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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the period ended June 30, 2012

or

 

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

For the transition period from          to         

Commission File Number: 0-18307

 

 

Northland Cable Properties Eight Limited Partnership

(Exact Name of Registrant as Specified in Charter)

 

 

 

Washington   91-1423516
(State of Organization)   (I.R.S. Employer Identification No.)
101 Stewart Street, Suite 700, Seattle, Washington   98101
(Address of Principal Executive Offices)   (Zip Code)

(206) 623-1351

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART 1 — FINANCIAL INFORMATION

     3   

ITEM 1. Financial Statements (Unaudited)

     3   

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     9   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     13   

ITEM 4. Controls and Procedures

     13   

PART II — OTHER INFORMATION

     14   

ITEM 1 Legal proceedings

     14   

ITEM 1A Risk Factors

     14   

ITEM 2 Changes in securities

     14   

ITEM 3 Defaults upon senior securities

     14   

ITEM 4 Submission of matters to a vote of security holders

     14   

ITEM 5 Other information

     14   

ITEM 6 Exhibits

     14   

SIGNATURES

     15   

EX-10.53

  

EX-31.A

  

EX-31.B

  

EX-32.A

  

EX-32.B

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 DEFINITION LINKBASE DOCUMENT

  

EX-101 LABELS LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

 

2


Table of Contents

PART 1 - FINANCIAL INFORMATION

ITEM 1. Financial Statements

NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP

CONDENSED BALANCE SHEETS - (UNAUDITED)

(Prepared by the Managing General Partner)

 

     June 30,
2012
    December 31,
2011
 

ASSETS

    

Cash

   $ 432,777      $ 367,788   

Accounts receivable, net of allowance of $4,000

     90,347        113,519   

Due from affiliates

     64,123        53,343   

Prepaid expenses

     82,204        52,960   

Property and equipment, net of accumulated depreciation of $10,603,356 and $10,592,877 respectively

     2,617,802        2,701,780   

Franchise agreements, net of accumulated amortization of $1,907,136

     2,292,704        2,292,204   

Loan fees, net of accumulated amortization of $102,359 and $100,345, respectively

     3,021        5,035   
  

 

 

   

 

 

 

Total assets

   $ 5,582,978      $ 5,586,629   
  

 

 

   

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

    

Accounts payable and accrued expenses

   $ 280,178      $ 282,906   

Due to General Partner and affiliates

     8,109        24,978   

Deposits

     12,065        10,825   

Subscriber prepayments

     156,663        164,519   

Term loan

     778,376        928,376   
  

 

 

   

 

 

 

Total liabilities

     1,235,391        1,411,604   
  

 

 

   

 

 

 

Partners’ capital (deficit):

    

General Partner:

    

Contributed capital, net

     1,000        1,000   

Accumulated deficit

     (37,560     (39,286
  

 

 

   

 

 

 
     (36,560     (38,286
  

 

 

   

 

 

 

Limited Partners:

    

Contributed capital, net (19,087 units)

     8,102,518        8,102,518   

Accumulated deficit

     (3,718,371     (3,889,207
  

 

 

   

 

 

 
     4,384,147        4,213,311   
  

 

 

   

 

 

 

Total partners’ capital

     4,347,587        4,175,025   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 5,582,978      $ 5,586,629   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

3


Table of Contents

NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF OPERATIONS - (UNAUDITED)

(Prepared by the Managing General Partner)

 

     For the six months ended June 30,  
     2012     2011  

Service revenues

   $ 2,131,118      $ 2,097,297   

Expenses:

    

Cable system operations / cost of revenue (including $28,484 and $24,164 to affiliates in 2012 and 2011, respectively), excluding depreciation shown below

     237,003        216,147   

General and administrative (including $239,763 and $232,781 to affiliates in 2012 and 2011, respectively)

     582,874        544,131   

Programming / cost of revenue (including $17,129 and $12,890 to affiliates in 2012 and 2011, respectively)

     836,698        823,451   

Depreciation / cost of revenue

     262,132        278,436   

Loss on disposal of assets

     24,588        —     
  

 

 

   

 

 

 
     1,943,295        1,862,165   
  

 

 

   

 

 

 

Income from operations

     187,823        235,132   

Other income (expense):

    

