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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 [X]
    
    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, 2003 [  ]
    
    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. 
  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 [X] No [  ] 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 [  ] No [ X ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [  ] No [ X ] 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-KSIGNATURESIndependent Auditors ReportConsolidated Balance SheetsConsolidated Statements of Operations and Comprehensive Income (Loss)Consolidated Statements of Changes in Shareholders DeficitConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsEXHIBIT 10.3EXHIBIT 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 34 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 development and production of computer
software used in billing and financial record keeping for
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 two following entities: STATESBORO MEDIA, INC.  formed in April 1995 and principally
involved in operating an AM radio station serving the community of
Statesboro, Georgia and surrounding areas. This radio station was
sold to an unaffiliated third party during 2003. 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, 2003, the total
number of basic subscribers served by the Systems was 84,596, and the
Companys penetration rate (basic subscribers as a percentage of homes
passed) was approximately 55%. 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. 2




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The Company has 79 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 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, 2003. 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
    
    
    70,635
    
    
    
    40,851
    
    
    
    57.8
    %
    
    
    48.3
    %
    
    
    18,177
    
    
    
    44.5
    %
    
    $
    50.10
    
    
    
    41.0
    %Washington
    
    
    15,175
    
    
    
    9,634
    
    
    
    63.5
    %
    
    
    11.4
    %
    
    
    3,824
    
    
    
    39.7
    %
    
    $
    43.45
    
    
    
    33.3
    %Texas
    
    
    47,950
    
    
    
    23,602
    
    
    
    49.2
    %
    
    
    27.9
    %
    
    
    9,965
    
    
    
    42.2
    %
    
    $
    46.42
    
    
    
    34.8
    %California
    
    
    19,090
    
    
    
    10,509
    
    
    
    55.1
    %
    
    
    12.4
    %
    
    
    5,936
    
    
    
    56.5
    %
    
    $
    44.91
    
    
    
    32.9
    %Total Systems
    
    
    152,850
    
    
    
    84,596
    
    
    
    55.3
    %
    
    
    100.0
    %
    
    
    37,902
    
    
    
    44.8
    %
    
    $
    47.67
    
    
    
    37.5
    %
  (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 40,851
subscribers. Three headends, located in Greenwood and Clemson, South Carolina
and Statesboro, Georgia, serve 36,679 subscribers or 89.8% of the total
subscribers in the region. The region is currently 3




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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 12,650 subscribers
from two headends. The Clemson system, which is home to Clemson University,
is the largest system, serving 12,466 subscribers or approximately 98.5%.
Approximately 85% 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 16,878 subscribers
from three headends, with 15,191 or approximately 90.0% 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 9,022 subscribers from a
single headend with approximately 95% of the subscribers served by 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 2,301 subscribers from
a single headend. Approximately 55% of the systems plant has a channel
capacity of 330 MHz channel capacity and 45% 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 9,634 subscribers
from three headends. The Moses Lake headend serves 63.4% 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 17 headends serving 23,602 subscribers. Eight headends currently serve
84.6% 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 5,043 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. 4




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Mexia, Texas. The Mexia area systems serve 10,218 subscribers from a cluster
of nine headends, with the two largest headends, Mexia and Crockett, serving
54.7% of the subscribers. Approximately 80% of the systems plant has a
channel capacity of 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 7,112 subscribers
from a cluster of three headends. Approximately 82.2% 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 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 1,229 subscribers, with all of the subscribers served by
plant with 400 MHz capacity or better. The California Region. The California Region serves 10,509 subscribers
from seven headends, which are operated from three offices located in Yreka,
Oakhurst and Mount Shasta, California. Three headends serve 9,365 subscribers
or 89.1% of the total subscribers in the region. Oakhurst, California. Oakhurst, California area is one of the entrances to
Yosemite National Park. The Oakhurst area systems serve 3,533 subscribers
from a cluster of five headends. The Oakhurst headend serves 67.6% of the
subscribers in the area. Approximately 75% 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 2,946 subscribers from a single headend. Yreka is the
county seat of Siskiyou County. The Yreka system currently has a minimum
plant capacity of 400 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 4,030
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. Portions of the system serving approximately 85% of the
subscribers are currently at 330 MHz capacity with the remaining 15% at 550
MHz. The completion of an upgrade to 550 MHz is planned. 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, 2003, the Company had approximately 138 full-time
employees and nine part-time employees. Eleven 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 four
categories: basic subscribers, expanded basic subscribers, premium
subscribers, and digital 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. 5




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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 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. 6




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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 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 an 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 7




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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: 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. 8




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High-Speed Internet Service Since its introduction, some local governments and various Company
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 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. 9




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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 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 arrangement 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. 10




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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. 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. 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. This
amount is included in the system sale receivable line item on the
accompanying balance sheet. 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 $435,000
of the original escrow proceeds will remain in escrow until such claims are
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
$46,300,000 of which the Company received approximately $42,600,000 at
closing. The sales price was adjusted at closing for the proration of certain
revenues and expenses and approximately $3,700,000 is being held in escrow
and will be released to the Company one year from the closing of the
transaction, subject to general representations and warranties. This amount
is included in the system sale receivable line item on the accompanying
balance sheet. Historically, the Company has entered into similarly
structured transactions, and collected the amount held in escrow.
Substantially all of the proceeds were used to pay down amounts outstanding
under the Companys Senior Credit Facility. The sales were made pursuant to offers by separate, independent third
parties. Based on the offers made, management determined that acceptance of
the offers would be in the best economic interest of the Company. The sales
were not a result of declining or deteriorating operations nor was it
necessary to create liquidity or reduce outstanding debt. It is the opinion
of management that the Company could have continued existing operations and
met all obligations as they became due. 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. 12




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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. 
 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, 2003. (c) During 2003, 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 31,2003
    
    2002 (1)
    
    2001
    
    2000
    
    1999SUMMARY OF OPERATIONS:Revenue
    
    $
    49,630,146
    
    
    $
    48,784,362
    
    
    $
    50,039,588
    
    
    $
    48,452,897
    
    
    $
    46,746,486Operating income
    
    
    9,665,640
    
    
    
    11,804,492
    
    
    
    17,803,587
    
    
    
    5,110,991
    
    
    
    5,478,602(Loss) income from continuing operations
    
    
    (1,965,428
    )
    
    
    1,892,299
    
    
    
    1,937,116
    
    
    
    (13,392,013
    )
    
    
    (10,790,729
    )Income (loss) from discontinued operations (2)
    
    
    30,742,979
    
    
    
    (423,649
    )
    
    
    (3,801,834
    )
    
    
    (876,430
    )
    
    
    (985,552
    )Net income (loss)
    
    
    28,777,551
    
    
    
    1,468,650
    
    
    
    (1,864,718
    )
    
    
    (14,268,443
    )
    
    
    (11,776,281
    )
  (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 for the year ended December 31, 2001.(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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999BALANCE SHEET DATA:Total assets
    
    $
    96,648,818
    
    
    $
    121,181,353
    
    
    $
    125,926,194
    
    
    $
    135,997,674
    
    
    $
    141,985,167Notes payable
    
    
    116,000,000
    
    
    
    168,031,182
    
    
    
    171,031,182
    
    
    
    182,540,000
    
    
    
    175,090,000Total liabilities
    
    
    123,492,932
    
    
    
    176,803,018
    
    
    
    182,748,509
    
    
    
    192,022,121
    
    
    
    183,741,171Shareholders deficit
    
    
    (26,844,114
    )
    
    
    (55,621,665
    )
    
    
    (56,822,315
    )
    
    
    (56,024,447
    )
    
    
    (41,756,004
    )
 14




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For the quarters endedDecember 31,
    
    September 30,
    
    June 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,
    
    March 31,2003
    
    2003
    
    2003
    
    2003
    
    2002
    
    2002
    
    2002
    
    2002Revenue
    
    $
    12,387,748
    
    
    $
    12,376,798
    
    
    $
    12,459,845
    
    
    $
    12,405,755
    
    
    $
    12,122,784
    
    
    $
    12,183,899
    
    
    $
    12,344,368
    
    
    $
    12,133,311Operating income
    
    
    2,203,778
    
    
    
