##### Table of Contents



Report of Independent Registered Public Accounting Firm The Shareholder
Northland Cable Television, Inc.: We have audited the accompanying consolidated balance sheets of Northland Cable Television, Inc.
and subsidiary (a Washington Corporation and wholly owned subsidiary of Northland
Telecommunications Corporation) and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations and comprehensive income (loss), changes in stockholders
deficit, and cash flows for each of the years in the three-year period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Northland Cable Television, Inc. and subsidiary as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles.   Seattle, Washington
March 31, 2005 F-1




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##### Table of Contents



NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2004 and 2003 2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    913,878
    
    
    
    2,134,254Due from Parent and affiliates
    
    
    819,553
    
    
    
    653,029Accounts receivable
    
    
    1,098,644
    
    
    
    1,663,699System sale receivable
    
    
    
    
    
    
    4,279,968Prepaid expenses
    
    
    483,351
    
    
    
    464,934Total current assets
    
    
    3,315,426
    
    
    
    9,195,884Investment in cable television properties:Property and equipment, at cost
    
    
    108,667,159
    
    
    
    102,748,514Less accumulated depreciation
    
    
    (67,373,869
    )
    
    
    (60,525,405
    )41,293,290
    
    
    
    42,223,109Franchise agreements (net of accumulated amortization of
$38,923,291)
    
    
    39,504,437
    
    
    
    39,493,670Goodwill (net of accumulated amortization of $2,407,104)
    
    
    3,937,329
    
    
    
    3,937,329Other intangible assets (net of accumulated amortization of
$3,231,686 and $3,205,791, respectively)
    
    
    45,302
    
    
    
    71,197Total investment in
cable television
properties
    
    
    84,780,358
    
    
    
    85,725,305System sale receivable
    
    
    433,200
    
    
    
    Loan fees (net of accumulated amortization of $2,782,038
and $2,307,604, respectively)
    
    
    1,298,814
    
    
    
    1,727,629Total assets
    
    $
    89,827,798
    
    
    
    96,648,818Liabilities and Shareholder's DeficitCurrent liabilities:Accounts payable
    
    $
    747,973
    
    
    
    700,984Subscriber prepayments
    
    
    1,343,651
    
    
    
    1,401,200Accrued expenses
    
    
    4,732,046
    
    
    
    5,034,606Converter deposits
    
    
    93,604
    
    
    
    107,101Due to affiliates
    
    
    36,203
    
    
    
    96,847Current portion of notes payable
    
    
    3,400,000
    
    
    
    2,800,000Total current liabilities
    
    
    10,353,477
    
    
    
    10,140,738Notes payable, net of current portion
    
    
    109,660,000
    
    
    
    113,200,000Deferred income taxes
    
    
    1,006,408
    
    
    
    152,194Total liabilities
    
    
    121,019,885
    
    
    
    123,492,932Commitments and contingenciesShareholders deficit:Common stock (par value $1.00 per share)Authorized 50,000 shares; issued and outstanding 10,000 shares and additional paid-in capital
    
    
    12,359,377
    
    
    
    12,359,377Accumulated deficit
    
    
    (43,551,464
    )
    
    
    (39,203,491
    )Total shareholders deficit
    
    
    (31,192,087
    )
    
    
    (26,844,114
    )Total liabilities and shareholders deficit
    
    $
    89,827,798
    
    
    
    96,648,818
 See accompanying notes to consolidated financial statements. F-2




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##### Table of Contents



NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Revenues:Service revenues
    
    $
    50,469,380
    
    
    
    49,630,146
    
    
    
    48,784,362Operating expenses:Cable system operations (including $37,589,
$303,615, and $268,706, net paid to
affiliates, excluding depreciation and
amortization recorded below)
    
    
    20,922,526
    
    
    
    20,092,666
    
    
    
    19,309,669General and administrative (including
$2,528,103, $1,806,295, and $173,168, net,
paid to affiliates)
    
    
    9,250,035
    
    
    
    8,439,428
    
    
    
    6,223,324Management fees to Parent
    
    
    2,523,469
    
    
    
    2,481,840
    
    
    
    2,439,218Depreciation and amortization
    
    
    9,210,654
    
    
    
    8,949,926
    
    
    
    8,778,383Loss on disposal of assets
    
    
    378,665
    
    
    
    646
    
    
    
    229,276Total operating expenses
    
    
    42,285,349
    
    
    
    39,964,506
    
    
    
    36,979,870Income from operations
    
    
    8,184,031
    
    
    
    9,665,640
    
    
    
    11,804,492Other income (expense):Interest expense and amortization of loan fees
    
    
    (11,601,797
    )
    
    
    (11,218,849
    )
    
    
    (9,935,420
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (257,391
    )
    
    
    Other, net
    
    
    (70,190
    )
    
    
    29,469
    
    
    
    33,800(Loss) income from continuing
operations before income tax
expense
    
    
    (3,487,956
    )
    
    
    (1,781,131
    )
    
    
    1,902,872Income tax expense
    
    
    (860,017
    )
    
    
    (184,297
    )
    
    
    (10,573
    )(Loss) income from continuing
operations
    
    
    (4,347,973
    )
    
    
    (1,965,428
    )
    
    
    1,892,299Discontinued operations:Income (loss) from operations of Aiken and
Port Angeles systems, net of tax of $660,000
in 2003 (including gain on sale of systems of
$31,386,201 in 2003)
    
    
    
    
    
