<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 TO
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Filed by the Registrant
[ ] Filed by a party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only [as permitted by
Exchange Act Rule 14(a)-6(e)(2)]
[X] Definitive Proxy Statement
[ ] Definitive Additional Material
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
(Name of Registrant as Specified in Its Charter)
0-16064
(Commission File Number)
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
(Name of Persons Filing Proxy Statement)
Payment of Filing Fee:
[ ] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or
14a-6(i)(2), or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11:
(1) Title of each class of securities to which transaction
applies: LIMITED PARTNER INTERESTS (REGISTERED UNDER THE
EXCHANGE ACT), AND GENERAL PARTNER INTERESTS (NOT REGISTERED
UNDER THE EXCHANGE ACT)
(2) Aggregate number of securities to which transaction applies:
14,663 UNITS (REPRESENTING ALL OF THE LIMITED PARTNER
INTERESTS, THE "UNITS"), AND ALL OF THE GENERAL PARTNER
INTERESTS
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (including amount
on which filing fee is calculated and how determined): $645.35
PER UNIT, AND $2,443,318 FOR THE GENERAL PARTNER INTERESTS,
BASED UPON THE PROJECTED PARTNERSHIP NET CASH VALUE OF
$11,906,072 (AFTER RETURN OF LIMITED PARTNERS' INITIAL CAPITAL
CONTRIBUTION, 75% ATTRIBUTABLE TO THE UNITS, AND 25%
ATTRIBUTABLE TO THE GENERAL PARTNER INTERESTS)
(4) Proposed maximum aggregate value of transaction: $11,906,072
(5) Total fee paid: $2,381.21
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing:
(1) Amount previously paid:
(2) Form, schedule or registration statement number:
(3) Filing party:
(4) Date filed:
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NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
1201 THIRD AVENUE, SUITE 3600
SEATTLE, WASHINGTON 98101
NOVEMBER 1, 1996
TO: THE LIMITED PARTNERS OF NORTHLAND CABLE PROPERTIES FOUR LIMITED
PARTNERSHIP
The accompanying Notice of Special Meeting and Proxy Statement contain an
explanation relating to the proposed liquidation by Northland Cable Properties
Four Limited Partnership (the "Partnership") of the cable television systems
owned by the Partnership including the franchises and operating assets serving
eight operating groups, including Flint/Tyler, New Caney, Whitewright,
Hillsboro, Kaufman, Waterwood and Prairie View, Texas and Chowchilla, California
as well as surrounding contiguous areas in these operating groups (the
"Systems"), and the dissolution, winding up and liquidation of the Partnership.
The Proxy Statement describes a proposal whereby the Partnership would sell the
undivided portion of the Systems that is attributable to the Limited Partners'
collective interest in the Partnership (the "LPs' Interest") at a price which is
based on a valuation of the Systems of $32,000,000. Such valuation, which is
based on, but in excess of, the independently appraised fair market value of the
Systems ($30,318,000), represents the General Partners' arbitrary determination
of the fair market value of the Systems, and is not based on any formula or
recognized valuation method. In basing its valuation on the appraised value, the
General Partners did not receive any information regarding the appraisal other
than the written appraisal attached to the Proxy Statement. In particular, the
General Partners did not receive or review actual forecasts prepared by the
appraiser in the course of performing the appraisal. In arriving at their
determination of the Gross Valuation, the General Partners considered a range
of possible valuations, from the appraised value, at the low end, to valuations
as high as $33,500,000. The General Partners ultimately arrived at $32,000,000
as the Gross Valuation, based on the appraisal, their assessment of the
synergies likely to result from the sale of the Systems to an affiliate, and
their review of the financial results of the Partnership.
If approved, the sale transaction and resulting liquidation are anticipated to
yield a cumulative total of approximately $2,039 per $1,000 investment to
Limited Partners during the life of the Partnership (or approximately $1,020
per $500 unit of limited partnership interest). These estimates include prior
cash distributions to date of $700 per $1,000 investment (or $350 per $500
unit of limited partnership interest). Because the transaction involves the
acquisition of the Systems by an affiliate of the Managing General Partner of
the Partnership, the General Partners have a conflict of interest in making
this proposal.
If the proposal is approved, the Partnership will be authorized to enter into an
agreement (the "Agreement") with Northland Communications Corporation, the
Managing General Partner of the Partnership or its assigns ("Northland"), to (i)
sell to Northland both the LPs' Interest and the undivided portion of the
Systems that is attributable to the Administrative General Partner's interest in
the Partnership (the "AGP's Interest"), and (ii) distribute in-kind to Northland
the undivided portion of the Systems that is attributable to the Managing
General Partner's interest in the Partnership (the "MGP's Interest"). Net
proceeds from the sale of the LPs' Interest and the AGP's Interest will be
distributed solely to the Limited Partners and the Administrative General
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Partner. Closing of the sale ("Closing") will be subject to certain terms and
conditions, including the availability of sufficient debt financing to
Northland. The Managing General Partner believes that such terms and conditions
will be satisfied. If Closing does not occur within 180 days of the date of the
Special Meeting called pursuant to the Notice of Special Meeting included
elsewhere in this information package, the Agreement will be terminated without
penalty. Following Closing, which is expected to occur in January 1997,
the Partnership will be dissolved.
At Closing, Northland will purchase the LPs' Interest and the AGP's Interest by
(i) making an initial payment to the Partnership equal to that amount which,
after retiring Partnership liabilities attributable to the LPs' Interest and the
AGP's Interest, will enable the Partnership to distribute to the Limited
Partners $750 for every $1,000 invested, and (ii) delivering to the
Partnership a promissory note (the "Note") in principal amount equal to the
remaining balance of the aggregate purchase price for the LPs' Interest and the
AGP's Interest.
The aggregate amount to be distributed to the Limited Partners, as a group, in
connection with the acquisition of the Systems by Northland will be equal to the
amount of cash that would be distributable to the Limited Partners collectively
assuming the liquidation of the Partnership following the sale of the Systems to
a third party, as of the date of Closing, for a gross cash purchase price equal
to $32,000,000 (the "Gross Valuation"). Such amount will be determined in
accordance with the Partnership Agreement. In determining the amount
distributable to the Limited Partners collectively, the Gross Valuation
generally will be (i) reduced by Partnership liabilities attributable to the
Limited Partners' collective interest in the Systems and by the net value of the
portion of the Systems attributable to the collective interests of the General
Partners and (ii) increased by the Limited Partners' collective interest in any
net Partnership assets other than the Systems.
Distributions to Limited Partners will be made in three installments. The
initial distribution of $750 per $1,000 investment will be made within 30 days
after the date of Closing. The General Partners believe that the initial
distribution will occur in January or February 1997. The balance of
distributions to be made to the Limited Partners, anticipated to approximate a
total of $589 per $1,000 investment, will be made as and when payments are made
by Northland to the Partnership pursuant to the Note. The Note will have a
two-year term, with two equal payments of principal, plus accrued interest, due
annually commencing on the first anniversary of the Closing. The Note will bear
interest at a per annum rate of six percent (6%), and will be subordinated to
Northland's senior debt. Assuming that the Closing occurs in January 1997,
distributions to the Limited Partners are expected to approximate $303 per
$1,000 investment in January 1998, and $286 per $1,000 investment in January
1999. These payment estimates include both principal and interest. These
estimates take into account the payment of all known or anticipated Partnership
liabilities attributable to the Limited Partners' collective interest in the
Partnership, including any liquidation expenses and any claims against the
Partnership of which the General Partners are aware. However, if the Partnership
incurs any unanticipated liabilities or expenses which exceed amounts set asside
for the payment of known and anticipated current liabilities, such liabilities
or expenses would reduce, without limitation, the amount of cash available for
distribution to the Limited Partners.