    2,235,842
    
    
    
    2,597,093
    
    
    
    2,628,927
    
    
    
    3,020,678
    
    
    
    2,709,193
    
    
    
    2,998,846
    
    
    
    3,075,875(Loss) income from
continuing operations
    
    
    (871,160
    )
    
    
    (641,760
    )
    
    
    (277,458
    )
    
    
    (175,050
    )
    
    
    212,582
    
    
    
    354,879
    
    
    
    410,201
    
    
    
    914,637(Loss) income from
discontinued operations
    
    
    (299,384
    )
    
    
    
    
    
    
    
    
    
    
    31,042,363
    
    
    
    188,300
    
    
    
    (45,960
    )
    
    
    (140,640
    )
    
    
    (425,349
    )Net (loss) income
    
    
    (1,170,544
    )
    
    
    (641,760
    )
    
    
    (277,458
    )
    
    
    30,867,313
    
    
    
    400,882
    
    
    
    308,919
    
    
    
    269,561
    
    
    
    489,288
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS 2003 and 2002 Basic subscribers attributable to continuing operations decreased 1,831 or
2.1%, from 86,427 as of December 31, 2002 to 84,596 as of December 31, 2003.
Revenues attributable to continuing operations increased $800,000 or 1.6%,
from $48.8 million to $49.6 million in 2003. Average monthly revenue
attributable to continuing operations per basic subscriber increased $1.89 or
4.1%, 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 $700,000 or 3.8%,
from $18.5 million to $19.2 million for the year ended December 31, 2003.
Operating expenses as a percentage of revenues increased from 37.9% to 38.7%
for the year ended December 31, 2003. 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. General and administrative expenses attributable to continuing operations,
which include on-site office and customer service personnel costs, increased
approximately $2.3 million or 32.9% from $7.0 million to $9.3 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 in prior periods, to the
extent that allocation of these costs would have resulted in non-compliance
with the Companys debt covenants. Corporate overhead expenses represent
actual costs incurred by the Companys Parent for the period that are
attributable to the operations of the Company. The Company has no obligation
or liability to its Parent for past reductions in corporate overhead charges.
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 1.1%, 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. 15




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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. 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. 2002 and 2001 Basic subscribers attributable to continuing operations decreased 5,006 or
5.5%, from 91,433 as of December 31, 2001 to 86,427 as of December 31, 2002. Revenues earned from continuing operations decreased $1.2 million or 2.4%,
from $50.0 million to $48.8 million in 2002. Average monthly revenue earned
from continuing operations per basic subscriber increased $3.05 or 7.1%, from
$42.73 to $45.78 for the year ended December 31, 2002. On a pro forma basis,
adjusting for the acquisition of the Highlands, NC System and the disposition
of the Bainbridge, WA system during 2001, system revenues would have
increased $1.2 million or 2.5%, from $47.6 million to $48.8 million and
revenue earned from continuing operations per average basic subscriber would
have increased $3.46 or 8.2%, from $42.32 to $45.78. Such increases were
attributable to rate increases implemented in a majority of the Companys
systems during the year, revenue from the increased penetration of new
product tiers, and an increase in advertising revenue in 2002 compared to
2001. Cable system operations expense attributable to continuing operations
increased approximately $600,000 or 3.4%, from $17.9 million to $18.5 million
for the year ended December 31, 2002. These operating expenses as a
percentage of revenues increased from 35.8% to 37.9% for the year ended
December 31, 2002. On a pro forma basis, adjusting for the acquisition of the
Highlands, NC System and the disposition of the Bainbridge, WA system during
2001, operating expenses attributable to continuing operations would have
increased $1.5 million or 8.8%, from $17.0 million to $18.5 million and
operating expenses as a percentage of revenue would have increased from 35.6%
to 37.9%. Such increase is primarily attributable to annual wage and benefit
increases, higher programming costs resulting from rate increases by certain
programming vendors and the launch of new programming services in various
systems. General and administrative expenses attributable to continuing operations
decreased approximately $900,000 or 11.4%, from $7.9 million to $7.0 million
for the year ended December 31, 2002. On a pro forma basis, adjusting for the
acquisition of the Highlands, NC System and the disposition of the
Bainbridge, WA system during 2001, general and administrative expenses would
have decreased $500,000 or 6.7%, from $7.5 million to $7.0 million. This
decrease is primarily attributable to decrease in corporate overhead
allocations by the Companys Parent during 2002 compared to 2001. These
corporate overhead allocations were reduced during 2002 as compared to 2001,
as 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 reductions in corporate overhead charges. Management fees are calculated at 5.0% of gross revenues. Management fees
attributable to continuing operations decreased $100,000 or 4.0%, from $2.5
million to $2.4 million for the year ended December 31, 2002. On a pro forma
basis, adjusting for the acquisition of the Highlands, NC System and the
disposition of the Bainbridge, WA during 2001, management fees from
continuing operations would have increased slightly, which is attributable to
the revenue increases discussed above. Depreciation and amortization expense attributable to continuing operations
decreased $7.9 million or 47.3% from $16.7 million to $8.8 million in 2002.
The decrease is primarily attributable to the Companys implementation of
SFAS No. 142, Goodwill and Other Intangible Assets. As of December 31, 2001,
the Company discontinued amortizing its franchise agreements and goodwill,
resulting in a decrease of approximately $8.1 million in amortization expense
attributable to continuing operations for the year ended December 31, 2002.
This is offset by depreciation and amortization of plant, equipment, and
other intangible assets acquired during 2002. 16




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Interest expense and amortization of loan fees allocated to continuing
operations decreased $5.9 million or 37.3% from $15.8 million to $9.9 million
for the year ended December 31, 2002. This decrease is attributable to the
Companys implementation of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, which resulted in the
recognition of an unrealized loss of $2.2 million related to the Companys
interest rate swap agreements in 2001. The Company subsequently recognized
an unrealized gain of $2.1 million in 2002, also related to the Companys
interest rate swap agreements. These amounts are included in the interest
expense and amortization of loan fees line item in the accompanying financial
statements. In addition, interest expense attributable the Companys Senior
Credit Facility and allocated to continuing operations decreased $1.6 million
or 55.2% from $2.9 million to $1.3 million for the year ended December 31,
2002, due to the fact that proceeds from the sale of the Bainbridge, WA
system were applied to the Facility in December of 2001. 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 $2.2 million
or 10.6%, from $20.8 million to $18.6 million for the year ended December 31,
2003, and EBITDA margin decreased from 42.7% to 37.5% 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 from continuing operations decreased approximately $900,000 or
4.1%, from $21.7 million to $20.8 million for the year ended December 31,
2002, and EBITDA margin decreased from 43.4% to 42.7% for the year ended
December 31, 2003. On a pro forma basis adjusting for the acquisition of the
Highlands, NC System and the disposition of the Bainbridge, WA during 2001,
EBITDA would have remained relatively constant at $20.8 million for the years
ended December 31, 2002 and 2001, and EBITDA margin would have decreased from
43.6% to 42.7% in 2002. EBITDA. The aforementioned increases in revenues
were offset by increased operating expenses resulting from rate increases by
certain programming vendors, as 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: Year Ended December 31,2003
    
    2002
    
    2001EBITDA
    
    $
    18,616,212
    
    
    $
    20,812,151
    
    
    $
    21,710,325Depreciation and amortization
expense
    
    
    (8,949,926
    )
    
    
    (8,778,383
    )
    
    
    (16,666,067
    )(Loss) gain on disposal of assets
    
    
    (646
    )
    
    
    (229,276
    )
    
    
    12,759,329Operating income
    
    
    9,665,640
    
    
    
    11,804,492
    
    
    
    17,803,587Interest
expense and amortization of loan fees
    
    
    (11,218,849
    )
    
    
    (9,935,420
    )
    
    
    (15,811,688
    )Loss on
extinguishment of debt
    
    
    (257,391
    )
    
    
    
    
    
    
    Other, net
    
    
    29,469
    
    
    
    33,800
    
    
    