Interest expense and amortization of loan fees

     (15,442     (20,186

Interest income and other, net

     181        (1,127

Escrow proceeds

     —          65,572   
  

 

 

   

 

 

 
     (15,261     44,259   
  

 

 

   

 

 

 

Net income

   $ 172,562      $ 279,391   
  

 

 

   

 

 

 

Allocation of net income:

    

General Partner (1%)

   $ 1,726      $ 2,794   
  

 

 

   

 

 

 

Limited Partners (99%)

   $ 170,836      $ 276,597   
  

 

 

   

 

 

 

Net income per limited partnership unit:

    

(19,087 units)

   $ 8.95      $ 14.49   
  

 

 

   

 

 

 

 

The accompanying notes are an integral part of these statements.

 

4


Table of Contents

NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF OPERATIONS - (UNAUDITED)

(Prepared by the Managing General Partner)

 

     For the three months ended June 30,  
     2012     2011  

Service revenues

   $ 1,067,004      $ 1,048,938   

Expenses:

    

Cable system operations / cost of revenue (including $12,619 and $10,773 to affiliates in 2012 and 2011, respectively), excluding depreciation shown below

     118,419        110,025   

General and administrative (including $118,094 and $116,165 to affiliates in 2012 and 2011, respectively)

     303,505        281,738   

Programming / cost of revenue (including $8,908 and $6,599 to affiliates in 2012 and 2011, respectively)

     424,742        410,154   

Depreciation / cost of revenue

     130,736        138,568   

Loss disposal of assets

     24,393        —     
  

 

 

   

 

 

 
     1,001,795        940,485   
  

 

 

   

 

 

 

Income from operations

     65,209        108,453   

Other income (expense):

    

Interest expense and amortization of loan fees

     (7,381     (9,772

Interest income and other, net

     81        (551
  

 

 

   

 

 

 
     (7,300     (10,323
  

 

 

   

 

 

 

Net income

   $ 57,909      $ 98,130   
  

 

 

   

 

 

 

Allocation of net income:

    

General Partner (1%)

   $ 579      $ 981   
  

 

 

   

 

 

 

Limited Partners (99%)

   $ 57,330      $ 97,149   
  

 

 

   

 

 

 

Net income per limited partnership unit:

    

(19,087 units)

   $ 3.00      $ 5.09   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

5


Table of Contents

NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF CASH FLOWS - (UNAUDITED)

(Prepared by the Managing General Partner)

 

     For the six months ended June 30,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 172,562      $ 279,391   

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation

     262,132        278,436   

Amortization of loan fees

     2,014        2,014   

Escrow Proceeds

     —          (65,572

Loss on sale of property

     4,588        —     

(Increase) decrease in operating assets:

    

Accounts receivable

     23,172        (3,130

Due from affiliates

     (10,780     8,556   

Prepaid expenses

     (29,244     (9,817

Increase (decrease) in operating liabilities:

    

Accounts payable and accrued expenses

     36,443        11,662   

Due to General Partner and affiliates

     (16,869     (9,882

Subscriber prepayments and deposits

     (6,616     11,150   
  

 

 

   

 

 

 

Net cash provided by operating activities

     437,402        502,808   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (222,413     (222,947

Escrow proceeds

     —          65,572   

Proceeds from sale of property

     500     

Franchises

     (500  
  

 

 

   

 

 

 

Net cash used in investing activities

     (222,413     (157,375
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Principal payments on borrowings

     (150,000     (150,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (150,000     (150,000
  

 

 

   

 

 

 

INCREASE IN CASH

     64,989        195,433   

CASH, beginning of period

     367,788        220,365   
  

 

 

   

 

 

 

CASH, end of period

   $ 432,777      $ 415,798   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Cash paid during the period for interest

     13,934      $ 18,172   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

6


Table of Contents

NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

(1) Basis of Presentation

These unaudited financial statements are being filed in conformity with Rule 10-01 of Regulation S-X regarding interim financial statement disclosure and do not contain all of the necessary footnote disclosures required for a full presentation of the balance sheets, statements of operations and statements of cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, these statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Partnership’s financial position at June 30, 2012, its statements of operations for the three and six months ended June 30, 2012 and 2011, and its statements of cash flows for the six months ended June 30, 2012 and 2011. Results of operations for these periods are not necessarily indicative of results to be expected for the full year. These financial statements and notes should be read in conjunction with the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2011.