Approval of the proposed transaction is subject to the affirmative vote of the
holders of a majority of the outstanding units of limited partnership interest.
Each Limited Partner is entitled to one vote for each unit held. Because
Northland is not yet assured of financing for purchase of
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the LPs' Interest and the AGP's Interest, Northland will be under no obligation
to consummate the purchase. No bids from independent third parties have been
solicited by the General Partners to date. Although the Partnership obtained an
independent appraisal of the value of the Systems, the Partnership has not
sought or obtained a fairness opinion with respect to the terms of the proposed
transaction. If the requisite approval of Limited Partners is not obtained, or
if Limited Partners approve the proposed transaction but Closing does not occur
for any reason, the Partnership will continue to conduct its operations as
usual. If the requisite approval of Limited Partners is obtained and the Closing
does not occur within the requisite period, the Systems will not be sold without
again obtaining approval of the Limited Partners. The General Partners believe
that the proposed transaction at a Gross Valuation of $32,000,000, which is
based on, but in excess of, the appraised fair market value of the Systems, will
enable Limited Partners to liquidate their investment at a favorable price.
Adjustments will not be made to this valuation, in the event of changes which
would affect the value of the Systems prior to Closing, without resubmitting
the proposal to the Limited Partners for a new vote.
A Special Meeting of the Limited Partners to vote on the proposed transaction
will be held at the executive offices of Northland Communications Corporation,
the Managing General Partner, at 1201 Third Avenue, Suite 3600, Seattle,
Washington at 3:00 p.m., local time, on December 18, 1996. The Notice of Special
Meeting and Proxy Statement are included with this letter.
YOUR VOTE IS IMPORTANT.
The accompanying Proxy Statement, which relates to the Special Meeting, provides
you with a description of the proposed transaction. The General Partners urge
you to review carefully the accompanying Proxy Statement, including the section
entitled "Conflicts of Interest."
ALL LIMITED PARTNERS OF THE PARTNERSHIP, WHETHER OR NOT THEY INTEND TO ATTEND
THE SPECIAL MEETING, ARE URGED TO VOTE BY COMPLETING THE ENCLOSED PROXY AND BY
MAILING THE PROXY, PROPERLY EXECUTED, IN THE POSTAGE-PAID ENVELOPE AS SOON AS
POSSIBLE. A copy of the form of proxy is included as Exhibit A to the Proxy
Statement, and should be retained for your records.
The General Partners recommend that you vote IN FAVOR of the proposed
transaction.
If you have any questions or desire further information, you are encouraged to
contact our Investor Relations Department or Richard I. Clark, Vice
President/Treasurer of Northland, at (206) 621-1351.
Very truly yours,
NORTHLAND COMMUNICATIONS CORPORATION,
Managing General Partner of the Partnership
By /s/ John S. Whetzell
__________________________________________
John S. Whetzell, President
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NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
OF NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
TO BE HELD DECEMBER 18, 1996
A Special Meeting of the Limited Partners of Northland Cable Properties Four
Limited Partnership (the "Partnership") will be held at 1201 Third Avenue, Suite
3600, Seattle, Washington, at 3:00 p.m., local time, on December 18, 1996.
The purpose of the Special Meeting is to consider and vote upon the proposed
liquidation by the Partnership of its cable television systems, including the
franchises and operating assets serving eight operating groups including
Flint/Tyler, New Caney, Whitewright, Hillsboro, Kaufman, Waterwood and Prairie
View, Texas and Chowchilla, California, as well as surrounding contiguous areas
in these operating groups (the "Systems"), and the dissolution, winding up and
liquidation of the Partnership.
If the proposal is approved, the Partnership will be authorized to enter into an
agreement (the "Agreement") with Northland Communications Corporation, the
Managing General Partner of the Partnership or its assigns ("Northland"), to (i)
sell to Northland the undivided portion of the Systems that is attributable to
the Limited Partners' and the Administrative General Partner's collective
interest in the Partnership (the "LPs' Interest" and the "AGP's Interest,"
respectively) at a price which is based on a valuation of the Systems of
$32,000,000, and (ii) distribute in-kind to Northland the undivided portion of
the Systems that is attributable to the Managing General Partner's interest in
the Partnership (the "MGP's Interest"). Such $32,000,000 valuation, which is
based on, but in excess of, the independently appraised fair market value of the
Systems, represents the General Partners' arbitrary determination of the fair
market value of the Systems, and is not based on any formula or recognized
valuation method. In basing its valuation on the appraised value, the General
Partners did not receive any information regarding the appraisal other than the
written appraisal attached to the Proxy Statement. In particular, the General
Partners did not receive or review actual forecasts prepared by the appraiser in
the course of performing the appraisal. In arriving at their determination of
the Gross Valuation, the General Partners considered a range of possible
valuations, from the appraised value, at the low end, to valuations as high as
$33,500,000. The General Partners ultimately arrived at $32,000,000 as the Gross
Valuation, based on the appraisal, their assessment of the synergies likely to
result from the sale of the Systems to an affiliate, and their review of the
financial results of the Partnership.
Net proceeds from the sale of the LPs' Interest and the AGP's Interest will be
distributed solely to the Limited Partners and the Administrative General
Partner. If approved, the sale transaction and resulting liquidation is
anticipated to yield a cumulative total of approximately $2,039 per $1,000
investment to Limited Partners during the life of the Partnership (or
approximately $1,020 per $500 unit of limited partnership interest). These
estimates include prior cash distributions to date of $700 per $1,000 investment
(or $350 per $500 unit of limited partnership interest).
Closing of the sale and the in-kind distribution ("Closing") will be subject to
certain terms and conditions, including the availability of sufficient debt
financing to Northland. The Managing General Partner believes that such terms
and conditions will be satisfied. If Closing does not occur within 180 days of
the date of the Special Meeting, the Agreement will be terminated without
penalty. Following Closing, which is expected to occur in January 1997,
the Partnership will be dissolved. Also in January or February 1997, the
Partnership expects to make its initial distribution of sale proceeds to
Limited Partners, in the amount of $750 per $1,000 investment.
Approval of the proposed transaction is subject to the affirmative vote of the
holders of a majority of the outstanding units of limited partnership interest.
Each Limited Partner is entitled to one vote for each unit held. Because
Northland is not yet assured of financing for purchase of
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<PAGE> 6
the LPs' Interest and the AGP's Interest, Northland will be under no obligation
to consummate the purchase. No bids from independent third parties have been
solicited by the General Partners to date. Although the Partnership obtained an
independent appraisal of the value of the Systems, the Partnership has not
sought or obtained a fairness opinion with respect to the terms of the proposed
transaction. If the requisite approval of Limited Partners is not obtained, or
if Limited Partners approve the proposed transaction but Closing does not occur
within the requisite period, the Partnership will continue to conduct its
operations as usual. If the requisite approval of Limited Partners is obtained
and the Closing does not occur, the Systems will not be sold without again
obtaining approval of the Limited Partners. The General Partners believe that
the proposed transaction at a Gross Valuation of $32,000,000, which is based on,
but in excess of, the appraised fair market value of the Systems, will enable
Limited Partners to liquidate their investment at a favorable price.