    (51,591
    )(Loss)
income from continuing operations before income tax expense
    
    
    (1,781,131
    )
    
    
    1,902,872
    
    
    
    1,940,308Income tax expense
    
    
    (184,297
    )
    
    
    (10,573
    )
    
    
    (3,192
    )(Loss)
income from continuing operations
    
    $
    (1,965,428
    )
    
    $
    1,892,299
    
    
    $
    1,937,116
 17




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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, 2003, 2002 and
2001, the Companys net cash provided from operations was $6.4 million, $9.1
million and $10.1 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. Acquisitions of cable
television systems during these periods primarily were financed through bank
borrowings. Based on amounts outstanding as of December 31, 2003, the
Companys debt service obligations for the years ended December 31, 2004 and
2005 are expected to be approximately $2.8 million and $3.4 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. 2003 Net cash provided by operating activities was $6.4 million for the year
ended December 31, 2003. Adjustments to the $28.7 million net income for the
period to reconcile to net cash provided by operating activities consisted
primarily of a gain on disposal of assets of $31.4 million related primarily
to the sale of the Aiken and Port Angeles systems and changes in other
operating assets and liabilities of $1.1 million, off-set by deprecation and
amortization of $9.4 million, amortization of loan fees of $500,000 and a
loss on extinguishment of debt of $300,000. Net cash provided by investing activities was $46.4 million for the year
ended December 31, 2003, and consisted primarily of $53.4 million of proceeds
from the sale of the Aiken and Port Angeles systems, offset by capital
expenditures of $7.0 million. Net cash used in financing activities was $52.4 million for the year
ended December 31, 2003, and consisted primarily of $68.0 million in
principal payments on notes payable and payment of additional loan fees of
$300,000, offset by borrowings of $16.0 million under the Companys Amended
and Restated Senior Credit Facility. 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, 2003, 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
fee 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. Annual maturities of the Amended and Restated Senior Credit Facility are as
follows: 18




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##### Table of Contents



PrincipalPayments2004
    
    $
    2,800,0002005
    
    
    3,400,0002006
    
    
    9,800,000Total
    
    $
    16,000,000
 The interest rate per annum applicable to the Amended and Restated Senior
Credit Facility is a fluctuating rate of interest measured by reference to
either: (i) the Index Rate, as defined, plus a borrowing margin of 2.50%; or
(ii) the London interbank offered rate (LIBOR), plus a borrowing margin of
3.75%. The Amended and Restated Senior Credit Facility contains a number of
covenants, which among other things, require the Company to comply with
specified financial ratios, including maintenance, as tested on a quarterly
basis, of: (A) a Maximum Total Leverage Ratio (the ratio of Total Debt to
Annualized Operating Cash Flow (as defined)) of not more than 6.50 to 1.00;
(B) a Maximum Senior Leverage Ratio (the ratio of Senior Debt to Annualized
Operating Cash Flow (as defined)) of not more than 1.00 to 1.00 (C) an
Interest Coverage Ratio (the ratio of Operating Cash Flow (as defined) to
Total Cash Interest Expense of not less than 1.50 to 1.00 initially; and (D)
a Minimum Fixed Charge Coverage Ratio (the ratio of Annualized Operating Cash
Flow (as defined) to the Companys Fixed Charges (as defined) of not less
than 1.00 to 1.00. As of December 31, 2003, the Company was in compliance
with the covenants required by the Refinanced Credit Facility. As of the date of this filling, the Amended and Restated Senior Credit
Facility had an outstanding balance of $16.0 million and applicable interest
rates are as follows: $12.0 million at a LIBOR based interest rate of
$4.88%, $3.0 million at a LIBOR based interest rate of 4.86% and $1.0 million
at a LIBOR based interest rate of 4.85%. These interest rates expire in May,
March and March of 2004 respectively, at which time new rates will be
established. Obligations and Commitments In addition to working capital needs for ongoing operations, the Company has
capital requirements for (i) annual maturities related
to the notes payable and (ii) required minimum operating lease payments. The
following table summarizes the Companys contractual obligations as of
December 31, 2003 and the anticipated effect of these obligations on its
liquidity in future years: Payments Due By PeriodLess than 1
    
    1 - 3
    
    3 - 5

    
    More than 5Total
    
    year
    
    years
    
    years

    
    yearsNotes
payable principal payments
    
    $
    116,000,000
    
    
    $
    2,800,000
    
    
    $
    113,200,000
    
    
    $
    
    

    $
    Minimum operating lease payments
    
    
    304,121
    
    
    
    98,802
    
    
    
    159,807
    
    
    
    45,512
    

    
    Total
    
    $
    116,304,121
    
    
    $
    2,898,802
    
    
    $
    113,359,807
    
    
    $
    45,512
    

    $
    
  (a)
    
    These contractual obligations do not include accounts payable and
accrued liabilities, which are expected to be paid in 2004.(b)
    
    The Company also rents utility poles in its operations. Amounts
due under these agreements are not included in the above minimum
operating lease payments as, generally, pole rentals are cancelable on
short notice. The Company does, however, anticipate that such rentals
will recur. 19




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##### Table of Contents



Capital Expenditures For the year ended December 31, 2003, the Company had capital expenditures of
approximately $7.0 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 $7.0 million in capital
expenditures for 2004. This represents anticipated expenditures for upgrading
and rebuilding certain distribution facilities, continued deployment of
high-speed Internet services, extensions of distribution facilities to add
new subscribers and vehicle replacements. It is expected that cash flow from
operations, including receipt of the system sale receivables, 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. This amount is included in the system sale
receivable line item on the accompanying balance sheet. 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 $435,000 of the original escrow proceeds will remain
in escrow until such claims are resolved. The remaining 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
$46,300,000 of which the Company received approximately $42,600,000 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 $3,700,000 is being held in escrow and will be released to the
Company one year from the closing of the transaction, subject to general
representations and warranties. This amount is included in the system sale
receivable line item on the accompanying balance sheet. Historically, the
Company has entered into similarly structured transactions, and collected the
amount held in escrow. The sales were made pursuant to offers by separate, independent third
parties. Based on the offers made, management determined that acceptance of
the offers would be in the best economic interest of the Company. The sales
were not a result of declining or deteriorating operations nor was it
necessary to create liquidity or reduce outstanding debt. It is the opinion
of management that the Company could have continued existing operations and
met all obligations as they became due. CRITICAL ACCOUNTING POLICIES This discussion and analysis of our financial condition and results of
operations is based on the Companys financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The following critical accounting policies, which have been
chosen among alternatives, require a more significant amount of
management judgment than other accounting policies the Company employs. Revenue Recognition Cable television service revenue, including service and maintenance, is
recognized in the month service is provided to customers. Advance
payments on cable services to be rendered are recorded as subscriber
prepayments. Revenues resulting from the sale of local spot advertising
are recognized when the related advertisements or commercials appear
before the public. 20




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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, 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. Accordingly,
amortization of goodwill and franchise agreements ceased on
December 31, 2001. The Company tested goodwill for impairment
during the fourth quarter of 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 during the fourth quarter of 2003 and 2002 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. Management believes the franchises have indefinite lives because the
franchises are expected to be used by the Company for the foreseeable
future and effects of obsolescence, competition and other factors are
minimal. In addition, the level of maintenance expenditures required to
obtain the future cash flows expected from the franchises are not
material in relation to the carrying value of the franchises. While the
franchises have defined lives based on the franchising authority,
renewals are routinely granted, and management expects them to continue
to be granted, 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 December 2003, the FASB revised FASB interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights
and accordingly should consolidate the entity. FIN 46R requires that
calendar year public companies apply the unmodified or revised
provisions of FIN 46 to entities previously considered special purpose
entities in the reporting period ended December 31, 2003. The
interpretation is applicable to all other entities not previously
considered special purpose entities in the quarter ending March 31,
2004. The adoption of FIN 46R did not have an impact on the Companys
December 31, 2003 financial statements. Further, management does not
anticipate that the adoption in 2004 as it relates to non-special
purpose entities will have an impact on the Companys financial
statements. In June 2001, SFAS No. 143, Accounting for Asset Retirement Obligations,
was issued. SFAS No. 143 requires the Company to record the fair value
of an asset retirement obligation as a liability in the period in which
it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The Company also would
record a corresponding asset that is depreciated over the life of the
asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation would be adjusted at the end of each period
to reflect the passage of time and changes in the estimated future cash
flows underlying the obligation. The Company was required to adopt SFAS
No. 143 on January 1, 2003. Under the scope of this pronouncement, the
Company has asset retirement obligations associated with the removal of
equipment from poles and headend sites that are leased from third
parties. The adoption of SFAS No. 143 did not have a material effect on
the Companys financial statements. 21