(2) Intangible Assets

The Partnership does not amortize intangible assets determined to have indefinite lives. The Partnership has determined that its franchises meet the definition of indefinite lived assets. The Partnership tests these assets for impairment on an annual basis during the fourth quarter using financial information as of September 30th, or on an interim basis if an event occurs or circumstances change that would indicate the assets might be impaired.

Loan fees are being amortized using the straight-line method, which approximates the effective interest rate method. Future amortization of loan fees is expected to be approximately as follows:

 

2012 (6 months)

     2,014  

2013 (3 Months)

     1,007  
  

 

 

 
   $ 3,021  
  

 

 

 

(3) Term Loan

On February 3, 2010, the Partnership and its existing lender agreed to amend its credit agreement so as to extend the maturity date to March 31, 2013, modify the principal repayment schedule, and modify certain other covenants and provisions of the credit agreement. Interest rates are based on the Adjusted LIBOR Rate, plus a margin of 3.0 percent per annum. The term loan is collateralized by a first lien position on all present and future assets of the Partnership. Principal payments plus interest are due quarterly. In connection with the credit amendment, the Partnership paid $12,755 in additional loan fees, which are being amortized over the extended term of the loan. As of June 30, 2012, the balance of the term loan agreement was $778,376.

Annual maturities of the term loan after June 30, 2012 are as follows:

 

2012

     225,000  

2013

     553,376  
  

 

 

 
   $ 778,376  
  

 

 

 

On March 31, 2013 the Partnership’s term loan matures and $553,376 becomes due and payable as of that date.

Under the terms of the amended loan agreement, the Partnership has agreed to restrictive covenants which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of no more than 1.75 to 1 and a Cash Flow Coverage Ratio of no less than 1.25 to 1, among other restrictions.

The General Partner submits quarterly debt compliance reports to the Partnership’s creditor under this agreement. As of June 30, 2012, the Partnership was in compliance with the terms of its credit agreement.

 

7


Table of Contents

The Partnership follows general accounting standards that require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. Due to the variable interest rate the carrying value of the term loan approximates fair value.

As of June 30, 2012, the balance under the credit facility was $778,376 at a LIBOR based interest rate of 3.25%. This interest rate is set to expire on July 31, 2012, at which time the LIBOR based rate of 3.25% was extended through August 31, 2012.

(4) Litigation

The Partnership is party to ordinary and routine litigation proceedings that are incidental to the Partnership’s business. Management believes that the outcome of all pending legal proceedings will not, individually or in the aggregate, have a material adverse effect on the Partnership, its financial statements, prospects or debt service abilities.

(5) Escrow Proceeds and Potential Sale of Systems

On July 5, 2007, Northland Cable Properties Eight Limited Partnership executed a purchase and sale agreement (the “Agreement”) to sell the operating assets and franchise rights of its remaining cable systems serving the communities of Aliceville, Alabama and Swainsboro, Georgia to Green River Media and Communications, LLC (”Green River”), an unaffiliated third party. The transaction was expected to close by the end of March 2008. To secure their performance under the Agreement, Green River deposited $75,000 into escrow (the “Escrow Deposit”), which was intended to be credited to the purchase price at closing. Closing of this transaction would have resulted in the liquidation of the Partnership.

On March 31, 2008, the Partnership notified Green River of its termination of the Agreement. Green River disputed the right of the Partnership to terminate the Agreement. The parties reached a final settlement in the first quarter of 2011. As a result of the settlement, the Partnership received proceeds and accrued interest of $65,572 from the Escrow Deposit. The escrow proceeds were recorded as other income during the first quarter of 2011.

Fees for legal and accounting activities in connection with the aforementioned purchase and sale transaction amounted to $0 and $595 for the three months ended June 30, 2012 and 2011, respectively, and have been expensed as incurred within interest income and other in the accompanying statements of operations.

(6) Fair Value of Assets

We measure certain financial assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the inputs used to determine fair value. These levels are:

 

   

Level 1 — inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

   

Level 2 – quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active.

 

   

Level 3 – significant inputs are unobservable for the asset or liability.