Accordingly, the specific purpose of the meeting is to consider and vote upon
the following, and to consider and transact such other business as may properly
come before the meeting:
The grant to the Managing General Partner of authority to sell the
cable systems owned by the Partnership (the "Systems") to Northland
Communications Corporation or its assigns ("Northland"), to dissolve
and wind up the affairs of the Partnership, to distribute the proceeds
of the liquidation and any remaining assets in accordance with the
Partnership Agreement and the Proxy Materials, and to take any action
deemed necessary or appropriate by it to accomplish the foregoing;
together with an amendment to the Amended and Restated Certificate and
Agreement of Limited Partnership of Northland Cable Properties Four
Limited Partnership, as such amendment is set forth in Exhibit B to the
Proxy Materials, to authorize the Partnership to enter into an
agreement with Northland for the sale to Northland of the undivided
portion of the Systems which is attributable to the Limited Partners'
and Administrative General Partner's collective interest in the
Partnership, and the distribution to Northland, in-kind, of the
undivided portion of the Systems which is attributable to the Managing
General Partner's interest in the Partnership, all on the terms and
conditions described in the Proxy Materials; and all such other and
future actions reasonably necessary to accomplish the foregoing.
Approval of Limited Partners for these matters is solicited by the General
Partners and shall be given (or withheld) by Limited Partners in attendance in
person at the Special Meeting to be held on December 18, 1996, or by execution
and delivery of the enclosed proxy prior to the Special Meeting. Any Limited
Partner who later finds that he or she can be present at the meeting, or who for
any reason desires to do so, may revoke his or her proxy at any time before it
is voted. The proposed transaction is subject to the approval of a majority in
interest of the Limited Partners.
Only persons who are Limited Partners of record of the Partnership at the close
of business on October 15, 1996 will be entitled to notice of and to vote at the
Special Meeting or any adjournments thereof. The Special Meeting may be
adjourned by the Managing General Partner
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from time to time for any reason without notice except such notice as is
conveyed at the meeting or adjournment thereof.
Your attention is directed to the accompanying Proxy Statement which contains
further information with respect to the meeting and the proposed transaction. A
form of proxy is enclosed. YOU ARE URGED TO COMPLETE, SIGN AND RETURN PROMPTLY
THE ENCLOSED PROXY, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. A
POSTAGE-PAID RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. PROXIES MUST BE
RECEIVED ON OR BEFORE DECEMBER 18, 1996.
The General Partners recommend that you vote IN FAVOR of the proposed
transaction.
NORTHLAND CABLE PROPERTIES FOUR
LIMITED PARTNERSHIP
By: Northland Communications Corporation,
Managing General Partner of the Partnership
By ___________________________________________
John S. Whetzell, President
Seattle, Washington
November 1, 1996
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NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
PROXY STATEMENT
This Proxy Statement describes a proposal whereby Northland Cable Properties
Four Limited Partnership (the "Partnership") would liquidate its cable
television systems and other operating assets (the "Systems") at a valuation
which is based on, but in excess of, the appraised fair market value of such
Systems. The proposal, which is made jointly by Northland Communications
Corporation, the Managing General Partner of the Partnership (the "Managing
General Partner"), and FN Equities Joint Venture, the Administrative General
Partner of the Partnership (the "Administrative General Partner"), includes the
grant of authority to the Partnership to enter into an agreement (the
"Agreement") with the Managing General Partner or its assigns ("Northland"), to
(i) sell to Northland the undivided portion of the Systems which is attributable
to the Limited Partners' and the Administrative General Partner's collective
interest in the Partnership (the "LPs' Interest" and the "AGP's Interest,"
respectively), and (ii) distribute in-kind to Northland the undivided portion of
the Systems which is attributable to the Managing General Partner's interest in
the Partnership (the "MGP's Interest). See "Proposed Transaction."
The proposed transaction is subject to the approval of a majority in interest of
the Limited Partners. As of October 15, 1996, the record date, there were 14,663
units of limited partnership interest outstanding, held by 1,028 Limited
Partners of record. The Managing General Partner holds 20 of such units
(representing 0.1% of the total), and intends to vote in favor of the proposal
described herein. No affiliate of the General Partners holds units of limited
partnership interest. The General Partners do not know the voting intentions of
other unit holders. Units of limited partnership interest held and voted by the
Managing General Partner will be included in determining whether the requisite
approval has been obtained. If the proposal described herein is approved and
closing of the transaction occurs, Northland will acquire the Systems from the
Partnership and the Partnership will be dissolved. Northland's obligation
to consummate the purchase of the Systems is subject to its obtaining the
requisite financing, and no such financing has yet been obtained. If the
proposal is approved and Closing (defined below) does not occur within the
requisite period, the Systems will not be sold without again obtaining approval
of the Limited Partners.
This Proxy Statement and the accompanying proxy are furnished in connection with
the solicitation of proxies by the Managing General Partner for use at the
Special Meeting of Limited Partners to be held at 3:00 p.m. on December 18,
1996, at the offices of the Managing General Partner at 1201 Third Avenue, Suite
3600, Seattle, Washington 98101, and at any adjournments thereof (the "Special
Meeting"). Only Limited Partners of record as of October 15, 1996 will be
entitled to vote at the meeting. This Proxy Statement is first being mailed to
Limited Partners on November 1, 1996.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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A proxy that is properly executed and returned will be voted for or against the
proposed transaction in accordance with the instructions on the proxy. In the
absence of instructions on the proxy to the contrary, all interests of an
executing Limited Partner will be voted in favor of the proposal described in
this Proxy Statement. Any Limited Partner executing the proxy shall have the
power to revoke it at any time prior to the voting thereof by delivering written
notice of revocation to the Managing General Partner, by executing and
delivering another proxy dated as of a later date, or by voting in person at the
Special Meeting.
The General Partners recommend that Limited Partners vote IN FAVOR of the
proposed transaction.
LIMITED PARTNERS ARE URGED TO CAREFULLY REVIEW THIS PROXY
STATEMENT AND TO RETURN THEIR PROXY PROMPTLY.
----------------------------------------
The date of this Proxy Statement is November 1, 1996.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction......................................................................................................4
Special Factors...................................................................................................8
Summary Historical Financial Information.........................................................................11
Proposed Transaction.............................................................................................12
Certain Consequences Of The Transaction..........................................................................27
Certain Consequences Of Limited Partners' Determination Not To Sell..............................................30
Projected Cash Available From Liquidation........................................................................31
Projected Cash Available If Closing Occurs.......................................................................32
Management's Discussion And Analysis Of Financial Condition And Results Of Operations............................34
Federal Income Tax Consequences..................................................................................39
Conflicts Of Interest............................................................................................44
Overview of Partnership Business and Properties..................................................................46
Certain Affiliates Of The Partnership............................................................................53
Plan Of Solicitation.............................................................................................59
Incorporation By Reference.......................................................................................60
Financial Statements.............................................................................................60
Exhibits:
Form of Proxy..........................................................................................A-1
Form of Amendment to Partnership Agreement.............................................................B-1
Daniels Appraisal......................................................................................C-1
</TABLE>
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INTRODUCTION
GENERAL
This Proxy Statement is being furnished to the Limited Partners of the
Partnership by the Managing General Partner, whose principal executive offices
are located at 1201 Third Avenue, Suite 3600, Seattle, Washington 98101 and
whose telephone number is (206) 621-1351. The principal executive offices and
telephone number of the Partnership are the same. The Proxy Statement is to be
used in connection with the solicitation of proxies for use at the Special
Meeting.
The purpose of the Special Meeting is to consider and vote upon the proposed
liquidation by the Partnership of its cable television systems, including the
franchises and operating assets serving eight operating groups including
Flint/Tyler, New Caney, Whitewright, Hillsboro, Kaufman, Waterwood and Prairie
View, Texas and Chowchilla, California, as well as surrounding contiguous areas
in these operating groups (the "Systems"), and the dissolution, winding up and
liquidation of the Partnership.