    
    30,742,979
    
    
    
    (423,649
    )Net (loss) income
    
    
    (4,347,973
    )
    
    
    28,777,551
    
    
    
    1,468,650Other comprehensive (loss) income:Reclassification of accumulated other
comprehensive income to unrealized
gain (loss) on interest rate swap agreements
    
    
    
    
    
    
    
    
    
    
    (268,000
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    (268,000
    )Total comprehensive (loss) income
    
    $
    (4,347,973
    )
    
    
    28,777,551
    
    
    
    1,200,650
 See accompanying notes to consolidated financial statements. F-3




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##### Table of Contents



NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders Deficit
Years ended December 31, 2004, 2003, and 2002 Common stock
    
    
    
    
    
    
    Accumulatedand additional
    
    
    
    
    
    
    otherpaid-in capital
    
    
    
    
    
    
    comprehensive
    
    
    AccumulatedShares
    
    
    Amount
    
    
    income
    
    
    deficit
    
    
    TotalBalance, December 31, 2001
    
    
    10,000
    
    
    $
    12,359,377
    
    
    
    268,000
    
    
    
    (69,449,692
    )
    
    
    (56,822,315
    )Net income and
other comprehensive
loss, net
    
    
    
    
    
    
    
    
    
    
    (268,000
    )
    
    
    1,468,650
    
    
    
    1,200,650Balance, December 31, 2002
    
    
    10,000
    
    
    
    12,359,377
    
    
    
    
    
    
    
    (67,981,042
    )
    
    
    (55,621,665
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,777,551
    
    
    
    28,777,551Balance, December 31, 2003
    
    
    10,000
    
    
    
    12,359,377
    
    
    
    
    
    
    
    (39,203,491
    )
    
    
    (26,844,114
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,347,973
    )
    
    
    (4,347,973
    )Balance, December 31, 2004
    
    
    10,000
    
    
    $
    12,359,377
    
    
    
    
    
    
    
    (43,551,464
    )
    
    
    (31,192,087
    )
 See accompanying notes to consolidated financial statements. F-4




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##### Table of Contents



NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net (loss) income
    
    $
    (4,347,973
    )
    
    
    28,777,551
    
    
    
    1,468,650Adjustments to reconcile net (loss) income to
net cash provided by operating activities:Depreciation and amortization
    
    
    9,210,654
    
    
    
    9,367,724
    
    
    
    10,674,194Amortization of loan costs
    
    
    550,194
    
    
    
    500,242
    
    
    
    680,351Loss on extinguishment of debt
    
    
    
    
    
    
    257,391
    
    
    
    Loss (gain) on disposal of assets
    
    
    378,665
    
    
    
    (31,385,555
    )
    
    
    229,276Unrealized gain on interest rate swap
agreements
    
    
    
    
    
    
    (120,377
    )
    
    
    (2,067,210
    )Deferred income tax expense
    
    
    854,214
    
    
    
    152,194
    
    
    
    Other,
primarily cable equipment losses
    
    
    288,847
    
    
    
    21,313
    
    
    
    Changes in certain assets and liabilities,
net of acquisition:Due to/from Parent and affiliates
    
    
    (227,168
    )
    
    
    3,589
    
    
    
    (515,335
    )Accounts receivable
    
    
    576,359
    
    
    
    778,264
    
    
    
    (473,076
    )Prepaid expenses
    
    
    (18,519
    )
    
    
    (45,117
    )
    
    
    90,071Accounts payable
    
    
    6,779
    
    
    
    (191,971
    )
    
    
    (285,504
    )Subscriber prepayments
    
    
    (55,566
    )
    
    
    (1,137,444
    )
    
    
    223,301Other current liabilities, net
    
    
    (312,950
    )
    
    
    (552,562
    )
    
    
    (901,949
    )Cash provided by operating
activities
    
    
    6,903,536
    
    
    
    6,425,242
    
    
    
    9,122,769Cash flows from investing activities:Investment in property and equipment
    
    
    (9,033,744
    )
    
    
    (7,041,321
    )
    
    
    (8,262,327
    )Proceeds from disposition of cable systems
    
    
    3,990,778
    
    
    
    53,424,467
    
    
    
    1,017,457Proceeds from disposal of assets
    
    
    6,900
    
    
    
    18,678
    
    
    
    79,591Franchise fees and other intangibles
    
    
    (10,767
    )
    
    
    (6,534
    )
    
    
    (8,295
    )Cash (used in) provided by
investing activities
    
    
    (5,046,833
    )
    
    
    46,395,290
    
    
    
    (7,173,574
    )Cash flows from financing activities:Proceeds from notes payable
    
    
    
    
    
    
    16,000,000
    
    
    
    Principal payments on notes payable
    
    
    (2,940,000
    )
    
    
    (68,031,182
    )
    
    
    (3,000,000
    )Loan fees
    
    
    (137,079
    )
    
    
    (321,193
    )
    
    
    (7,197
    )Cash used in financing
activities
    
    
    (3,077,079
    )
    
    
    (52,352,375
    )
    
    
    (3,007,197
    )(Decrease) increase in cash and cash equivalents
    
    
    (1,220,376
    )
    
    
    468,157
    
    
    
    (1,058,002
    )Cash and cash equivalents, beginning of year
    
    $
    2,134,254
    
    
    
    1,666,097
    
    
    
    2,724,099Cash and cash equivalents, end of year
    
    $
    913,878
    
    
    
    2,134,254
    
    
    