The following table summarizes the balances of assets measured at fair value on a recurring basis at June 30, 2012.

 

     Total      Level 1      Level 2      Level 3  

Cash

   $ 432,777       $ 432,777       $ —         $ —     

The following table summarizes the balances of assets measured at fair value on a recurring basis at December 31, 2011.

 

     Total      Level 1      Level 2      Level 3  

Cash

   $ 367,788       $ 367,788       $ —         $ —     

The Partnership follows the provisions of FASB ASC 820 Fair Value Measurements and Disclosures. The carrying values of cash and the variable rate term loan approximate fair value.

 

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Table of Contents

PART I (continued)

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations - Six months ended June 30, 2012 and 2011

Total video basic subscribers decreased from 4,196 as of June 30, 2011 to 3,954 as of June 30, 2012. The loss in subscribers is a result of several factors including competition from Direct Broadcast Satellite (DBS) providers, availability of off-air signals in the Partnership’s markets and regional and local economic conditions. To address this customer trend, the Partnership is increasing its marketing and customer retention efforts and its emphasis on bundling its video, data and phone products.

Revenue totaled $2,131,118 for the six months ended June 30, 2012, an increase of 2% from $2,097,297 for the six months ended June 30, 2011. Revenues for the six months ended June 30, 2012 were comprised of the following sources:

 

   

$1,338,017 (63%) from basic and expanded video services

 

   

$491,081 (23%) from high speed internet services

 

   

$52,918 (2%) from premium video services

 

   

$86,283 (4%) from telephony services

 

   

$38,322 (2%) from advertising

 

   

$42,223 (2%) from late fees

 

   

$82,274 (4%) from other sources

Average monthly revenue per subscriber increased $6.37 or approximately 8% from $81.45 for six months ended June 30, 2011 to $87.82 for the six months ended June 30, 2012. This increase is attributable to rate increases implemented throughout the Partnership’s systems during the first quarter of 2012, increased penetration of new products to existing customers, specifically high-speed Internet and telephony services, and product bundling to new customers. This increase in average monthly revenue per subscriber was offset by the aforementioned decrease in basic subscribers.

Operating expenses, excluding general and administrative, programming and depreciation expenses totaled $237,003 for the six months ended June 30, 2012, an increase of approximately 10% from the same period in 2011. The increase is primarily attributable to higher operating salaries, pole rental expense, system utilities and vehicle operating expenses. Employee wages, which represent the largest component of operating expenses, are reviewed annually, and in most cases, increased based on cost of living adjustments and other factors. Therefore, assuming the number of operating and regional employees remains constant, management expects increases in operating expenses in the future.

General and administrative expenses totaled $582,874 for the six months ended June 30, 2012, an increase of approximately 7% from $544,131 for the same period in 2011. This increase is primarily attributable to higher administrative salaries, administrative services, marketing and SEC reporting expenses.

Programming expenses totaled $836,698 for the six months ended June 30, 2012, representing an increase of $13,247 or approximately 2% over the same period in 2011. The increase is primarily attributable to higher costs charged by various program suppliers and higher costs associated with the increase in high-speed Internet and telephone subscribers, offset by the aforementioned decrease in video subscribers. Rate increases from program suppliers, as well as new fees due to the launch of additional channels, high-speed Internet and telephone services, will contribute to the trend of increased programming costs in the future.

Depreciation expense totaled $262,132 for the six months ended June 30, 2012, a decrease of approximately 6% over the same period in 2011. Certain assets becoming fully depreciated were offset by depreciation of recent purchases related to the upgrade of plant and equipment.

Interest expense and amortization of loan fees totaled $15,442 for the six months ended June 30, 2012, a decrease of approximately 24% over the same period in 2011. This decrease is attributable to lower average outstanding indebtedness as a result of required principal payments.

Loss on disposal of assets totaled $24,588 and $0 for the six months ended June 30, 2012 and 2011, respectively. This increase consists primarily of costs incurred in connection with the Millport and Aliceville tower wreck out and asset disposal.

 

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The Partnership received escrow proceeds and accrued interest of $65,572 as a result of the termination of the purchase and sale agreement with Green River (see footnote 4). The escrow proceeds were recorded as other income during the first quarter of 2011.