If the proposal is approved, the Partnership will be authorized to enter into an
agreement (the "Agreement") with Northland Communications Corporation, the
Managing General Partner of the Partnership or its assigns ("Northland"), to (i)
sell to Northland the undivided portion of the Systems that is attributable to
the Limited Partners' and the Administrative General Partner's collective
interest in the Partnership (the "LPs' Interest" and the "AGP's Interest,"
respectively) at a price which is based on a valuation of the Systems of
$32,000,000, and (ii) distribute in-kind to Northland the undivided portion of
the Systems that is attributable to the Managing General Partner's interest in
the Partnership (the "MGP's Interest"). Such $32,000,000 valuation, which is
based on, but in excess of, the independently appraised fair market value of the
Systems ($30,318,000), represents the General Partners' arbitrary determination
of the fair market value of the Systems and is not based on any formula or
recognized valuation method. In basing its valuation on the appraised value, the
General Partners did not receive any information regarding the appraisal other
than the written appraisal attached to this Proxy Statement as Exhibit C. In
particular, the General Partners did not receive or review actual forecasts
prepared by the appraiser in the course of performing the appraisal. In arriving
at its determination of the Gross Valuation, the General Partners considered a
range of possible valuations, from the appraised value, at the low end, to
valuations as high as $33,500,000. The General Partners ultimately arrived at
$32,000,000 as the Gross Valuation, based on the appraisal, their assessment of
the synergies likely to result from the sale of the Systems to its affiliate,
and its review of the financial results of the Partnership.
Net proceeds from the sale of the LPs' Interest and the AGP's Interest will be
distributed solely to the Limited Partners and the Administrative General
Partner. If approved, the sale transaction and resulting liquidation are
anticipated to yield a cumulative total of approximately $2,039 per $1,000
investment to Limited Partners during the life of the Partnership (or
approximately $1,020 per $500 unit of limited partnership interest). These
estimates include prior cash distributions to date of $700 per $1,000 investment
(or $350 per $500 unit of limited partnership interest).
Closing of the sale and the in-kind distribution ("Closing") will be subject to
certain terms and conditions, including the availability of sufficient debt
financing to Northland. The Managing General Partner believes that such terms
and conditions will be satisfied. If Closing does not occur within 180 days of
the date of the Special Meeting, the Agreement will be terminated without
penalty. Following Closing, which is expected to occur in January 1997,
the Partnership will be dissolved. Also in January or February 1997, the
Partnership expects to make its initial distribution of sale proceeds to
Limited Partners, in the amount of $750 per $1,000 investment.
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<PAGE> 12
In June 1996, the Systems were appraised by Daniels & Associates, an
internationally-recognized expert in the appraisal of cable television systems,
at an aggregate valuation of $30,318,000 (the "Appraised Value"). For purposes
of the proposed transaction, the General Partners have valued the Systems at
$32,000,000, which exceeds their appraised fair market value. At Closing,
Northland will purchase the LPs' Interest and the AGP's Interest by (i) making
an initial payment to the Partnership equal to that amount which, after retiring
Partnership liabilities, will enable the Partnership to distribute to the
Limited Partners an amount equal to $750 for every $1,000 invested, and (ii)
delivering to the Partnership a promissory note (the "Note") in principal amount
equal to the remaining balance of the aggregate purchase price for the LPs'
Interest and the AGP's Interest.
The aggregate amount to be distributed to the Limited Partners, as a group, in
connection with the acquisition of the Systems by Northland will be equal to the
amount of cash that would be distributable to the Limited Partners collectively
assuming the liquidation of the Partnership following the sale of the Systems to
a third party, as of the date of Closing, for a gross cash purchase price equal
to $32,000,000 (the "Gross Valuation"). Such amount will be determined in
accordance with the Partnership Agreement. In determining the amount
distributable to the Limited Partners collectively, the Gross Valuation
generally will be (i) reduced by Partnership liabilities attributable to the
Limited Partners' collective interest in the Systems and by the net value of the
portion of the Systems attributable to the collective interests of the General
Partners and (ii) increased by the Limited Partners' collective interest in any
net Partnership assets other than the Systems. If approved, the transaction is
anticipated to yield a total of approximately $2,039 per $1,000 investment to
Limited Partners during the life of the Partnership (or approximately $1,020 per
$500 unit of limited partnership interest). These estimates include prior cash
distributions to date of $700 per $1,000 investment (or $350 per $500 unit of
limited partnership interest).
Distributions to Limited Partners will be made in three installments. The
initial distribution of $750 per $1,000 investment will be made within 30 days
after the date of Closing. The General Partners believe that the initial
distribution will occur in late January 1997. The balance of distributions to be
made to the Limited Partners, anticipated to approximate a total of $589 per
$1,000 investment, will be made as and when payments are made by Northland to
the Partnership pursuant to the Note. The Note will have a two-year term, with
two equal payments of principal, plus accrued interest, due annually commencing
on the first anniversary of the Closing. The Note will bear interest at a per
annum rate of six percent (6%), will be full recourse and unsecured, and will be
subordinated to Northland's senior debt. Northland Communications Corporation
currently has no debt that would be senior to the Note, but it could incur such
debt in the future. Assuming that the Closing occurs in January 1997,
distributions to the Limited Partners are expected to approximate $303 per
$1,000 investment in January 1998, and $286 per $1,000 investment in January
1999. These payment estimates include both principal and interest. These
estimates take into account the payment of all known or anticipated Partnership
liabilities attributable to the Limited Partners' collective interest in the
Partnership, including any liquidation expenses and any claims against the
Partnership of which the General Partners are aware. However, if the
Partnership incurs any unanticipated liabilities or expenses which exceed
amounts set aside for the payment of known and anticipated current liabilities,
such liabilities and expenses would reduce, without limitation, the amount of
cash available for distribution to the Limited Partners.
The proposed transaction is subject to the approval of a majority in interest of
Limited Partners. Units of limited partnership interest held and voted by the
Managing General Partner will be
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<PAGE> 13
included in determining whether the requisite approval has been obtained.
Although Northland presently intends to consummate the proposed transaction, if
approved, it will be under no obligation to do so. If Limited Partners approve
the proposed transaction and Closing does not occur within the requisite period,
or if the requisite approval of Limited Partners is not obtained, the
Partnership will continue to conduct its operations as usual.
VOTING AT THE SPECIAL MEETING
The Managing General Partner and the Administrative General Partner (the
"General Partners") have determined that Limited Partners of record as of the
close of business on October 15, 1996 are entitled to notice of and to vote at
the Special Meeting. Each Limited Partner is entitled to one vote for each
limited partnership unit held. Under the terms of the Certificate and Agreement
of Limited Partnership of the Partnership, as amended (the "Partnership
Agreement"), the affirmative vote of Limited Partners holding a majority of the
outstanding units is required to approve the proposed transaction. Abstentions,
therefore, will have the same effect as a vote to disapprove the proposal. There
currently is no established market in which the units are being traded.
A proxy that is properly completed and returned in time for voting with the
choice specified thereon will be voted in accordance with the specification. If
an executed proxy is returned without a specification having been made, such
proxy will be voted at the Special Meeting in favor of the proposed transaction
and the amendment to the Partnership Agreement authorizing the proposed
acquisition of the Systems by Northland. Limited Partners may revoke their
proxies at any time prior to voting by delivering to the Managing General
Partner either an instrument revoking the proxy or a duly executed proxy bearing
a later date, or by attending the Special Meeting and voting in person.
Attendance at the Special Meeting, by itself, will not revoke a proxy.