    1,666,097Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    11,110,659
    
    
    
    11,640,908
    
    
    
    15,764,020Cash paid for state income taxes
    
    
    5,803
    
    
    
    9,810
    
    
    
    10,573Supplemental disclosure of noncash activities:
 A hold back note of approximately $1,000,000 was held in escrow until June of 2002 related to the 2001
sale of the
Bainbridge Island
system. See accompanying notes to consolidated financial statements. F-5




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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   (1)
    Organization and Significant Accounting Policies  (a)
    Formation and BusinessNorthland Cable Television, Inc. (NCTV or the Company), a Washington corporation, was
formed to own and operate cable television systems. As of December 31, 2004, NCTV had 74
nonexclusive franchises to operate cable television systems. These franchises expire at
various dates through 2022.On March 11 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 present the results of
operations and the sale of the Port Angeles and Aiken systems as discontinued operations.The Company is subject to certain risks as a cable television operator. These include
competition from alternative technologies (e.g., satellite), requirements to renew its
franchises, availability of capital and compliance with note payable covenants.(b)
    Related CompaniesThe Company and its affiliates, Northland Communications Corporation and subsidiary
(NCC); Northland Cable Services Corporation and subsidiary (NCSC); and Northland Media,
Inc. and subsidiaries (NMI) are wholly owned subsidiaries of Northland Telecommunications
Corporation (NTC or Parent). NCC is the managing general partner of two limited
partnerships, and is the managing member of Northland Cable Networks, LLC (the LLC), all
of which own and operate cable television systems. Additionally, NCC owns and operates
cable systems through its wholly owned subsidiary, Northland Cable Properties, Inc.
(NCPI). Northland Cable Ventures, LLC, is a majority-owned subsidiary of NCPI which was
formed to own and operate cable television systems. NCSC is the parent company of Cable
Ad-Concepts, Inc. (CAC). NCSC provides billing services and technical support to cable
systems owned by the limited partnerships and the LLC, which are managed by NCC, and
wholly owned systems of the Company and NCC. CAC develops and produces video commercial
advertisements to be cablecast on Northland affiliated cable systems. NMI was formed as a
holding company to own and operate AM radio stations.  (2)
    Basis of PresentationCertain prior period amounts have been reclassified to conform to the current period
presentation.The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates. F-6


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   (3)
    Summary of Significant Accounting Policies  (a)
    Principles of ConsolidationThe consolidated financial statements include the accounts of NCTV and its wholly owned
subsidiary, Northland Cable News, Inc., which ceased operations on January 1, 2001. All
significant intercompany accounts and transactions have been eliminated.(b)
    Acquisition of Cable Television SystemsCable television system acquisitions are accounted for as purchase transactions and their
cost is allocated to the estimated fair market value of net tangible assets acquired and
identifiable intangible assets, including franchise agreements. Any excess is allocated
to goodwill.(c)
    Cash and Cash EquivalentsCash and cash equivalents include cash and investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.(d)
    Accounts ReceivableAccounts receivable consist primarily of amounts due from customers for cable television
or advertising services provided by the Company, and are net of an allowance for doubtful
accounts of $55,000 as of December 31, 2004 and $0 as of December 31, 2003. Receivables
are stated at net realizable value and are written-off when the Company deems specific
customer invoices to be uncollectible.(e)
    Property and EquipmentProperty 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 Statement of Financial Accounting Standards (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 are charged to operating expense in the period
incurred. Costs for repairs and maintenance are also charged to operating expense, while
equipment replacements are capitalized.At the time of retirements, sales or other dispositions of property, the original cost
and related accumulated depreciation are removed from the respective accounts, and the
gains or losses are included in the consolidated statement of operations. F-7


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   Depreciation of property and equipment is calculated using the straight-line method over
the following estimated service lives: Buildings
    
    20 yearsDistribution plant
    
    2-10 yearsOther equipment and leasehold improvements
    
    5-20 years
  The Company periodically evaluates the depreciation periods of property and equipment to
determine whether events or circumstances warrant revised estimates of useful lives.The Company recorded depreciation expense within continuing operations of $9,184,760,
$8,857,018, and $8,539,836 in 2004, 2003, and 2002 respectively, and depreciation expense
within discontinued operations of $416,545 and $1,770,762 in 2003 and 2002, respectively.SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets, provides a
single accounting model for long-lived assets to be disposed of. SFAS No. 144 also
changes the criteria for classifying an asset as held for sale; and broadens the scope of
businesses to be disposed of that qualify for reporting as discontinued operations and
changes the timing of recognizing losses on such operations. The Company adopted SFAS No.
144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the Companys
financial statements.In accordance with SFAS No. 144, long-lived assets, such as property and equipment and
purchased intangibles subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed of would
be separately presented in the balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposal group classified as held for sale would be presented separately
in the appropriate asset and liability sections of the balance sheets.(f)
    Intangible AssetsEffective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 required that the Company cease amortization of goodwill
and any other intangible assets determined to have indefinite lives, and established a
new method of testing these assets for impairment on an annual basis or on an interim
basis if an event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying value or if the fair value of intangible assets with
indefinite lives falls below their carrying value. The amortization of existing goodwill,
which is related to two profit centers remaining in continuing operations, ceased on
December 31, 2001. The Company determined that its franchise agreements met the
definition of indefinite lived assets due to the history of obtaining franchise renewals,
among other considerations. F-8