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##### Table of Contents



In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections, was
issued. SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of
the gain or loss as extraordinary, as the use of such extinguishments
have become part of the risk management strategy of many companies.
SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to require
sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions
of SFAS No. 145 related to the rescission of SFAS No. 4, Reporting Gains
and Losses from Extinguishment of Debt, were applied in fiscal years
beginning after May 15, 2002. The provisions of SFAS No. 145 related to
SFAS No. 13 were effective for transactions occurring after May 15,
2002. The adoption of SFAS No. 145 had no effect on the Companys
historical financial statements; however, it did impact the
classification of the loss on extinguishment of debt recorded in 2003. In November 2002, FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57
and 107 and a Rescission of FASB Interpretation No. 34, was issued.
This interpretation enhances the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the Interpretation were
applicable to guarantees issued or modified after December 31, 2002 and
the disclosure requirements were effective for financial statements of
interim or annual periods ending after December 31, 2002. Application
of this Interpretation had no effect on the Companys 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. Management
believes that the combination of management fees and allocated costs shown in
the accompanying consolidated statements of operations exceed direct costs
for all periods presented. The Company reflected $1,593,183, $221,834 and
$811,407 of expenses attributable to continuing operations on the
accompanying statements of operations for these services for the years ended
December 31, 2003, 2002, and 2001, respectively. 22




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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 $191,727, $220,040 and $145,279, net, attributable
to continuing operations under the terms of these agreements during 2003,
2002, and 2001, 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. 
 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 $160,000. 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, 2003, 2002 and 2001 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 Previous Independent Accountant The Company dismissed Arthur Andersen LLP as its independent auditor on
July 10, 2002. The decision to dismiss Arthur Andersen was approved by the
Board of Directors. During 2001 and through July 10, 2002, there were no disagreements with
Arthur Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if
not resolved to Arthur Andersens satisfaction, would have caused Arthur
Andersen to make reference to the subject matter in connection with its
report on the Companys financial statements for such years; and there were
no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
Arthur Andersens reports on the financial statements of the Company for
2000 did not contain an adverse opinion or disclaimer of opinion, nor was
it qualified or modified as to uncertainty, audit scope, or accounting
principles. The Company requested that Arthur Andersen provide a currently dated letter
confirming its agreement with the above statements. Arthur Andersen
informed the Company that, because of Arthur Andersens current situation,
it is unable to provide such letter. New Independent Accountant On July 10, 2002, the Company engaged KPMG LLP as the firm of independent
auditors to audit the Companys financial statements for the fiscal year
ending December 31, 2002. The decision to engage KPMG was approved by the
Board of Directors. During the period from January 2000 to April 1, 2002,
The Company did not consult KPMG regarding (i) the application of
accounting principles to a specified transaction, either completed or
proposed, that was an important factor the Company considered in reaching a
decision on an accounting, auditing, or financial reporting issue, or the
type of audit opinion that might be rendered on our financial statements,
or (ii) any matter that was the subject of either a disagreement 23




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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 have materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 24




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##### Table of Contents



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
    
    
    62
    
    
    Director, Chairman of the Board and Chief Executive OfficerRichard I. Clark
    
    
    46
    
    
    Director, Executive Vice President, Treasurer and Assistant SecretaryGary S. Jones
    
    
    46
    
    
    PresidentRichard J. Dyste
    
    
    58
    
    
    Senior Vice President, Technical ServicesR. Gregory Ferrer
    
    
    48
    
    
    Vice President and Assistant TreasurerH. Lee Johnson
    
    
    60
    
    
    Divisional Vice PresidentJohn E. Iverson
    
    
    67
    
    
    Director and SecretaryMatthew J. Cryan
    
    
    39
    
    
    Vice President, Budgets and PlanningRick J. McElwee
    
    
    42
    
    
    Vice President, Controller
 JOHN S. WHETZELL (AGE 62.). 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 29 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 67). 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 41 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 46). 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 25 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. 25




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##### Table of Contents



GARY S. JONES (AGE 46). 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 58). Mr. Dyste serves as Senior Vice
President-Technical Services of Northland Telecommunications Corporation and
each of its subsidiaries. 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 60). 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 34 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 48). 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 39). 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 42). 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. 26




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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, 2003 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
    
    
    1,154,200
    
    
    
    25.58
    %Adele P. Butler
    
    
    530,000
    
    
    
    11.75
    %Pamela B. McCabe
    
    
    510,144
    
    
    
    11.30
    %Robert M. Arnold
    
    
    384,000
    
    
    
    8.50
    %Richard I. Clark
    
    
    317,000
    
    
    
    7.02
    %Robert A. Mandich
    
    
    278,400
    
    
    
    6.17
    %Gary S. Jones
    
    
    60,818
    
    
    
    1.35
    %John E. Iverson
    
    
    50,000
    
    
    
    1.11
    %Richard J. Dyste
    
    
    32,714
    
    
    
    *H. Lee Johnson
    
    
    25,455
    
    
    
    *R. Gregory Ferrer
    
    
    12,688
    
    
    
    *Matthew J. Cryan
    
    
    6,998
    
    
    
    *Rick J. McElwee
    
    
    6,296
    
    
    
    *All executive officers and directors as a group
(nine persons)
    
    
    1,666,149
    
    
    
    36.92
    %
   *
    
    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. 27




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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, 2003, 2002 and 2001, the Company paid a Management Fee of
$2.5 million, $2.4 million and $2.5 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. Management
believes that the combination of management fees and allocated costs shown in
the accompanying consolidated statements of operations exceed direct costs
for all periods presented. The Company reflected $1593,183, $221,834 and
$811,407 of expenses attributable to continuing operations on the
accompanying statements of operations for these services for the years ended
December 31, 2003, 2002, and 2001, respectively. 28




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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 $191,727, $220,040 and $145,279, net, attributable
to continuing operations under the terms of these agreements during 2003,
2002, and 2001, 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, 2003 and 2002 are set forth below. Year Ended December 31,2003
    
    2002Audit fees
    
    $
    71,293
    
    
    $
    85,526Audit-related fees
    
    $
    2,405
    
    
    
    2,405Total
    
    $
    73,698
    
    
    $
    87,932
 Audit fees for the fiscal years ended December 31, 2003 and 2002 were for
professional services rendered for the audits of the Companys financial
statements for the respective years, quarterly review of the financial
statements included in the Companys Quarterly Reports on Form 10-Q, and the
reaudit of the Companys 2001 financial statements during 2002. Audit-Related Fees as of the fiscal years ended December 31, 2003 and 2002
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. 29




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K SEQUENTIALLY
NUMBERED
PAGE(a) FINANCIAL STATEMENTS:Independent Auditors Report
    
    
    F-1Consolidated Balance SheetsDecember 31, 2003 and 2002
    
    
    F-2Consolidated Statements of Operations and Comprehensive Income (Loss) for the years
ended December 31, 2003, 2002 and 2001
    
    
    F-4Consolidated Statements of Changes in Shareholders Deficit for
the years ended December 31, 2003, 2002 and 2001
    
    
    F-5Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001
    
    
    F-6Notes to Financial StatementsDecember 31, 2003 and 2002
    
    
    F-8
  (b)
    
    REPORTS ON FORM 8-K :NONE  (c)
    
    EXHIBITS: 10.3
    
    Amended and Restated Credit Agreement between Northland Cable
Television, Inc. and General Electric Capital Corporation dated
November 13, 2003.31 (a)
    
    Certification of Chief Executive Officer dated March 30, 2004
pursuant to section 302 of the Sarbanes-Oxley Act31 (b)
    