CONFLICTS OF INTEREST
There are no contracts, arrangements, understandings or relationships between
the General Partners or their affiliates and any Limited Partner regarding the
voting of proxies at the Special Meeting.
The General Partners and their affiliates have faced and will continue to face
substantial conflicts of interest in connection with the proposed transaction.
The conflicts of interest arise out of the relationship of the General Partners
with the Partnership and the proposed agreement with Northland to liquidate the
Systems. For example, assuming that the requisite approval of Limited Partners
is obtained, Northland will be authorized to enter into an agreement with the
Partnership for the acquisition of the Systems. The terms of the acquisition
have been determined by the General Partners. Neither the Administrative General
Partner nor any affiliate of the Administrative General Partner will be
acquiring any interest in the Systems. The Managing General Partner has faced a
substantial conflict of interest in determining the terms of acquisition of the
Systems by Northland. In addition, the Managing General Partner faced a
significant conflict of interest in determining not to solicit bids from
independent third parties, but instead to propose that the Partnership grant to
Northland the right to acquire the Systems.
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<PAGE> 14
Conflicts of interest include the possibility that the fair market value and net
cash flow of the Systems may increase over time. Therefore, it is possible that
Limited Partners would receive a greater return on their investment if the
Partnership continues to own and operate the Systems, instead of consummating
the proposed transaction. Similarly, if the Systems are acquired by Northland as
proposed, Northland may experience a rate of return on its investment in excess
of that experienced by the Partnership. In addition, although Daniels &
Associates, the cable appraiser retained by the General Partners in connection
with the proposal herein ("Daniels"), is not affiliated with the General
Partners or the Partnership, the General Partners and their affiliates have
frequently entered into material contracts with Daniels for the purchase or sale
of cable television systems in transactions where Daniels or its affiliates
acted either as broker or as principal, and the General Partners expect that
they and their affiliates will enter into similar transactions with Daniels or
its affiliates in the future. See "Conflicts of Interest."
The General Partners recommend a vote IN FAVOR of the proposed transaction and
amendment to the Partnership Agreement. The Managing General Partner holds 20
units of limited partnership interest and intends to vote IN FAVOR of the
transaction. Units of limited partnership interest held and voted by the
Managing General Partner will be included in determining whether the requisite
approval has been obtained. See "Conflicts of Interest."
In addition to use of the mail, proxies may be solicited by telephone or
personally by the General Partners and their directors, officers, partners and
employees, none of whom will receive any extra compensation for their services.
The expenses of the solicitation will be borne by the Partnership. The
Partnership's accountants are not expected to attend the Special Meeting.
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<PAGE> 15
SPECIAL FACTORS
A number of special factors apply to the proposed transaction. Such factors are
described more fully elsewhere in this Proxy Statement and should be read in
conjunction with the rest of this Proxy Statement. Limited partners are urged
to read all of this Proxy Statement carefully.
The purpose of the proposed transaction is primarily to provide Limited Partners
with an opportunity to liquidate their investment in the Partnership. The
General Partners considered seeking third party buyers for the Systems, but
believe that the present transaction structure represents a more favorable
option for Limited Partners, especially in light of present market conditions.
Although the solicitation of third party bids may provide the Partnership with
an opportunity to consider a disinterested estimate of the sale value of the
Systems, or even to obtain a higher price for the Systems, the General Partners
believe that this is unnecessary given the obtaining of an independent appraisal
of the Systems, given the General Partners' belief that there is little
likelihood of obtaining bids in the immediate future on more favorable terms
than those offered by Northland, and further given that any such solicitation
would involve broker's fees and an additional investment of Partnership time and
resources. See "Proposed Transaction -- Background of Proposed Transaction and
Market Factors." If the Limited Partners approve of the disposition of the
Systems and the Closing occurs, the General Partners will proceed with the
distribution of proceeds in accordance with the Partnership Agreement provisions
for dissolution, winding up and termination. The Systems will then be owned and
operated by Northland. See "Certain Consequences of the Transaction." There are
material tax consequences to the Limited Partners resulting from the proposed
transaction. See "Federal Income Tax Consequences."
Limited Partners should also be aware, however, that Northland hopes to benefit
from its acquisition of the Systems, for example, by achieving potential
economies of scale. Notwithstanding the factors described below under "Proposed
Transaction -- Market Factors," the fair market value and net cash flow of the
Systems may increase over time. Therefore, it is possible that Limited Partners
would receive a greater return on their investment if the Partnership continues
to own and operate the Systems, instead of consummating the proposed
transaction. Similarly, if the Systems are acquired by Northland, Northland may
experience a rate of return on its investment in excess of that experienced by
the Partnership.
The General Partners have faced a substantial conflict of interest in proposing,
negotiating and structuring the proposed transaction. See "Conflicts of
Interest." Although the General Partners believe that Limited Partners are
interested in a means of liquidating their investment, the proposed transaction
has not been solicited by Limited Partners. The only steps taken to provide the
Limited Partners with procedural safeguards are the commissioning of an
independent appraisal of the Systems, and the submission of the proposed
transaction to Limited Partners for their approval. The Partnership has not, for
example, solicited an independent fairness opinion, or arranged for the
appointment of an independent representative of the Limited Partners. The
General Partners nonetheless believe that the steps taken and to be taken
constitute sufficient safeguards for the Limited Partners' interests.
-8-
<PAGE> 16
The General Partners also believe that the proposed transaction is fair to the
Limited Partners. The General Partners have considered a number of material
factors in connection with such belief. Foremost among such factors are the
obtaining of an independent appraisal with respect to the Systems, and the
structuring of the proposed transaction so that the approval of Limited Partners
is required to be obtained. (Units of limited partnership interest held and
voted by the Managing General Partner will be included in determining whether
the requisite approval has been obtained.) In relying on the Daniels Appraisal,
neither the General Partners nor any other parties evaluating the fairness of
the proposed transaction received any information other than a copy of the
Daniels Appraisal. In particular, none of these parties received or reviewed the
actual forecasts prepared by Daniels in arriving at the valuation contained in
the Daniels Appraisal. In arriving at their determination of the Gross
Valuation, the General Partners considered a range of possible valuations, from
the appraised value, at the low end, to valuations as high as $33,500,000. The
General Partners ultimately arrived at $32,000,000 as the Gross Valuation, based
on the appraisal, their assessment of the synergies likely to result from the
sale of the Systems to an affiliate, and their review of the financial results
of the Partnership.
In determining the fairness of the proposed transaction, the General Partners
carefully considered a number of factors. In favor of the proposed transaction
were the valuation of the Systems, which is in excess of the appraised value,
and the opportunity for the Limited Partners to liquidate their investment.
Against the proposed transaction were the fact of an inside transaction, under
which Northland would acquire the Systems, and the General Partners' decision
not to solicit bids from independent third parties. See "Proposed Transaction
- -- Fairness of the Proposed Transaction."
No other material factors were considered. For example, in the absence of an
established market in which units of limited partnership interests are being
traded, the General Partners were not able to consider current market prices for
the units, nor historical market prices. Having obtained an appraisal from
Daniels, an internationally-recognized cable brokerage, appraisal and
investment banking firm, the General Partners did not believe it worthwhile
to consider the going concern value or liquidation value of the Partnership.