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##### Table of Contents



NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   Accordingly, amortization of franchise agreements also ceased on December 31,
2001. The Company tested goodwill for impairment during the fourth quarter of 2004, 2003
and 2002 and determined that the fair value of the reporting units, for which goodwill is
a component, exceeded the carrying value of the respective reporting units. The Company
also tested intangible assets determined to have indefinite lives for impairment annually
during the fourth quarter and determined that the fair value of the assets exceeded their
carrying value. The Company determined that there are not conditions such as
obsolescence, regulatory changes, changes in demand, competition, or other factors that
would change their indefinite life determination. The Company will continue to test these
assets for impairment annually, or more frequently as warranted by events or changes in
circumstances.(g)
    Loan FeesLoan fees are being amortized using the straight-line method, which approximates the
effective interest method, over periods of 5 to 10 years (current weighted average
remaining useful life of 2.76 years). The Company recorded amortization of loan fees
attributable to continuing operations of $550,194, $438,996, and $451,844 in 2004, 2003,
and 2002, respectively, and amortization of loan fees attributable to discontinued
operations of $61,246 and $228,507 in 2003 and 2002, respectively. Future amortization of
loan fees is expected to be as follows: 2005
    
    $
    494,7802006
    
    
    494,7802007
    
    
    309,254$
    1,298,814
  (h)
    Other Intangible AssetsOther intangible assets are being amortized using the straight-line method over periods
of five years (current weighted average remaining useful life of 1.75 years). The Company
recorded amortization expense attributable to continuing operations of $25,894, $92,908,
and $238,547 in 2004, 2003, and 2002, respectively, and amortization expense attributable
to discontinued operations of $1,253 and $125,048 in 2003 and 2002, respectively. Future
amortization of other intangible assets is expected to be as follows: 2005
    
    $
    25,8872006
    
    
    19,415$
    45,302
  (i)
    Self InsuranceNCTV began self-insuring for aerial and underground plant in 1996. Beginning in 1997,
NCTV began making quarterly contributions into an insurance fund maintained by NTC which
covers all Northland entities and would defray a portion of any loss should NCTV be faced
with a significant F-9


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##### Table of Contents



NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   uninsured loss. To the extent NCTVs losses exceed the funds balance, NCTV would absorb
any such loss. If NCTV were to sustain a material uninsured loss, such reserves could be
insufficient to fully fund such a loss. The capital cost of replacing such equipment and
physical plant could have a material adverse effect on NCTV, its financial condition,
prospects and debt service ability.Amounts paid to NTC, which maintains the fund for the Company and its affiliates, are
expensed as incurred and are included in the consolidated statements of operations. To
the extent a loss has been incurred related to risks that are self-insured, the Company
records an expense for the amount of the loss, net of any amounts to be drawn from the
fund. During 2001, NCTV was charged $18,728 by the fund. Management of NTC suspended
contributions during 2001 and throughout 2002 based on its assessment that the current
balance would be sufficient to meet potential claims. In 2004 and 2003, the Company was
required to make contributions and was charged $9,978 and $12,065, respectively, by the
fund. As of December 31, 2004, the fund (related to all Northland entities) had a balance
of $588,379.(j)
    Revenue RecognitionCable 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. Local spot advertising revenues earned in continuing operations were
$1,972,584, $2,631,289, and $2,619,278 in 2004, 2003, and 2002, respectively, and local
spot advertising revenues earned in discontinued operations were $115,178 and $517,735 in
2003 and 2002, respectively.(k)
    DerivativesThe Company has only limited involvement with derivative instruments and does not use
them for trading purposes. They are used to manage well-defined interest rate risks. The
Company periodically enters into interest rate swap agreements with major banks or
financial institutions (typically its bank) in which the Company pays a fixed rate and
receives a floating rate with the interest payments being calculated on a notional
amount.The Company is exposed to credit related losses in the event of nonperformance by
counterparties to financial instruments but does not expect any counterparties to fail to
meet their obligations, as the Company currently deals only with its bank. The exposure
in a derivative contract is the net difference between what each party is required to pay
based on the contractual terms, which in the Companys case, is based on notional amounts
and the interest rates.The Company records all derivative instruments on the balance sheet at fair value. The
changes in the fair value of derivatives are recognized in earnings, unless the
instrument has been designated and documented as a hedge.The Company elected not to designate its derivatives as hedges under SFAS No. 133.
Agreements in place as of December 31, 2002 expired during 2003, and the Company elected not to enter into any new
agreements. F-10