    Certification of President (Principal Financial and Accounting
Officer) dated March 30, 2004 pursuant to section 302 of the
Sarbanes-Oxley Act32 (a)
    
    Certification of Chief Executive Officer dated March 30, 2004
pursuant to section 906 of the Sarbanes-Oxley Act32 (b)
    
    Certification of President (Principal Financial and Accounting
Officer) dated March 30, 2004 pursuant to section 906 of the
Sarbanes-Oxley Act
 30




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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: 3/30/03
 Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. SIGNATURES
    
    CAPACITIES
    
    DATE/s/
    
    John S. Whetzell
    
    Director, Chairman of the Board and
    
    3-30-04Chief Executive OfficerJohn S. Whetzell/s/
    
    Richard I. Clark
    
    Director, Executive Vice President, Treasurer
    
    3-30-04and Assistant SecretaryRichard I. Clark/s/
    
    Gary S. Jones
    
    President
    
    3-30-04Gary S. Jones/s/
    
    John E. Iverson
    
    Director and Secretary
    
    3-30-04John E. Iverson
 31




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##### Table of Contents



Independent Auditors Report The Shareholder
Northland Cable Television, Inc.: We have audited the accompanying consolidated balance sheets of Northland
Cable Television, Inc. (a Washington Corporation and wholly owned subsidiary
of Northland Telecommunications Corporation) and subsidiary as of December 31,
2003 and 2002, and the related consolidated statements of operations and
comprehensive income (loss), changes in shareholders deficit, and cash flows
for each of the years in the three year period ended December 31, 2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and
the results of their operations and their cash flows for each of the years in
the three year period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. As discussed in note 3(f) to the financial statements, the Company changed its
method of accounting for goodwill and intangible assets beginning January 1,
2002. As discussed in note 3(k) to the financial statements, the Company changed its
method of accounting for derivative instruments beginning January 1, 2001. Seattle, Washington
March 12,2004 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, 2003 and 2002 2003
    
    2002AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,134,254
    
    
    
    1,666,097Due from Parent and affiliates
    
    
    653,029
    
    
    
    796,464Accounts receivable
    
    
    1,663,699
    
    
    
    2,684,548System sale receivable
    
    
    4,279,968
    
    
    
    Prepaid expenses
    
    
    464,934
    
    
    
    457,409Total current assets
    
    
    9,195,884
    
    
    
    5,604,518Investment in cable television properties:Property and equipment, at cost
    
    
    102,748,514
    
    
    
    118,081,523Less accumulated depreciation
    
    
    (60,525,405
    )
    
    
    (63,160,487
    )42,223,109
    
    
    
    54,921,036Franchise agreements (net of accumulated amortization
of $38,923,291 and $48,279,931, respectively)
    
    
    39,493,670
    
    
    
    53,393,281Goodwill (net of accumulated amortization of $2,407,104)
    
    
    3,937,329
    
    
    
    3,937,329Other intangible assets (net of accumulated amortization
of $3,205,791 and $3,765,621, respectively)
    
    
    71,197
    
    
    
    136,608Total investment in cable television properties
    
    
    85,725,305
    
    
    
    112,388,254Loan fees (net of accumulated amortization of $2,307,604
and $2,650,564, respectively)
    
    
    1,727,629
    
    
    
    3,188,581Total assets
    
    $
    96,648,818
    
    
    
    121,181,353
 (Continued) F-2




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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Consolidated Balance Sheets December 31, 2003 and 2002 2003
    
    2002Liabilities and Shareholders DeficitCurrent liabilities:Accounts payable
    
    $
    700,984
    
    
    
    650,757Subscriber prepayments
    
    
    1,401,200
    
    
    
    2,121,413Accrued expenses
    
    
    5,034,606
    
    
    
    5,525,890Converter deposits
    
    
    107,101
    
    
    
    125,179Due to affiliates
    
    
    96,847
    
    
    
    228,220Interest rate swap agreements
    
    
    
    
    
    
    120,377Current portion of notes payable
    
    
    2,800,000
    
    
    
    2,775,920Total current liabilities
    
    
    10,140,738
    
    
    
    11,547,756Notes payable, net of current portion
    
    
    113,200,000
    
    
    
    165,255,262Deferred income taxes
    
    
    152,194
    
    
    
    Total liabilities
    
    
    123,492,932
    
    
    
    176,803,018Commitments and contingenciesShareholders deficit:Common stock (par value $1 .00 per share)Authorized 50,000 shares; 10,000 shares issued and
outstanding) and additional paid-in capital
    
    
    12,359,377
    
    
    
    12,359,377Accumulated deficit
    
    
    (39,203,491
    )
    
    
    (67,981,042
    )Total shareholders deficit
    
    
    (26,844,114
    )
    
    
    (55,621,665
    )Total liabilities and shareholders deficit
    
    $
    96,648,818
    
    
    
    121,181,353
 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 Operations and Comprehensive Income (Loss) Years ended December 31,2003, 2002, and 2001 2003
    
    2002
    
    2001Revenues:Service revenues
    
    $
    49,630,146
    
    
    
    48,784,362
    
    
    
    50,039,588Operating expenses:Cable system operations (including $303,615,
$268,706 and $270,540, net paid to
affiliates, excluding depreciation and
amortization recorded below
    
    
    19,246,284
    
    
    
    18,502,055
    
    
    
    17,931,190General and administrative (including
$1,481,295, $173,168 and $617,070, net, paid
to affiliates)
    
    
    9,285,810
    
    
    
    7,030,938
    
    
    
    7,896,093Management fees to Parent
    
    
    2,481,840
    
    
    
    2,439,218
    
    
    
    2,501,980Depreciation and amortization
    
    
    8,949,926
    
    
    
    8,778,383
    
    
    
    16,666,067Loss (gain) on disposal of assets
    
    
    646
    
    
    
    229,276
    
    
    
    (12,759,329
    )Total operating expenses
    
    
    39,964,506
    
    
    
    36,979,870
    
    
    
    32,236,001Income from operations
    
    
    9,665,640
    
    
    
    11,804,492
    
    
    
    17,803,587Other income (expense):Interest expense and amortization of loan fees
    
    
    (11,218,849
    )
    
    
    (9,935,420
    )
    
    
    (15,811,688
    )Loss on extinguishment of debt
    
    
    (257,391
    )
    
    
    
    
    
    
    Other, net
    
    
    29,469
    
    
    
    33,800
    
    
    
    (51,591
    )(Loss) income from continuing
operations before income tax
expense
    
    
    (1,781,131
    )
    
    
    1,902,872
    
    
    
    1,940,308Income tax expense
    
    
    (184,297
    )
    
    
    (10,573
    )
    
    
    (3,192
    )(Loss) income from continuing
operations
    
    
    (1,965,428
    )
    
    
    1,892,299
    
    
    
    1,937,116Discontinued operations:Income (loss) from operations of Aiken and
Port Angeles systems, net of tax of $660,000
(including gain on sale of systems of $31,386,201 in 2003)
    
    
    30,742,979
    
    
    
    (423,649
    )
    
    
    (3,801,834
    )Net income (loss)
    
    
    28,777,551
    
    
    
    1,468,650
    
    
    
    (1,864,718
    )Other comprehensive (loss) income:Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    689,000Reclassification of accumulated other
comprehensive income to unrealized gain
(loss) on interest rate swap agreements
    
    
    
    
    
    
    (268,000
    )
    
    
    (421,000
    )Other comprehensive (loss)
income
    
    
    
    
    
    
    (268,000
    )
    
    
    268,000Total comprehensive income
(loss)
    
    $
    28,777,551
    
    
    
    1,200,650
    
    
    
    (1,596,718
    )
 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 Changes in Shareholders Deficit Years ended December 31, 2003, 2002, and 2001 Common stock
    
    
    
    
    
    Accumulatedand additional
    
    
    
    
    
    otherpaid-in capital
    
    
    
    
    
    comprehensive
    
    AccumulatedShares
    
    Amount
    
    income
    
    deficit
    
    TotalBalance, December 31, 2000
    
    
    10,000
    
    
    $
    11,560,527
    
    
    