While the General Partners believe that such valuations would support the
appraised value, it is possible that such valuation would have exceeded the
appraised value. The appraised value as of July 31, 1996 substantially exceeds
the net book value of the Partnership as of July 31, 1996.The General Partners
could not consider recent purchases of units by the Partnership or any
affiliate of the Partnership because none have occurred. The General Partners
have made no recent effort to solicit bids from independent third parties for
a sale of the Systems, and no firm offers have been made by an unaffiliated
entity for a merger or consolidation of the Partnership, the saleor transfer
for all or a substantial part of the assets of the Partnership, or a sale of
partners' interests in the Partnership allowing the purchaser thereof to
exercise control over the Partnership. The General Partners decided not to
solicit third-party bids to purchase the Systems in part because of the time and
costs of soliciting such bids. Based on their previous experience with cable
system sale transactions, the General Partners estimate the cost of soliciting
such bids attributable to legal fees alone to be approximately $100,000. In
addition, the Partnership would typically employ a broker to solicit interested
purchasers for the Systems, in exchange for which the Partnership would be
charged a brokerage fee typically based on a percentage of the purchase price.
Based on their experience in such matters, the General Partners estimate the
likely brokerage fee which would be incurred in connection with the solicitation
of a third-party purchaser of the Systems to be approximately $450,000. See
"Proposed Transaction -- Fairness of the Proposed Transaction."
In connection with the proposed transaction, the Partnership obtained an
independent appraisal of the Systems from Daniels. Daniels was retained based
upon its reputation and expertise. Daniels has a prior history of providing
investment banking, brokerage and appraisal services to Northland, and the
General Partners believe that such services will continue to be provided by
Daniels to Northland and its affiliates following consummation or expiration of
the proposed transaction. The Partnership paid Daniels $25,000 for its
services in the proposed transaction. The Partnership has not previously engaged
Daniels for any services, and the Partnership does not expect to engage Daniels
for any services in the future. No other reports, opinions or appraisals were
obtained from outside or independent parties. See "Proposed Transaction --
Market Factors and Appraisal Process." A COPY OF THE DANIELS APPRAISAL IS
ATTACHED AS EXHIBIT C TO THIS PROXY STATEMENT. In addition, a summary of the
appraisal is contained elsewhere in this Proxy Statement. See "Proposed
Transaction -- Summary of Appraisal."
Daniels appraised the fair market value of the Systems at $30,318,000. See
"Proposed Transaction -- Summary of Appraisal." The valuation of $32,000,000
applicable to the proposed transaction is based on, but in excess of, the
Daniels appraised fair market value. This higher valuation represents the
General Partners' arbitrary determination of the fair market value of the
Systems, and is not based on any formula or recognized valuation method.
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<PAGE> 17
In valuing the Systems, Daniels relied primarily on a discounted operating cash
flow analysis based on the projected operating results of the Systems over a
ten-year period and applied a factor for the residual value of the Systems at
the end of that ten-year period. The value of the Systems is also expressed in
terms of a multiple of operating cash flow and value-per-subscriber. The
valuation is supported by a review of other cable system sales that have
occurred over the recent past and by a comparison of the value-per-subscriber
and multiple of cash flows for such system sales with the value-per-subscriber
and multiple of cash flows for the Systems. See "Proposed Transaction -- Summary
of Appraisal."
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<PAGE> 18
SUMMARY HISTORICAL FINANCIAL INFORMATION
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
(unaudited)
YEAR ENDED DECEMBER 31, Six Months
----------------------- Ended
June 30,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 4,709,010 $ 5,062,574 $5,406,112 $5,657,619 $ 6,617,205 $4,326,394
Expenses 4,235,553 4,591,589 4,775,166 5,090,689 5,354,807 $3,655,282
----------- ----------- ---------- ---------- ----------- ----------
Operating 473,457 470,985 630,946 566,930 1,262,398 671,112
Income
Other Income
(Expenses) (1,092,390) (841,860) (723,428) (636,208) (1,070,856) (889,133)
----------- ----------- ---------- ---------- ----------- ----------
Net Income (Loss) ($618,933) ($370,875) ($92,482) ($69,278) $191,542 ($218,021)
=========== =========== ========== ========== =========== ==========
Allocation of
Net Income (Loss):
General Partners ($6,189) ($3,709) ($925) ($693) $ 1,915 ($2,180)
Limited Partners (612,744) (367,166) (91,557) (68,585) 189,627 (215,841)
Net Income (Loss)
Per Limited (41) (25) (6) (5) 13 (15)
Partnership Unit
Cash Distributions Per
Limited Partnership Unit 20 20 20 20 20 5
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, (unaudited)
------------ June 30,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $ 8,300,267 $ 7,178,850 $ 5,788,906 $ 4,745,345 $ 15,074,134 $ 14,718,361
Total Liabilities 12,495,196 12,108,578 11,138,379 10,502,904 20,937,173 20,873,477
Partners' Deficit:
General Partners (105,225) (111,948) (115,866) (119,537) (120,592) (123,513)
Limited Partners (4,089,704) (4,817,780) (5,233,607) (5,638,022) (5,742,447) (6,031,603)
</TABLE>
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<PAGE> 19
PROPOSED TRANSACTION
BACKGROUND OF PROPOSED TRANSACTION
Commencing in 1985, the Partnership acquired the Systems in a series of
transactions. The Systems currently serve eight operating groups including the
communities of Flint/Tyler, New Caney, Whitewright, Hillsboro, Kaufman,
Waterwood and Prairie View, Texas and Chowchilla, California, and contiguous
areas around these operating groups. The Flint/Tyler, New Caney, Whitewright and
Chowchilla systems were acquired in 1985. The Kaufman, Hillsboro, Waterwood and
Prairie View systems were acquired in 1995. All of the initial acquisitions were
financed through a combination of Limited Partners' equity and bank loans, and
the later acquisitions were financed through a combination of Partnership cash
flow and bank loans. As of June 30, 1996, the outstanding principal balance
owing on the Partnership's bank financing was $19,333,406. In addition, the
Partnership owed the Managing General Partner an aggregate of approximately
$60,408 for accrued but unpaid management fees and certain unreimbursed
operating expenses.
Due to the General Partners' belief, based on the fact that
many investors have held their units for more than thirteen years without
liquidity, that a significant number of Limited Partners may desire to
liquidate their investment, the General Partners began in early 1996 to
formulate a proposal to sell the Systems. (There is no established public
trading market for the Partnership's units of limited partnership interest.)
After assessing the opportunities for sale to unaffiliated third parties, and
after considering the current small cable system marketplace, the General
Partners believe the transaction described in this Proxy Statement represents
the optimum method to achieve a liquidation of the Limited Partners' investment
in today's marketplace. Therefore, the General Partners are submitting the
proposal described in this Proxy Statement to provide the Limited Partners an
opportunity to liquidate their investment and to receive significant cash
distributions upon such liquidation. The General Partners have faced
substantial conflicts of interest in making these determinations. See
"Conflicts of Interest."
PURPOSE OF MEETING
The General Partners are calling the Special Meeting for the purpose of
providing the Limited Partners with an opportunity to approve, by the requisite
consent of a majority in interest, the proposed liquidation of the Systems and
the dissolution of the Partnership. Limited Partners approving the proposal
described in this Proxy Statement will be consenting to: (a) the disposition of
the Systems and specific amendments to the Partnership Agreement authorizing the
acquisition of the Systems by Northland; (b) the effect of such disposition and
grant on the amount of proceeds and assets distributed to the Partners; and (c)
the dissolution, winding up and termination of the Partnership.
The proposed amendment to the Partnership Agreement contains provisions that
authorize the Partnership to enter into an agreement with Northland for the sale
of the undivided portion of the Systems which is attributable to the Limited
Partners' and the Administrative General Partner's collective interest in the
Partnership. If the Closing occurs, the net proceeds from such sale will be
distributed to the Limited Partners and the Administrative General Partner, and
the undivided
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<PAGE> 20
portion of the Systems attributable to the Managing General Partner's interest
will be distributed to Northland in-kind. Following the Closing, the Partnership
will be dissolved.