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##### Table of Contents



NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   (l)
    Advertising CostsThe Company expenses advertising costs as they are incurred. Advertising costs
attributable to continuing operations were $743,671, $1,307,896, and $1,173,746 in 2004,
2003, and 2002, respectively, and advertising costs attributable to discontinued
operations were $38,714 and $194,266 in 2003 and 2002, respectively.(m)
    Segment InformationThe Company follows SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. The Company manages its business and makes operating decisions at the
operating segment level. Following the operating segment aggregation criteria in SFAS No.
131, the Company reports business activities under a single reportable segment,
telecommunications services. Additionally, all of its activities take place in the United
States of America.(n)
    Concentration of Credit RiskThe Company is subject to concentrations of credit risk from cash investments on deposit
at various financial institutions that at times exceed insured limits by the Federal
Deposit Insurance Corporation. This exposes the Company to potential risk of loss in the
event the institution becomes insolvent.(o)
    Fair Value of Financial InstrumentsFinancial instruments consist of cash, interest rate swap agreements and notes payable.
The fair value of interest rate swap agreements is the estimated amount that a bank would
receive or pay to terminate the swap agreement at the reporting date and is equal to
their carrying value. The fair value of the Revised Senior Credit Facility approximates
its carrying value because of its variable interest rate nature (note 7). The estimated
fair value of the Senior Subordinated Notes was $99,500,000 and $99,625,000 at December
31, 2004 and 2003, respectively (note 7).(p)
    Recently Adopted Accounting PrincipalsIn November 2004, the EITF ratified its consensus on Issue No. 03-13, Applying the
Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report
Discontinued Operations (EITF 03-13). EITF 03-13 relates to components of an
enterprise that are either disposed of or classified as held for sale in fiscal periods
beginning after December 15, 2004. EITF 03-13 allows significant events or circumstances
that occur after the balance sheet date but before the issuance of financials statements
to be taken into consideration in the evaluation of whether a component should be
presented as discontinued or continuing operations, and modifies assessment period
guidance to allow for an assessment period of greater than one year. The implementation
of EITF 03-13 is not expected to have a material impact on the Companys consolidated
financial statements. F-11


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   (4)
    Transactions with Related Parties  (a)
    Management FeesThe Company pays management fees to NTC equal to 5% of NCTVs gross revenues, excluding
revenues from the sale of cable television systems or franchises.(b)
    ReimbursementsNTC provides or causes to be provided certain centralized services to the Company and
other affiliated entities. NTC is entitled to reimbursement from the Company for various
expenses incurred by it or its affiliates on behalf of the Company allocable to its
management of the Company, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and licenses,
headquarters supplies and expenses, pay television expenses, equipment and vehicle
charges, operating salaries and expenses, administrative salaries and expenses, postage
and office maintenance. NTC has historically assigned its reimbursement rights to NCC. In
addition, Northland Cable Service Corporation (NCSC), an affiliate, was formed to provide
billing system support to cable systems owned and managed by the Parent. Further, NCSC
provides technical support associated with the build out and upgrade of Northland
affiliated cable systems. Cable Ad Concepts, a subsidiary of NCSC, assists in the
development of local advertising as well as billing for video commercial advertisements
to be cablecast on Northland affiliated cable systems.The amounts billed to the Company are based on costs incurred by affiliates in rendering
the services. The costs of certain services are allocated to the Company, based upon the
personnel time spent by the employees rendering the service. The cost of other services
is allocated to the Company and affiliates based upon relative size and revenue.
Management believes that method used to allocate services to the Company are reasonable.
NTC has, from time to time, reduced the amount of costs allocated to the Company, to the
extent the allocated costs would result in noncompliance with debt covenants. This
reduction in direct costs allocated has been less than the management fee in all periods
presented. The
Company recorded $2,488,544, $1,918,183, and $221,834 of expenses attributable to
continuing operations on the accompanying statements of operations for these services for
the years ended December 31, 2004, 2003, and 2002, respectively, and $173,582 and $47,693
of expenses attributable to discontinued operations on the accompanying statements of
operations for the years ended December 31, 2003 and 2002.The Company has operating management agreements with affiliated entities managed by NCC.
Under the terms of these agreements, the Company or an affiliate serves as the managing
agent for certain cable television systems and is reimbursed for certain operating,
administrative, and programming expenses. The Company paid $77,148, $191,727, and
$220,040, net, attributable to continuing operations under the terms of these agreements
during 2004, 2003, and 2002, respectively, and received $15,217 and $44,880, net,
attributable to discontinued operations under the terms of these agreements during 2003
and 2002. F-12


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##### Table of Contents



NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   (5)
    Property and EquipmentProperty and equipment consists of the following: December 312004
    
    
    2003Land and buildings
    
    $
    2,327,390
    
    
    
    2,206,269Distribution plant
    
    
    100,673,285
    
    
    
    94,681,606Other equipment
    
    
    5,075,095
    
    
    
    4,762,955Leasehold improvements
    
    
    116,386
    
    
    
    79,355Construction in progress
    
    
    475,003
    
    
    
    1,018,329$
    108,667,159
    
    
    
    102,748,514
  (6)
    Accrued ExpensesAccrued expenses consists of the following: December 312004
    
    
    2003Program license fees
    
    $
    1,523,361
    
    
    
    1,313,254Franchise fees
    
    
    960,391
    
    
    
    974,375Interest
    
    
    1,327,798
    
    
    
    1,386,854Taxes
    
    
    219,870
    
    
    
    493,260Other
    
    
    700,626
    
    
    
    866,863$
    4,732,046
    
    
    
    5,034,606
  (7)
    Notes Payable December 312004
    
    
    2003Senior subordinated notes
    
    $
    100,000,000
    
    
    
    100,000,000Revised senior credit facility
    
    
    13,060,000
    
    
    
    16,000,000113,060,000
    
    
    
    116,000,000Less current portion
    
    
    3,400,000
    
    
    
    2,800,000$
    109,660,000
    
    
    