    
    
    
    
    (67,584,974
    )
    
    
    (56,024,447
    )Equity contribution in-kind from Parent
    
    
    
    
    
    
    798,850
    
    
    
    
    
    
    
    
    
    
    
    798,850Net loss and other comprehensive income, net
    
    
    
    
    
    
    
    
    
    
    268,000
    
    
    
    (1,864,718
    )
    
    
    (1,596,718
    )Balance, 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
    )
 See accompanying notes to consolidated financial statements. F-5




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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, 2003, 2002, and 2001 2003
    
    2002
    
    2001Cash flows from operating activities:Net income (loss)
    
    $
    28,777,551
    
    
    
    1,468,650
    
    
    
    (1,864,718
    )Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:Depreciation and amortization
    
    
    9,367,724
    
    
    
    10,674,194
    
    
    
    20,737,176Amortization of loan costs
    
    
    500,242
    
    
    
    680,351
    
    
    
    673,875Loss on extinguishment of debt
    
    
    257,391
    
    
    
    
    
    
    
    Loss (gain) on disposal of assets
    
    
    (31,385,555
    )
    
    
    229,276
    
    
    
    (12,759,329
    )Unrealized (gain) loss on interest
rate swap agreements
    
    
    (120,377
    )
    
    
    (2,067,210
    )
    
    
    2,187,587Deferred income tax expense
    
    
    152,194
    
    
    
    
    
    
    
    Other
    
    
    21,313
    
    
    
    
    
    
    
    Changes in certain assets and
liabilities, net of acquisition:Due to/from affiliates
    
    
    3,589
    
    
    
    (515,335
    )
    
    
    1,053,288Accounts receivable
    
    
    778,264
    
    
    
    (473,076
    )
    
    
    (19,146
    )Prepaid expenses
    
    
    (45,117
    )
    
    
    90,071
    
    
    
    31,593Accounts payable
    
    
    (191,971
    )
    
    
    (285,504
    )
    
    
    412,588Subscriber prepayments
    
    
    (1,137,444
    )
    
    
    223,301
    
    
    
    159,036Other current liabilities, net
    
    
    (552,562
    )
    
    
    (901,949
    )
    
    
    (532,603
    )Net cash provided by
operating activities
    
    
    6,425,242
    
    
    
    9,122,769
    
    
    
    10,079,347Cash flows from investing activities:Acquisition of cable systems
    
    
    
    
    
    
    
    
    
    
    (3,855,373
    )Investment in property and equipment
    
    
    (7,041,321
    )
    
    
    (8,262,327
    )
    
    
    (13,103,679
    )Proceeds from disposition of cable systems
    
    
    53,424,467
    
    
    
    1,017,457
    
    
    
    18,526,332Proceeds from disposal of assets
    
    
    18,678
    
    
    
    79,591
    
    
    
    78,885Franchise fees and other intangibles
    
    
    (6,534
    )
    
    
    (8,295
    )
    
    
    Net cash provided by
(used in) investing
activities
    
    
    46,395,290
    
    
    
    (7,173,574
    )
    
    
    1,646,165
 (Continued) F-6




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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 2003, 2002, and 2001 2003
    
    2002
    
    2001Cash flows from financing activities:Proceeds from notes payable
    
    $
    16,000,000
    
    
    
    
    
    
    
    6,800,000Principal payments on notes payable
    
    
    (68,031,182
    )
    
    
    (3,000,000
    )
    
    
    (18,308,818
    )Loan fees
    
    
    (321,193
    )
    
    
    (7,197
    )
    
    
    (44,020
    )Net cash used in financing activities
    
    
    (52,352,375
    )
    
    
    (3,007,197
    )
    
    
    (11,552,838
    )Increase (decrease) in cash
    
    
    468,157
    
    
    
    (1,058,002
    )
    
    
    172,674Cash and cash equivalents, beginning of year
    
    
    1,666,097
    
    
    
    2,724,099
    
    
    
    2,551,425Cash and cash equivalents, end of year
    
    $
    2,134,254
    
    
    
    1,666,097
    
    
    
    2,724,099Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    11,640,908
    
    
    
    15,764,020
    
    
    
    17,678,819Cash paid for state income taxes
    
    
    9,810
    
    
    
    10,573
    
    
    
    3,192
 Supplemental disclosure of noncash activities: In association with the acquisition of the cable television systems
in 2001, the Company assumed certain capital balances related to the
accounts receivable, prepaid expenses, accrued expenses, deposits,
and subscriber prepayments. The Company also received an in-kind
equity contribution from its Parent in the amount of $798,850. 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-7




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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, 2003 and 2002  (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, 2003, NCTV had 79 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. This includes reclassification of unrealized
gains and losses on interest rate swap agreements, which were previously
classified in a separate financial statement caption within other income
(expense), to the interest expense and amortization of loan fees financial
statement caption.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. (Continued) F-8




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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, 2003 and 2002  (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 stated at net realizable value. Receivables 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
statement of operations. (Continued) 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 31,2003 and 2002  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 recorded depreciation expense within continuing operations of
$8,857,018, $8,539,836, and $8,041,696 in 2003, 2002 and 2001
respectively, and depreciation expense within discontinued operations of
$416,545, $1,770,762 and $1,559,135 in 2003, 2002 and 2001, respectively.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 also reviews the carrying value of
its property and equipment for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. As
of December 31,2003 there has been no indication of such impairment.(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
on an annual basis. The amortization of existing goodwill, which is
related to two profit centers remaining in continuing operation 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 goodwill and franchise agreements ceased on
December 31, 2001. The Company tested goodwill for impairment
during the fourth quarter of 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 during the fourth quarter of 2003 and 2002 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. (Continued) F-10




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NORTHLAND CABLE TELEVISION, INC.
(A Wholly Owned Subsidiary of Northland Telecommunications Corporation)AND SUBSIDIARY Notes to Consolidated Financial Statements December 31,2003 and 2002  As required by SFAS No. 142, the statement has not been retroactively
applied to the results for the periods prior to adoption. A reconciliation
of net loss for the year ended December 31, 2001, as if amortization of
franchise agreements and goodwill had not been recorded, is presented
below: Continuing
    
    Discontinuedoperations
    
    operations
    
    TotalNet income (loss):Reported net income (loss)
    
    $
    1,937,116
    
    
    
    (3,801,834
    )
    
    
    (1,864,718
    )Add back:Amortization of franchise agreements
    
    
    7,956,761
    
    
    
    2,386,926
    
    
    
    10,343,687Amortization of goodwill Adjusted
    
    
    171,903
    
    
    
    
    
    
    
    171,903Adjusted net income (loss)
    
    
    10,065,780
    
    
    
    (1,414,908
    )
    
    
    8,650,872
  (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 3.78 years). The Company
recorded amortization of loan fees attributable to continuing operations of
$438,996, $451,845 and $486,174 in 2003, 2002 and 2001, respectively, and
amortization of loan fees attributable to discontinued operations of
$61,246, $228,507 and $187,700 in 2003, 2002 and 2001, respectively. Future
amortization of loan fees is expected to be as follows: 2004
    
    $
    471,4382005
    
    
    471,4382006
    
    
    471,4382007
    
    
    313,315$
    1,727,629
  (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 2.75 years). The Company recorded amortization expense attributable to
continuing operations of $92,908, $238,547 and $8,624,371 in 2003, 2002
and 2001, respectively, and amortization expense attributable to
discontinued operations of $1,253, $125,048 and $2,511,974 in 2003, 2002
and 2001, respectively. Future amortization of other intangible assets is
expected to be as follows: 2004
    