MARKET FACTORS
The Limited Partners acquired their units of limited partnership interest in
1985. There is no established market in which the units are being traded.
Pending a liquidation of the Partnership, the units will likely remain an
illiquid investment. Although the General Partners have not solicited or
received input from representatives of the Limited Partners concerning the
proposal described herein, the General Partners believe that Limited Partners
may welcome the opportunity to liquidate their investment. In these
circumstances, the Managing General Partner began to formulate a proposal for
the sale of the Systems in early 1996. The General Partners decided to implement
the proposed transaction at this time in light of the length of time over which
Limited Partners have held their investment, the belief that Limited Partners
would welcome the opportunity to liquidate their investment, the possibility
that Northland might have access to funds necessary to consummate the proposed
transaction, and the General Partners' belief that the prospects for the
Partnership's obtaining third party buyers may be difficult. In particular, the
Managing General Partner studied the market factors discussed below.
Due to a number of factors, the market for small rural cable systems nationwide
has generally declined over the past few years. In late 1992, Congress enacted
The Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Act"), which significantly increased regulation of the cable television
industry. While the Telecommunications Act of 1996 (the "1996 Act"), and
rulemakings of the Federal Communications Commission ("FCC"), have essentially
rescinded the most stringent aspects of rate regulation with respect to "small
systems" owned by "small cable operators" (as those terms are defined in the
1996 Act and the regulations of the FCC), many of the rules promulgated in
response to the 1992 Act make it more expensive for cable companies to operate.
Competition to the cable television industry is becoming more intense. Several
direct broadcast satellite companies are operational, each with a full line-up
of direct-to-home satellite-delivered programming, including pay-per-view. In
addition, many of the Regional Bell Operating Companies have announced plans to
spend billions of dollars over the next several years to upgrade their twisted
copper wire to fiber optic transmission facilities, thereby significantly
increasing their ability to offer video service within their service areas. The
1996 Act essentially eliminated the remaining legal barriers to telephone
company entry in the video programming business.
Based on the market factors discussed above, the General Partners concluded that
selling the Systems to an independent third party at a price and on terms
acceptable to the Partnership would be difficult. The General Partners have made
no attempt to solicit interest from independent third parties for the Systems.
Prior to this solicitation, the Partnership has never sought to liquidate all of
its assets. The General Partners believe that the effective invitation of third
party offers would require the appointment of a broker. Given their conclusion
that the obtaining of acceptable offers would be difficult, the General Partners
believe that the cost and delay
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<PAGE> 21
associated with the appointment of a broker, the seeking of potential buyers,
and the conduct of negotiations would likely not be in the best interests of the
Partnership.
The possibility that Northland might acquire the Systems first arose in early
1996, at the same time as the General Partners began to consider a means to
permit Limited Partners to liquidate their investment in the Partnership. The
possibility was considered by John S. Whetzell and Richard I. Clark, who are
senior officers of the Managing General Partner. As such, Messrs. Whetzell and
Clark were in a position to assess the opportunity presented to each of the
Partnership and Northland by the prospect of a sale or other disposition of the
Systems. They realized that a sale or other disposition would provide a means
for the Limited Partners to liquidate their investment, and they believed that
the Systems would be more attractive to Northland, as a purchaser familiar with
the operation of the Systems and one able to realize economies of scale, than
the Systems might be to an unaffiliated third party. By virtue of their dual
capacity, Messrs. Whetzell and Clark faced a conflict of interest in making such
an assessment.
Messrs. Whetzell and Clark, together with other officers of the Managing General
Partner, gave further consideration to the acquisition at meetings commencing in
March. Participants at the meetings carefully considered, among other factors,
the market factors discussed above, the availability of third party purchasers
willing and able to acquire the Systems on terms acceptable to the Partnership,
the advantages and disadvantages of soliciting independent third-party bids and
the benefits to the Partnership and Northland of Northland's acquisition of the
Systems. Such meetings occurred in series on an informal basis. A series of
meetings regarding the proposed transaction was also held by telephone among the
respective management groups of Northland and the Administrative General Partner
over the same period. Such meetings consisted primarily of contacts and
negotiations between Messrs. Whetzell and Clark and John S. Simmers, a general
partner of the Administrative General Partner, to discuss and formulate the
proposed transaction. Although the Managing General Partner and the
Administrative General Partner are general partners of a number of other cable
television system limited partnerships, the Administrative General Partner is
independent of Northland. Officers of FN Equities, Inc., the corporate general
partner of the Administrative General Partner, also considered the proposed
transaction. See "Certain Affiliates of the Partnership." Except with respect to
a meeting of the General Partners held on May 1, 1996, no formal written logs
specifying the dates and times of meetings are available.
In agreeing with the Administrative General Partner to pursue the proposed
transaction, Northland's primary motivating factor was its desire to accommodate
the General Partners' joint interest in obtaining liquidity for the Limited
Partners. The sole other material factors motivating Northland's interest were
the potential economies of scale it could achieve and its familiarity with the
Systems.
Although the negative market factors described above were perceived as an
obstacle to the sale of the Systems to an independent third party on acceptable
terms, the ownership by Northland of other cable television systems in the
vicinity of the Systems makes the acquisition of the Systems a more valuable
proposition to Northland. Third parties would not experience such economies of
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<PAGE> 22
scale. The proximity of the Partnership's Systems to other cable systems owned
or managed by Northland would enable all of such systems to share, for example,
certain customer service, technical and administrative personnel.
A third party purchaser would also be forced to bear transition costs that
Northland would not be required to bear. For example, Northland's engineers are
currently familiar with the technical aspects of the Systems, and Northland's
management is familiar with the Partnership's on-site operations and
administrative staff. A third party purchaser presumably would be required to
devote additional management, administrative, human resources and technical
attention to the operation of the Systems while gaining the degree of
familiarity with the Systems that Northland has attained.
Due to the reasons for Northland's interest in acquiring the Systems, and the
fact that Northland's motivating factors are unique to Northland, the General
Partners remain convinced that selling the Systems to an independent third party
on acceptable terms would be difficult.
As a result, in May 1996, the Partnership retained Daniels & Associates, L.P.,
Denver, Colorado, an internationally-recognized cable brokerage, appraisal and
investment banking firm to appraise the fair market value of the Systems. Given
Daniels' experience, the General Partners determined not to retain outside
experts other than Daniels. The Partnership will pay the fees and expenses of
Daniels. See "Conflicts of Interest."
APPRAISAL PROCESS
The Partnership instructed Daniels to prepare its appraisal on the basis that
the Systems were to be sold to an independent third party on the open market.
Daniels was advised that Northland would be a potential buyer of the Systems.
Daniels delivered a written report in July 1996 that the fair market gross asset
value of the Systems as of June 30, 1996 was $30,318,000. Daniels valued the
Systems on a cash-for-assets basis, free and clear of all liens, liabilities and
encumbrances. The estimated value of the Systems represented Daniels' best
judgment as to the probable market value of the Systems at that time, if sold in
an orderly, arms'-length transaction between willing and knowledgeable buyers
and sellers.
LIMITED PARTNERS ARE ENCOURAGED TO REVIEW THE DANIELS APPRAISAL ATTACHED HERETO
AS EXHIBIT C.
SUMMARY OF APPRAISAL
The following summary is qualified in its entirety by, and should be read in
conjunction with, the Daniels Appraisal attached hereto as Exhibit C.