    113,200,000
 F-13


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##### Table of Contents



NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   (a)
    Revised Senior Credit FacilityOn November 13, 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 assumption of the credit
facility by one of the syndicate members. Accordingly, the Company wrote off remaining
deferred loan costs, which resulted in a loss on extinguishment of debt of $257,391. The
Company also capitalized loan fees of $292,466, 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. The Amended and Restated Senior Credit Facility is secured by substantially all of
the Companys assets.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 December 31, 2004, the
Company was out of compliance with its Minimum Fixed Charge Ratio, however, appropriate
waivers have been obtained.In March of 2005, the Company further amended the Amended and Restated Senior Credit
Facility such that the Company will be allowed to retain the net proceeds from the sale of the Navasota
system which are expected to be
approximately $1.2 million. The amendment also establishes a
limitation on the maximum amount of annual capital expenditures to be
incurred of $5.7 million and modifies the Minimum Fixed Charge
Coverage Ratio as follows: F-14


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   March 31, 2005
    
    0.80 to 1.00June 30, 2005
    
    0.80 to 1.00September 30, 2005
    
    0.80 to 1.00December 31, 2005
    
    0.90 to 1.00
  The Minimum Fixed Charge Coverage Ratio requirements revert back to the original
requirements of 1.00 to 1.00 in 2006.(b)
    Senior Subordinated NotesIn 1997, the Company issued $100,000,000 in principal amount of 10.25% Senior
Subordinated Notes (the Notes) due November 15, 2007.The Notes are presently redeemable at the option of the Company at face value, in whole
or in part, together with interest accrued to the redemption date:The indenture pursuant to which the Notes were issued, among other things, limits the
ability of the Company and its subsidiaries to incur additional indebtedness or issue
preferred stock; make certain restricted payments, grant liens on assets; merge,
consolidate, or transfer substantially all of their assets; enter into certain
transactions with related persons; make certain payments affecting subsidiaries; sell
assets; and issue capital stock of subsidiaries. Additionally, the Company has agreed to
restrictive covenants, as defined in the indenture, which require the maintenance of
certain ratios, including a Debt to Cash Flow ratio of not more than 6.50 to 1, among
other restrictions. The Company submits annual debt compliance reports to a trustee. As
of December 31, 2004, the Company was in compliance with the terms of the Notes.In the event of a change of control of the Company as defined in the indenture, holders
of the Notes will have the right to require the Company to make an offer to repurchase
such Notes, in whole or in part, at a price of 101% of the aggregate principal amount
thereof plus accrued and unpaid interest to the date of repurchase.(c)
    Principal PaymentsAnnual maturities of notes payable after December 31, 2004 based on amounts outstanding
at December 31, 2004 are as follows: 2005
    
    $
    3,400,0002006
    
    
    9,660,0002007
    
    
    100,000,000$
    113,060,000
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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   (8)
    401(k)PlanNTC sponsors a 401(k) plan that covers substantially all Northland employees. The Company
makes matching contributions to the plan up to a limit specified by the plan. The Company made
contributions of approximately $30,623, $36,018, and $44,287 for the years ended December 31,
2004, 2003, and 2002, respectively. Neither the Company nor NTC has any other post employment
or post retirement benefit plans.(9)
    Other, NetOther, net included as a component of other income (expense) in the consolidated statements of
operations consists of: Year ended December 312004
    
    
    2003
    
    
    2002Interest income
    
    $
    49,085
    
    
    
    30,293
    
    
    
    62,170Other
    
    
    (119,275
    )
    
    
    (824
    )
    
    
    (28,370
    )$
    (70,190
    )
    
    
    29,469
    
    
    
    33,800
  (10)
    Income TaxesThe operations of the Company and its affiliates are included for federal income tax purposes
in the consolidated federal income tax returns filed by NTC. For financial reporting purposes,
the provision for income taxes is computed as if the Company filed a separate federal income
tax return utilizing the tax rate applicable to the consolidated group.Deferred income taxes are determined using the asset and liability method in accordance with
SFAS No, 109, Accounting for Income Taxes.The asset and liability method requires the
recognition of deferred income taxes for the expected future tax consequences of temporary
differences between the carrying amounts on the financial statements and the tax bases of
assets and liabilities. F-16


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   The primary components of deferred income taxes are as follows: 2004
    
    
    2003Deferred tax assets:Net operating loss carryforward
    
    $
    21,808,000
    
    
    
    19,800,000Franchise agreements
    
    
    272,000
    
    
    
    836,000Alternative minimum tax credit carryforward
    
    
    390,000
    
    
    
    390,000Other
    
    
    1,864,000
    
    
    
    1,804,00024,334,000
    
    
    
    22,830,000Valuation allowance
    
    
    (14,826,000
    )
    
    
    (14,126,000
    )9,508,000
    
    
    
    8,704,000Deferred tax liabilities:Property and equipment
    
    
    9,196,000
    
    
    
    8,584,000Franchise agreements
    
    
    1,318,000
    
    
    
    272,000Net deferred tax liability
    
    $
    1,006,000
    
    
    
    152,000
  The federal income tax net operating loss carryforwards of approximately $60,579,000 expire
from 2005 through 2024. The net operating loss carryforward amounts and expiration periods in
the consolidated federal income tax return filed by NTC may be different than those determined
on a separate company basis. Management believes that the available objective evidence creates
significant uncertainty regarding the realization of the net deferred tax assets due to the
recurring operating losses historically incurred by the Company. The Company did not record an
operating loss in 2003 due to the sales of the Aiken and Port Angeles systems, however,
management believes that, assuming there are no additional system sales, the Company will
continue to generate such operating losses, as was the case in 2004, in future periods.
Accordingly, a valuation allowance has been provided for the net deferred tax assets exclusive
of certain franchise agreement liabilities which have an indefinite
reversal period and the AMT
credit carryforward. The increase (decrease) in the valuation allowance was $700,000,
($8,234,000), and $520,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.The Company recorded income tax expense attributable to continuing operations of $860,017,
$184,297, and $10,573 in 2004, 2003, and 2002, respectively, which consisted of the following: Year ended December 312004
    