Results of Operations - Three months ended June 30, 2012 and 2011

Total video basic subscribers decreased from 4,196 as of June 30, 2011 to 3,954 as of June 30, 2012. The loss in subscribers is a result of several factors including competition from Direct Broadcast Satellite (DBS) providers, availability of off-air signals in the Partnership’s markets and regional and local economic conditions. To address this customer trend, the Partnership is increasing its customer retention efforts and its emphasis on bundling its video, data and phone products.

Revenue totaled $1,067,004 for the three months ended June 30, 2012, an increase of 2% from $1,048,938 for the three months ended June 30, 2011. Revenues for the three months ended June 30, 2012 were comprised of the following sources:

 

   

$664,509 (62%) from basic and expanded video services

 

   

$249,855 (24%) from high speed internet services

 

   

$26,014 (2%) from premium video services

 

   

$47,553 (5%) from telephony services

 

   

$20,680 (2%) from advertising

 

   

$21,607 (2%) from late fees

 

   

$36,789 (3%) from other sources

Average monthly revenue per subscriber increased $6.91 or approximately 8% from $81.85 for three months ended June 30, 2011 to $88.76 for the three months ended June 30, 2012. This increase is attributable to rate increases implemented throughout the Partnership’s systems during the first quarter of 2012, increased penetration of new products to existing customers, specifically high-speed Internet and telephony services, and product bundling to new customers. This increase in average monthly revenue per subscriber was offset by the aforementioned decrease in basic subscribers.

Operating expenses, excluding general and administrative, programming and depreciation expenses totaled $118,419 for the three months ended June 30, 2012, an increase of approximately 8% from the same period in 2011. The increase is primarily attributable to higher pole, duct, and site rentals and vehicle operating expenses.

General and administrative expenses totaled $303,505 for the three months ended June 30, 2012, an increase of approximately 8% from $281,738 for the same period in 2011. This increase is primarily attributable to higher administrative salaries, administrative services, marketing and SEC reporting expenses.

Programming expenses totaled $424,742 for the three months ended June 30, 2012, an increase of approximately 4% from the same period in 2011. Higher costs charged by various program suppliers and higher costs associated with the increase in high-speed Internet and telephone subscribers, were offset by the aforementioned decrease in video subscribers and lower circuit costs. Rate increases from program suppliers, as well as new fees due to the launch of additional channels, high-speed Internet and telephone services, will contribute to increased programming costs in the future, assuming that the number of subscribers remains constant.

Depreciation expense totaled $130,736 for the three months ended June 30, 2012, a decrease of approximately 6% over the same period in 2011. Certain assets becoming fully depreciated were offset by depreciation of recent purchases related to the upgrade of plant and equipment.

Interest expense and amortization of loan fees totaled $7,381 for the three months ended June 30, 2012, a decrease of approximately 24% over the same period in 2011. This decrease is attributable to lower average outstanding indebtedness as a result of required principal payments.

Loss on disposal of assets totaled $24,393 and $0 for the three months ended June 30, 2012 and 2011, respectively. This increase consists primarily of costs incurred in connection with the Millport and Aliceville tower wreck out and asset disposal.

Liquidity and Capital Resources

The Partnership’s primary source of liquidity is cash flow provided by operations. The Partnership generates cash through the monthly billing of subscribers for cable and other services. Based on management’s analysis, the Partnership’s cash flow from operations and cash on hand will be sufficient to cover future operating costs, planned capital expenditures, debt service and working capital needs over the next twelve-month period. On March 31, 2013 the Partnership’s term loan matures and $553,376 becomes due and payable as of that date.

 

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Table of Contents

Net cash provided by operating activities totaled $437,402 for the six months ended June 30, 2012. Adjustments to the $172,562 net income for the period to reconcile to net cash provided by operating activities consisted primarily of depreciation of $262,132, offset by changes in other operating assets and liabilities of $(3,894).

Net cash used in investing activities totaled $222,413 for the six months ended June 30, 2012 and consisted primarily of purchases of property and equipment.

Net cash used in financing activities for the six months ended June 30, 2012 consisted of $150,000 in principal payments on the term loan.