    $
    25,8842005
    
    
    25,8842006
    
    
    19,429$
    71,197
 (Continued) F-11




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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, 2003 and 2002  (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
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 and an
associated liability 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 2003, NCTV was required to make contributions and
was charged $12,065 by the fund. As of December 31, 2003, the fund, related
to all Northland entities, had a balance of $560,350.(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 $2,631,289, $2,619,278 and $2,338,876 in 2003, 2002 and
2001, respectively, and local spot advertising revenues earned in
discontinued operations were $115,178, $517,735 and $405,584 in 2003, 2002
and 2001, 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 against the notional amount of the contract, which in
the Companys case, are interest rates. (Continued) 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, 2003 and 2002  Effective January 1, 2001 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. Accordingly, the Company records all
derivative instruments on the balance sheet at fair value. Depending on
the nature of the hedge, the changes in the fair value of derivatives are
either offset against the change in fair value of the hedged assets or
liabilities through earnings or are recognized in other comprehensive
income until the hedged item is recognized in earnings. Upon adoption of
SFAS No. 133, the Company recognized a gain of $689,000 in other
comprehensive income.The Company elected not to designate its derivatives as hedges under SFAS
No. 133. Accordingly, subsequent to the effective date of SFAS No. 133,
the Company has recorded any change in the fair value of these agreements
in its statements of operations and a corresponding asset/liability on the
balance sheet.(l)
    
    Advertising CostsThe Company expenses advertising costs as they are incurred. Advertising
costs attributable to continuing operations were $1,307,896, $1,173,746,
and $1,260,810 in 2003, 2002 and 2001, respectively, and advertising costs
attributable to discontinued operations were $38,714, $194,266 and
$164,251 in 2003, 2002 and 2001, 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 reporting 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 cash approximates its carrying value. 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 $99,625,000 and $67,125,000 at December 31,
2003 and 2002, respectively (note 7). (Continued) F-13




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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, 2003 and 2002  (p)
    
    Recently Adopted Accounting PronouncementsIn December 2003, the FASB revised FASB interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities,which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R requires that calendar
year public companies apply the unmodified or revised provisions of FIN 46
to entities previously considered special purpose entities in the
reporting period ended December 31, 2003. The interpretation is applicable
to all other entities not previously considered special purpose entities
in the quarter ending March 31, 2004. The adoption of FIN 46R did not have
an impact on the Companys December 31, 2003 financial statements.
Further, management does not anticipate that the adoption in 2004 as it
relates to non-special purpose entities will have an impact on the
Companys financial statements.In June 2001, SFAS No. 143, Accounting for Asset Retirement Obligations,
was issued. SFAS No. 143 requires the Company to record the fair value of
an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development, and/or normal use of the assets. The Company also would
record a corresponding asset that is depreciated over the life of the
asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation would be adjusted at the end of each period to
reflect the passage of tune and changes in the estimated future cash flows
underlying the obligation. The Company was required to adopt SFAS No. 143
on January 1, 2003. Under the scope of this pronouncement, the Company has
asset retirement obligations associated with the removal of equipment from
poles and headend sites that are leased from third parties. The adoption
of SFAS No. 143 did not have a material effect on the Companys financial
statements.In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections,was
issued. SFAS No. 145 amends existing guidance on reporting gains and losses
on the extinguishment of debt to prohibit the classification of the gain or
loss as extraordinary, as the use of such extinguishments have become part
of the risk management strategy of many companies. SFAS No. 145 also amends
SFAS No. 13, Accounting for Leases,to require sale-leaseback accounting
for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4, Reporting Gains and Losses from Extinguishment of
Debt,were applied in fiscal years beginning after May 15, 2002. The
provisions of SFAS No. 145 related to SFAS No. 13 were effective for
transactions occurring after May 15,
2002. The adoption of SFAS No. 145 had no effect on the Companys
historical financial statements; however, it did impact the classification
of the loss on extinguishment of debt recorded in 2003.In November 2002, FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and
107 and a Rescission of FASB Interpretation No. 34,was issued. This
interpretation enhances the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees issued. The (Continued) 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, 2003 and 2002  Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value
of the obligation undertaken. The initial recognition and measurement
provisions of the Interpretation were applicable to guarantees issued
or modified after December 31, 2002 and the disclosure requirements
were effective for financial statements of interim or annual periods
ending after December 31, 2002. Application of this Interpretation had
no effect on the Companys financial statements.  (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 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. Management believes that
the combination of management fees and allocated costs shown in the
accompanying consolidated statements of operations exceed direct costs
for all periods presented. The Company recorded $1,593,183, $221,834
and $811,407 of expenses attributable to continuing operations on the
accompanying statements of operations for these services for the years
ended December 31, 2003, 2002, and 2001, respectively, and $173,582,
$47,693 and $153,383 of expenses attributable to discontinued
operations on the accompanying statements of operations. (Continued) F-15




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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, 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 $191,727,
$220,040 and $145,279, net, attributable to continuing operations
under the terms of these agreements during 2003, 2002, and 2001,
respectively, and received $15,217, $44,880 and $55,182, net,
attributable to discontinued operations under the terms of these
agreements during 2003, 2002, and 2001.  (5)
    
    Property and Equipment  Property and equipment consists of the following: December 312003
    
    2002Land and buildings
    
    $
    2,206,269
    
    
    
    2,465,286Distribution plant
    
    
    94,681,606
    
    
    
    109,320,012Other equipment
    
    
    4,762,955
    
    
    
    5,608,299Leasehold improvements
    
    
    79,355
    
    
    
    45,216Construction in progress
    
    
    1,018,329
    
    
    
    642,710$
    102,748,514
    
    
    
    118,081,523
  (6)
    
    Accrued Expenses  Accrued expenses consists of the following: December 312003
    
    2002Program license fees
    
    $
    1,313,254
    
    
    
    1,891,885Franchise fees
    
    
    974,375
    
    
    
    1,084,796Interest
    
    
    1,386,854
    
    
    
    1,476,956Taxes
    
    
    493,260
    
    
    
    271,855Other
    
    
    866,863
    
    
    
    800,398$
    5,034,606
    
    
    
    5,525,890
 (Continued) 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, 2003 and 2002  (7)
    
    Notes Payable December 312003
    
    2002Senior subordinated notes
    
    $
    100,000,000
    
    
    
    100,000,000Revised senior credit facility
    
    
    16,000,000
    
    
    
    68,031,182116,000,000
    
    
    
    168,031,182Less current portion
    
    
    2,800,000
    
    
    
    2,775,920$
    113,200,000
    
    
    
    165,255,262
  (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 fee 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, 2003, the Company was in compliance with the covenants
required by the Refinanced Credit Facility. (Continued) 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, 2003 and 2002  (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 estimated
fair value of the $100,000,000 Notes at December 31, 2003 and 2002 was
approximately $99,625,000 and $67,125,000, respectively, based on
available market information.The Notes are presently redeemable at the option of the Company, in whole
or in part, at the following prices (expressed as percentages of principal
amount) if redeemed during the 12-month period beginning on November 15 of
the years dated below, in each case together with interest accrued to the
redemption date: PercentageYear:2004
    
    
    101.708
    %2005 and thereafter
    
    
    100.000
    %
  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 6.50
to 1, among other restrictions. The Company submits annual debt compliance
reports to a trustee. As of December 31, 2003, 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, 2003 based on
amounts outstanding at December 31, 2003 are as follows: 2004
    
    $
    2,800,0002005
    
    
    3,400,0002006
    
    
    9,800,0002007
    
    
    100,000,000$
    116,000,000
 (Continued) 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, 2003 and 2002  (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 $36,018, $44,287 and $53,589 for the years ended December 31,
2003, 2002 and 2001, 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 312003
    
    2002
    
    2001Interest income
    
    $
    30,293
    
    
    
    62,170
    
    
    
    125,897Other
    
    
    (824
    )
    
    
    (28,370
    )
    
    
    (177,488
    )$
    29,469
    
    
    
    33,800
    
    
    
    (51,591
    )
  (10)
    
    Income TaxesThe operations of the Company and its affiliates are included for federal
income tax purposes in a consolidated federal income tax return 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 on 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. (Continued) 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, 2003 and 2002 The primary components of deferred income taxes are as follows: 2003
    
    2002Deferred tax assets:Net
operating loss carryforwards
    
    $
    19,800,000
    
    
    
    28,800,000Franchise agreements
    
    
    836,000
    
    
    
    3,300,000Alternative minimum tax credit
carryforward
    
    
    390,000
    
    
    
    Other
    
    
    1,804,000
    
    
    