    
    2003
    
    
    2002Deferred expense
    
    $
    854,214
    
    
    
    152,194
    
    
    
    Current expense
    
    
    5,803
    
    
    
    32,103
    
    
    
    10,573$
    860,017
    
    
    
    184,297
    
    
    
    10,573
  The difference between the expected federal income tax
benefit of approximately $1,186,000 computed using the federal
statutory tax rate of 34% in 2004 and the federal
income tax expense disclosed
above is primarily the F-17


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   result of approximately $1,000,000 of deferred income tax expense related to the Companys inability to utilize
certain deferred tax liabilities related to franchise agreements to
realize deferred tax assets, approximately $700,000 of deferred
income tax expense related to the increase in
the valuation allowance against remaining net deferred tax assets and
approximately $300,000 related to the alternative minimum tax rate.The difference between the federal statutory tax rate of approximately 34% in 2003 and 2002
and the tax expenses disclosed above is primarily due to the full valuation allowance against
the remaining net deferred tax assets.The Companys ability to utilize the net operating loss carryforward in any given year may be
limited by certain events.(11)
    Commitments and Contingencies  (a)
    Lease ArrangementsThe Company leases certain office facilities and other sites under leases accounted for
as operating leases. The Company also rents utility poles in its operations. Generally,
pole rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rental expense attributable to continuing operations related to these
operating leases and pole rentals amounted to $783,852, $802,199, and $753,902 in 2004,
2003, and 2002, respectively. Rental expense attributable to discontinued operations
related to these operating leases and pole rentals amounted to $32,568 and $146,532 in
2003 and 2002, respectively. Minimum lease payments through the end of the lease terms,
for those agreements accounted for as operating leases, are as follows: 2005
    
    $
    104,0042006
    
    
    84,1922007
    
    
    66,1292008
    
    
    57,6262009
    
    
    21,490Thereafter
    
    
    1,967$
    335,408
  Each of the years from 2005 to 2008 above includes $86,400 to be paid to affiliates.(b)
    Effects of RegulationThe operation of a cable system is extensively regulated at the federal, local, and in
some instances, state levels. The Cable Communications Policy Act of 1984, as amended,
the Cable Television Consumer Protection and Competition Act of 1992 (the 1992 Cable
Act), and the 1996 Telecommunications Act (the 1996 Telecom Act, and, collectively, the
Cable Act) establish a national policy to guide the development and regulation of cable
television systems. The Federal Communications Commission (FCC) has principal
responsibility for implementing the policies of the Cable Act. Many aspects of such
regulation are currently the subject of judicial proceedings and administrative or
legislative proposals. Legislation and regulations continue to change. F-18


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   Cable Entry into Internet The U.S. Supreme Court recently ruled that cable television
systems may deliver high-speed Internet access and remain within the protections of
Section 703 of the Telecommunications Act of 1996 (the Pole Attachment Act). National
Cable & Telecommunications Assoc. v. Gulf Power Co., Nos. 00-832 and 00-843, 534 U.S.
(January 16, 2002). The Court reversed the Eleventh Circuits decision to the contrary
and sustained the FCC decision that applied the Pole Attachment Acts rate formula and
other regulatory protections to cable television systems attachments over which
commingled cable television and cable modem services are provided.Cable Rate Regulation Although the FCC established the rate regulatory scheme pursuant
to the 1992 Cable Act, local municipalities, commonly referred to as local franchising
authorities, are primarily responsible for administering the regulation of the lowest
level of cable service called the basic service tier. The basic service tier typically
contains local broadcast stations and public, educational, and government access
channels. Before a local franchising authority begins basic service rate regulation, it
must certify to the FCC that it will follow applicable federal rules. Many local
franchising authorities have voluntarily declined to exercise their authority to regulate
basic service rates.In a particular effort to ease the regulatory burden on small cable systems, the FCC
created special rate rules applicable for systems with fewer than 15,000 subscribers
owned by an operator with fewer than 400,000 subscribers. The special rate rules allow
for a simplified cost-of-service showing for basic service tier programming. All of
Northlands systems are eligible for these simplified cost-of-service rules, and have
calculated rates in accordance with those rules.Electric Utility Entry into Telecommunications and Cable Television The 1996 Telecom
Act provides that registered utility holding companies and subsidiaries may provide
telecommunications services, including cable television, notwithstanding the Public
Utility Holding Company Act. Electric utilities must establish separate subsidiaries,
known as exempt telecommunications companies and must apply to the FCC for operating
authority. Like telephone companies, electric utilities have substantial resources at
their disposal, and could be formidable competitors to traditional cable systems. Several
of these utilities have been granted broad authority to engage in activities that could
include the provision of video programming.Must Carry and Retransmission Consent The 1992 Cable Act contains broadcast signal
carriage requirements. Broadcast signal carriage is the transmission of broadcast
television signals over a cable system to cable customers. These requirements, among
other things, allow local commercial television broadcast stations to elect once every
three years between must carry status or retransmission consent status. Less popular
stations typically elect must carry, which is the broadcast signal carriage rule that
allows local commercial television broadcast stations to require a cable system to carry
the station. Must carry requests can dilute the appeal of a cable systems programming
offerings because a cable system with limited channel capacity may be required to forego
carriage of popular channels in favor of less popular broadcast stations electing must
carry. More popular stations, such as those affiliated with a national network, typically
elect retransmission consent, which is the broadcast signal carriage rule that allows
local commercial television broadcast stations to negotiate terms (such as mandating
carriage of an affiliated cable network or a digital F-19