Term Loan

On February 3, 2010, the Partnership and its existing lender agreed to amend its credit agreement so as to extend the maturity date to March 31, 2013, modify the principal repayment schedule, and modify certain other covenants and provisions of the credit agreement. Interest rates are based on the Adjusted LIBOR Rate, plus a margin of 3.0 percent per annum. The term loan is collateralized by a first lien position on all present and future assets of the Partnership. Principal payments plus interest are due quarterly. In connection with the credit amendment, the Partnership paid $12,755 in additional loan fees, which are being amortized over the extended term of the loan. As of June 30, 2012, the balance of the term loan agreement was $778,376.

Annual maturities of the term loan after June 30, 2012 are as follows:

 

2012

     225,000  

2013

     553,376  
  

 

 

 
   $ 778,376  
  

 

 

 

Under the terms of the amended loan agreement, the Partnership has agreed to restrictive covenants which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of no more than 1.75 to 1 and a Cash Flow Coverage Ratio of no less than 1.25 to 1, among other restrictions.

As of the date of this filing, the balance under the credit facility is $778,376 at a LIBOR based interest rate of 3.25%. This interest rate is set to expire on July 31, 2012, at which time the LIBOR based rate of 3.25% was extended through August 31, 2012.

Obligations and Commitments

In addition to working capital needs for ongoing operations, the Partnership has capital requirements for annual maturities related to the refinanced credit facility and required minimum operating lease payments. The following table summarizes the Partnership’s contractual obligations as of June 30, 2012:

 

            Payments Due By Period  
     Total      Less than
1 year
     1 – 3
Years
     3 – 5
years
     More than 5
years
 

Term Loan

     778,376         778,376         —           —           —     

Minimum operating lease payments

     33,280         6,380         7,660         2,120         17,120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 811,656       $ 784,756       $ 7,660       $ 2,120       $ 17,120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a) These contractual obligations do not include accounts payable and accrued liabilities, which are expected to be paid in 2012.

 

  (b) The Partnership also rents utility poles in its operations. Amounts due under these agreements are not included in the above minimum operating lease payments as pole rentals are based on pole usage and are cancelable on short notice. The Partnership does however anticipate that such rentals will recur. Pole rental expense was $111,070 in 2011.

 

  (c) Note that obligations related to the Partnership’s term loan exclude interest expense as it cannot be determined given the variable interest rate. Interest expense was $34,078 in 2011.

 

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Capital Expenditures

During the first six months of 2012, the Partnership paid approximately $222,413 for capital expenditures. These expenditures include continued upgrades to the Aliceville, AL and Swainsboro, GA systems expanding the high speed data capacity.

Management has estimated that the Partnership will spend approximately $282,000 on capital expenditures during the remainder of 2012. Planned expenditures include the continuation of a plant capacity upgrade in the Swainsboro system, continuation of the expansion of high speed data capacity in both systems, potential line extension opportunities, and customer premise equipment to provide services. The level of future capital spending will be dependent on the Partnership’s available cash on hand and its debt obligations.

Critical Accounting Policies

This discussion and analysis of financial condition and results of operations is based on the Partnership’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting policies require a more significant amount of management judgment than other accounting policies the Partnership employs.

Revenue Recognition

Cable television service revenue, including service and maintenance, is recognized in the month service is provided to customers. Advance payments on cable services to be rendered are recorded as subscriber prepayments and deferred. Revenues resulting from the sale of local spot advertising are recognized when the related advertisements or commercials appear before the public.

Property and Equipment

Property and equipment are recorded at cost. Costs of additions and substantial improvements, which include materials, labor, and other indirect costs associated with the construction of cable transmission and distribution facilities, are capitalized. Indirect costs include employee salaries and benefits, travel and other costs. These costs are estimated based on historical information and analysis. The Partnership performs evaluations of these estimates as warranted by events or changes in circumstances.

The Partnership capitalizes costs associated with initial customer installations. The costs of disconnecting service or reconnecting service to previously installed locations is expensed in the period incurred. Costs for repairs and maintenance are also charged to operating expense, while equipment replacements, including the replacement of drops, are capitalized.

Intangible Assets

The Partnership does not amortize intangible assets determined to have indefinite lives. The Partnership has determined that its franchises meet the definition of indefinite lived assets. The Partnership tests these assets for impairment on an annual basis during the fourth quarter using financial information as of September 30th, or on an interim basis if an event occurs or circumstances change that would indicate the assets might be impaired.