    830,00022,830,000
    
    
    
    32,930,000Valuation allowance
    
    
    (13,822,000
    )
    
    
    (22,360,000
    )9,008,000
    
    
    
    10,570,000Deferred tax liabilities:Property and equipment
    
    
    8,584,000
    
    
    
    10,570,000Franchise agreements
    
    
    272,000
    
    
    
    $
    152,000
    
    
    
    
 The
federal income tax net operating loss carryforwards of approximately
$55,000,000 expire from 2004 through 2022. 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 sufficient 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 in future periods. Accordingly, a valuation
allowance has been provided for the net deferred tax assets of the Company.
The (decrease) increase in the valuation allowance was ($8,538,000), $520,000,
and $940,000 for the years ended December 31, 2003, 2002, and 2001,
respectively. The Company recorded income tax expense attributable to continuing operations
of $184,297, $10,573 and $3,192 in 2003, 2002 and 2001, respectively, which
consisted of the following: Year ended December 312003
    
    2002
    
    2001Federal income tax expense
    
    $
    152,194
    
    
    
    
    
    
    
    State income tax expense
    
    
    32,103
    
    
    
    10,573
    
    
    
    3,192$
    184,297
    
    
    
    10,573
    
    
    
    3,192
 (Continued) 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, 2003 and 2002  The difference between the expected rate computed using the
federal statutory tax
rate of approximately 34% in 2003 and the federal income tax expense in
2003 of $152,194 disclosed above is the result of (1) a non-cash,
non-operating charge to increase the valuation allowance in connection
SFAS No. 142, which resulted in the Company not being able to utilize
certain deferred tax liabilities as a source of income to realize deferred
tax assets, and (2) the full valuation allowance against net deferred tax
assets.The difference between the federal statutory tax of
approximately 34% in 2003 and
2002 and the tax benefit of zero is primarily due to the full valuation
allowance against the net deferred tax assets.The Companys ability to utilize the net operating loss
carryforwards 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 $802,199, and $753,902 and $781,367 in 2003, 2002 and 2001,
respectively. Rental expense attributable to discontinued operations
related to these operating leases and pole rentals amounted to
$32,568, $146,532 and $108,959 in 2003, 2002 and 2001, respectively.
Minimum lease payments through the end of the lease terms, for those
agreements accounted for as operating leases, are as follows: 2004
    
    $
    98,8022005
    
    
    65,5272006
    
    
    50,9682007
    
    
    43,3122008
    
    
    39,514Thereafter
    
    
    5,998$
    304,121
  Each of the years from 2004 to 2008 above includes $30,600
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. (Continued) 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, 2003 and 2002  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 Cany 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 (Continued) 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, 2003 and 2002  stations to negotiate terms (such as mandating carriage of an affiliated cable
network or a digital 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. (Continued) F-23




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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, 2003 and 2002  (12)
    
    Acquisition and Sales of SystemsOn 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. This amount is included in the system sale
receivable line item on the accompanying balance sheet. 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 $435,000 of the original escrow proceeds
will remain in escrow until such claims are 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.As of December 31, 2002, the transaction was subject to certain closing
conditions, including the prospective buyer obtaining and providing
evidence of financing sufficient to complete the transaction. As the sale
of the assets was not probable, the assets associated with the transaction
were considered to be held for use, as defined in SFAS No. 144, at
December 31, 2002. In January 2003, the prospective buyer provided the
Company with the evidence of financing and the transaction closed in March
2003 as discussed above.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 $46,300,000 of which the Company received approximately
$42,600,000 at closing. The sales price was adjusted at closing for the
proration of certain revenues and expenses and approximately $3,700,000 is
being held in escrow and will be released to the Company one year from the
closing of the transaction, subject to general representations and
warranties. This amount is included in the system sale receivable line
item on the accompanying balance sheet. Historically, the Company has
entered into similarly structured transactions, and collected the amount
held in escrow. Substantially all of the proceeds were used to pay down
amounts outstanding under the Companys Senior Credit Facility.As of December 31, 2002, the transaction was subject to certain closing
conditions, including consent to the transaction by the Companys lenders.
As the required consents had not been obtained as of December 31, 2002, the
assets were not available for immediate
sale. Accordingly, pursuant to SFAS No. 144, the assets associated with the
transaction were considered to be held for use at December 31, 2002. In
January 2003, the Companys lenders consented to the transaction, which
then closed in March 2003 as discussed above. (Continued) F-24




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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, 2003 and 2002  The sales were made pursuant to offers by separate, independent third parties.
Based on the offers made, management determined that acceptance of the offers
would be in the best economic interest of the Company. The sales were not a
result of declining or deteriorating operations nor was it necessary to create
liquidity or reduce outstanding debt. It is the opinion of management that the
Company could have continued existing operations and met all obligations as
they became due.  The assets and liabilities attributable to the Aiken System and the Port
Angeles System as of December 31, 2002 consist of the following: Cash
    
    $
    128,095Accounts receivable
    
    
    636,648Prepaid expense
    
    
    65,139Property and equipment (net of accumulated depreciation
of $10,905,201)
    
    
    10,768,828Franchise agreements (net of accumulated amortization
of $9,356,640)
    
    
    13,906,143Total assets
    
    
    25,504,853Accounts payable
    
    $
    122,112Accrued expenses
    
    
    820,168Deposits
    
    
    9,152Subscriber prepayments
    
    
    492,178Total liabilities
    
    $
    1,443,610
 (Continued) F-25




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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, 2003 and 2002  In addition, the revenue, expenses and other items attributable to the
operations of the Aiken System and the Port Angeles system during the periods
presented in this filing have been reported as discontinued operations in the
accompanying statements of operations and comprehensive income, and include
the following: 2003
    
    2002
    
    2001Service revenues
    
    $
    3,079,390
    
    
    
    12,492,424
    
    
    
    12,028,072Expenses:Cable system operations
(including $6,271, $66,567 paid to
affiliates in 2003 and 2002, respectively, and
$48,700 received from affiliates in 2001)
    
    
    1,205,573
    
    
    
    4,619,715
    
    
    
    4,188,384General and administrative
(including $152,094 paid to
affiliates in 2003, $109,414
received from affiliates in 2002
and $127,269 paid to affiliates
in 2001)
    
    
    573,782
    
    
    
    1,865,633
    
    
    
    2,070,396Management fees
    
    
    153,637
    
    
    
    624,622
    
    
    
    601,403Depreciation and amortization
    
    
    417,798
    
    
    
    1,895,810
    
    
    
    4,071,109Income from operations
    
    
    728,600
    
    
    
    3,486,644
    
    
    
    1,096,780Other income (expense):Interest expense and
amortization of loan fees
    
    
    (711,822
    )
    
    
    (3,910,293
    )
    
    
    (4,898,614
    )Gain on sale of systems
    
    
    31,386,201
    
    
    
    
    
    
    
    Income (loss) from
operations of Port Angeles
and Aiken Systems, net
before income before income tax
expense
    
    
    31,402,979
    
    
    
    (423,649
    )
    
    
    (3,801,834
    )Income tax expense
    
    
    (660,000
    )
    
    
    
    
    
    
    Income (loss) from
operations of Port Angeles
and Aiken Systems, net
    
    $
    30,742,979
    
    
    
    (423,649
    )
    
    
    (3,801,834
    )
  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. (Continued) F-26




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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, 2003 and 2002  On September 30, 2001 the Company acquired a cable system serving the areas in
and around Highlands, North Carolina, serving approximately 3,200 basic
subscribers, from an affiliated limited partnership managed by NCC. The system
was acquired at a purchase price of approximately $4,600,000 and was financed
with approximately $3,800,000 of cash on hand and an in-kind equity
contribution from the Companys parent of $798,850.On December 21, 2001, the Company sold its cable system serving the areas of
Bainbridge Island, Kingston, and Hansville, Washington, which represented
approximately 6,450 basic subscribers, to TCI Cable Partners of St. Louis,
L.P. The systems were sold at a purchase price of approximately $19,800,000.
The Company recognized a gain of approximately $12,759,000 related to the
transaction. F-27