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   broadcast signal) for granting permission to the cable operator to carry the stations.
Retransmission consent demands may require substantial payments or other concessions.Access Channels  Local franchising authorities can include franchise provisions
requiring cable operators to set aside certain channels for public, educational, and
governmental access programming. Federal law also requires cable systems to designate a
portion of their channel capacity, up to 15% in some cases, for commercial leased access
by unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions, and maximum rates a cable operator may charge for commercial leased access
use.Inside Wiring  In an order issued in 1997, the FCC established rules that require an
incumbent cable operator upon expiration of a multiple dwelling unit service contract to
sell, abandon, or remove home run wiring that was installed by the cable operator in a
multiple dwelling unit building. These inside wiring rules are expected to assist
building owners in their attempts to replace existing cable operators with new
programming providers who are willing to pay the building owner a fee, where this fee is
permissible.State and Local Regulation  Cable television systems generally are operated pursuant to
nonexclusive franchises granted by a municipality or other state or local government
entity in order to cross public rights-of-way. Federal law now prohibits local
franchising authorities from granting exclusive franchises or from unreasonably refusing
to award additional or renew existing franchises.Cable franchises generally are granted for fixed terms and in many cases include monetary
penalties for noncompliance and may be terminable if the franchisee fails to comply with
material provisions. The specific terms and conditions of franchises vary materially
among jurisdictions. Each franchise generally contains provisions governing cable
operations, service rates, franchising fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer service
standards, and indemnification protections. A number of states subject cable systems to
the jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. Although local franchising
authorities have considerable discretion in establishing franchise terms, there are
certain federal limitations. For example, local franchising authorities cannot insist on
franchise fees exceeding 5% of the systems gross cable-related revenues, cannot dictate
the particular technology used by the system, and cannot specify video programming other
than identifying broad categories of programming.Federal law contains renewal procedures designed to protect incumbent franchisees against
arbitrary denials of renewal. Even if a franchise is renewed, the local franchising
authority may seek to impose new and more onerous requirements, such as significant
upgrades in facilities and service or increased franchise fees as a condition of renewal.
Historically, most franchises have been renewed and transfer consents granted to cable
operators that have provided satisfactory services and have complied with the terms of
their franchise. F-20


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   (12)
    Sales of Systems  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 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 holdback agreement
provisions of the purchase and sale agreement. Management believes that such claims are
unsubstantiated at this time and intends to vigorously contest such claims. However,
approximately $433,000 of the original escrow proceeds will remain in escrow until such claims
are resolved. Management believes that the contested amounts are collectible, but due to the
nature of the pending litigation, the company has classified the remaining escrow proceeds as
a long term asset as managements is not able to estimate when the claims will be resolved.
The remaining escrow proceeds in excess of the claims were released to the Company in March of
2004. 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. 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. F-21


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   The revenue, expenses and other items attributable to the operations of the Aiken System and
the Port Angeles system during the periods presented have been reported as discontinued
operations in the accompanying consolidated statements of operations and comprehensive income,
and include the following: 2003
    
    
    2002Service revenues
    
    $
    3,079,390
    
    
    
    12,492,424Expenses:Cable system operations (including
$6,271 and $66,567 paid to affiliates in
2003 and 2002, respectively)
    
    
    1,253,907
    
    
    
    4,812,803General and administrative (including
$152,094 paid to affiliates in 2003, and
$109,414 received from affiliates in
2002 , respectively)
    
    
    525,448
    
    
    
    1,672,545Management fees
    
    
    153,637
    
    
    
    624,622Depreciation and amortization
    
    
    417,798
    
    
    
    1,895,810Income from operations
    
    
    728,600
    
    
    
    3,486,644Other income (expense):Interest expense and amortization of
loan fees
    
    
    (711,822
    )
    
    
    (3,910,293
    )Gain on sale of systems
    
    
    31,386,201
    
    
    
    Income (loss) from operationsof Port Angeles and Aiken
Systems, net before income
before income tax expense
    
    
    31,402,979
    
    
    
    (423,649
    )Income tax expense
    
    
    (660,000
    )
    
    
    Income (loss) from operationsof Port Angeles and Aiken
Systems, net
    
    $
    30,742,979
    
    
    
    (423,649
    )
  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 $51,800,000
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. F-22


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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 2004 and 2003   In September 2004, the Company sold its systems serving the areas of Buffalo and Jewett,
Texas. These systems served approximately 415 basic subscribers and were sold for
approximately $149,000. The net proceeds from this sale were used to repay amounts
outstanding under the Companys Amended and Restated Senior Credit Facility. The transaction
did not have a material impact on the Companys financial statements.(13)
    Subsequent EventIn February 2005, the Company executed a purchase and sale agreement to sell its system
serving the community of Navasota, Texas, which serves approximately 1,080 subscribers. The
system will be sold for approximately $1,316,100. Under the terms of an amendment to the Amended and Restated Senior
Credit Facility, which was executed in March of 2005, the Company
will be allowed to retain these net proceeds, which are expected to be
approximately $1.2 million. The pro forma effect of the transaction will not have a material impact on the
Companys financial statements.  F-23