Management believes the franchises have indefinite lives because the franchises are expected to be used by the Partnership for the foreseeable future as determined based on an analysis of all pertinent factors, including changes in legal, regulatory or contractual provisions and effects of obsolescence, demand and competition. In addition, the level of maintenance expenditures required to obtain the future cash flows expected from the franchises is not material in relation to the carrying value of the franchises. While the franchises have defined lives based on the franchising authority, renewals are routinely granted, and management expects them to continue to be granted. This expectation is supported by management’s experience with the Partnership’s franchising authorities and the franchising authorities of the Partnership’s affiliates.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The Partnership is subject to market risks arising from changes in interest rates. The Partnership’s primary interest rate exposure results from changes in the LIBOR rate, which is used to determine the interest rate applicable to the Partnership’s debt facilities. The Partnership has from time to time entered into interest rate swap agreements to partially hedge interest rate exposure. Interest rate swaps have the effect of converting the applicable variable rate obligations to fixed or other variable rate obligations. As of the date of this filing, the Partnership is not involved in any interest rate swap agreements. The potential loss over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate of all of the Partnership’s variable rate obligations would be approximately $8,000.

Cautionary statement for purposes of the “Safe Harbor” provisions of the Private Litigation Reform Act of 1995: Statements contained or incorporated by reference in this document that are not based on historical fact are “forward-looking statements” within the meaning of the Private Securities Reform Act of 1995. Forward-looking statements may be identified by use of forward-looking terminology such as “believe”, “intends”, “may”, “will”, “expect”, “estimate”, “anticipate”, “continue”, or similar terms, variations of those terms or the negative of those terms.

 

ITEM 4. Controls and Procedures

The Partnership maintains disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Chief Executive Officer and President (Principal Financial and Accounting Officer) of the Managing General Partner have evaluated these disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q and have determined that such disclosure controls and procedures are effective.

There has been no change during the most recent quarter in the Partnership’s internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1 Legal proceedings

On March 31, 2008, the Partnership notified Green River of its termination the Agreement. Green River disputed the right of the Partnership to terminate the Agreement. The parties reached a final settlement in the first quarter of 2011. As a result of the settlement, the Partnership received proceeds and accrued interest of $65,572 of the Escrow Deposit. The escrow proceeds were recorded as other income during the first quarter of 2011. The Partnership will continue to operate its assets in a manner intended to maximize revenue and cash flow.

The Partnership is party to ordinary and routine litigation proceedings that are incidental to the Partnership’s business. Management believes that the outcome of all pending legal proceedings will not, individually or in the aggregate, have a material adverse effect on the Partnership, its financial statements, prospects or debt service abilities.

 

ITEM 1A Risk Factors

There have been no material changes from the Partnership’s risk factors as disclosed in the 2011 Form 10-K.

 

ITEM 2 Changes in securities

None

 

ITEM 3 Defaults upon senior securities

None

 

ITEM 4 Submission of matters to a vote of security holders

None

 

ITEM 5 Other information

None

 

ITEM 6 Exhibits

 

  (a) Exhibit Index

 

  31 (a). Certification of Chief Executive Officer of Northland Communications Corporation, the General Partner, dated August 13, 2012 pursuant to section 302 of the Sarbanes-Oxley Act

 

  31 (b). Certification of President (Principal Financial and Accounting Officer) of Northland Communications Corporation, the General Partner, dated August 13, 2012 pursuant to section 302 of the Sarbanes-Oxley Act

 

  32 (a). Certification of Chief Executive Officer of Northland Communications Corporation, the General Partner, dated August 13, 2012 pursuant to section 906 of the Sarbanes-Oxley Act

 

  32 (b). Certification of President (Principal Financial and Accounting Officer) of Northland Communications Corporation, the General Partner, dated August 13, 2012 pursuant to section 906 of the Sarbanes-Oxley Act

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP

BY: Northland Communications Corporation,

General Partner

 

SIGNATURES

  

CAPACITIES

  

DATE

     

/s/    RICHARD I, CLARK

   Executive Vice President, Treasurer and    08-13-12   

Richard I. Clark

   Assistant Secretary      

/s/    GARY S. JONES

   President    08-13-12   

Gary S. Jones

        

 

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