In valuing the Systems, Daniels relied primarily on a discounted operating cash
flow analysis (see pages 9-10 of the Daniels Appraisal) based on the projected
operating results of the Systems over a ten-year period and applied a factor for
the residual value of the Systems at the end of that ten-year period. The
valuation of the Systems is also expressed in terms of a multiple of
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<PAGE> 23
operating cash flow and value-per-subscriber. The valuation is supported by a
review of other system sales that have occurred over the recent past and by a
comparison of (i) the multiple of cash flow represented by the purchase price of
such other systems with the multiple of the Partnership's cash flow represented
by the appraised value for the Systems, and (ii) the value-per-subscriber of
such other system sales with the value- per-subscriber valuation of the Systems
(see pages 10-11 of the Daniels Appraisal).
In the course of performing the valuation, Daniels met with employees of the
Managing General Partner's corporate office, made due diligence visits to
inspect substantially all of the Systems, reviewed and evaluated materials and
information provided by the Managing General Partner and Systems' management,
researched demographic information relating to the various communities served by
the Systems, analyzed forecasted financial and operating information, and drew
upon its own general knowledge about the industry. On the basis of this
information and these efforts, Daniels prepared summaries of relevant operating,
technical, financial and demographic characteristics of the Systems.
Thereafter, in order to assess the fair market value of the Partnership's
assets, Daniels prepared detailed operating and financial forecasts for each
system operating group, taking into account operating revenues and expenses as
well as capital expenditure requirements. These financial forecasts formed the
basis for determining a discounted cash flow for each system operating group.
According to Daniels, this is a standard methodology used within the industry.
The combined values for each system operating group constituted the value of the
cable operating assets for the Partnership on a discounted cash flow basis.
In addition to this methodology, Daniels used the market multiple methodology to
derive an aggregate value for the Partnership by analyzing the value per
subscriber and operating cash flow multiples obtained in private sales of
comparable cable television systems. These multiples were compared to similar
multiples for the Systems obtained using the value arrived at for the Systems by
the discounted cash flow methodology. Informed by the results of both of these
methodologies, Daniels then determined a final appraised value for the
Partnership's assets.
Assumptions
In performing its discounted cash flow analysis of the value of the
Partnership's assets, Daniels assumed the Systems have been and will continue to
be operated as efficiently as comparable cable systems, and that the franchises
and asset leases used by the Partnership in the operation of the Systems will be
renewed indefinitely as needed without material change except to reflect any
upgrade or rebuild of the Systems. In addition, Daniels assumed, in evaluating
future capital expenditures and cash flows, that the Systems will be upgraded or
rebuilt within five to six years to increase their capacity (see pages 3-4 of
the Daniels Appraisal).
Discounted Cash Flow Valuation
This methodology measures the present value of the Systems' forecasted net cash
flow, which is defined as pre-tax operating income less capital expenditures
including all rebuild or upgrade
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<PAGE> 24
costs. Daniels determined forecasted net cash flows by creating ten-year
operating forecasts for each of the Systems, each of which took into account
detailed projections of critical revenue and expense components. Daniels then
calculated the projected residual value of the Systems at the end of such period
based on the projected growth of the Systems' net cash flow into perpetuity, and
discounted this value to the present.
Daniels' revenue forecasts were based on its forecasts of the number of homes
passed and the subscriber penetration levels and rates for each system operating
group, plus an analysis of non-subscriber based revenue sources. Its expense
forecasts were based on assumed rates of inflation over the forecast period,
adjusted to reflect the particular growth characteristics of each system
operating group. The capital expenditure forecasts were based upon costs
associated with new construction of cable plant, plant maintenance, replacement
and upgrading of converters, and rebuild or upgrade requirements. Daniels
believes that the opportunity of the Systems to provide ancillary
telecommunications and data services are limited and costs uncertain, and thus
Daniels did not include telephony or data service revenue, expenses or capital
costs in its projections. All information provided to the Managing General
Partner relating to Daniels' operating revenue and expense forecasts and the
assumptions underlying these forecasts is contained in the Daniels Appraisal.
Please see the Daniels Appraisal (Exhibit C).
Once Daniels had arrived at a forecast of cash flows, it determined the discount
rate for its valuation. Daniels attempted to approximate the weighted average
cost of capital for various entities within the cable television industry
capable of consummating a sale similar in size to the acquisition of the
Systems. Daniels described the weighted average cost of capital as the rate of
return required by an entity on its investment in order to satisfy the
expectations of the entity's debt and equity investors. Daniels assumed, after
some analysis, that the prime rate is a fair estimate of the cost of debt. It
determined the cost of equity by sampling the estimated private market cost of
equity for cable television investments as of the valuation date and blending
this cost with the equity return objectives for large publicly traded companies.
Daniels arrived at a weighted cost of capital of 14.55% (See pages 9-10 of the
Daniels Appraisal).
Applying the discount rate to its cash flow forecasts, Daniels arrived at a
valuation of $30,200,000 for the Partnership's assets. This figure is 8.1 times
the annualized operating cash flow for the five-month period ended May 31, 1996,
and represents $1,305 per basic subscriber.
Comparable Transactions Valuation
In addition to the discounted cash flow methodology, Daniels used a comparable
transactions methodology. Daniels describes this as a generally accepted
valuation methodology for correlating and validating the findings of the
discounted cash flow analysis with private market realities. Daniels examined
the sales of cable systems of similar size, situated in similar markets, and of
similar technical condition to the Systems, about which information was
available. All information provided to the Managing General Partner relating to
the basis for Daniels' selection of comparable transactions is contained in the
Daniels Appraisal. Please see the Daniels Appraisal (Exhibit C). Daniels
determined the relationship of the purchase price paid for these systems to the
annualized cash flow for the three or six month period prior to such sale,
expressed as a multiple, and the price paid per subscriber. Based on an analysis
of both the range and average of these multiples and a comparison to these
figures for the Systems, Daniels assessed its discounted cash flow valuation
(See pages 10-11 of the Daniels Appraisal).
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Daniels' comparable transactions analysis yielded a cash flow multiple range of
7.0 to 8.5 times cash flow, with a weighted average of all of the transactions
examined of 7.9 times cash flow. The range of value per subscriber was $1,062 to
$1,351, with an overall weighted average of $1,201 (see page 11 of the Daniels
Appraisal).
Valuation
Based on its analysis using these two methodologies, Daniels arrived at an
estimated fair market value for the Partnership's assets as of June 30, 1996 of
$30,318,000, which is 8.1 times annualized operating cash flow for the
five-month period prior to May 31, 1996, and equals $1,310 per basic subscriber.
This cash flow multiple is higher than the weighted average multiple for
comparable transactions and equal to the multiple derived from the discounted
cash flow analysis. The value per subscriber is significantly above the weighted
average value per subscriber for the comparable transactions and slightly above
the value per subscriber derived from the discounted cash flow analysis, due to
rounding.
The table set forth below indicates the appraised value as a multiple of cash
flow and value-per-subscriber, as compared to the offer price.
<TABLE>
<CAPTION>
Appraised Offer
--------- -----
<S> <C> <C>
Value of Systems $30,318,000 $32,000,000
Multiple of cash flow (1) 8.10 8.55
Value per subscriber (2) $1,310 $1,382
</TABLE>
(1) Based on annualized cash flow for the five months prior to May 31,
1996
(2) Based on basic subscribers as of May 31, 1996
Consolidated subscriber and financial information, discounted cash flow
valuation results, and a summary of comparable transactions are set forth on the
tables appearing in the Daniels Appraisal. The Daniels Appraisal describes each
of the system operating groups individually, including the number of
subscribers, penetration rate, homes passed, plant mileage, capacity, and cable
service rates (See pages 3-8 of the Daniels Appraisal).
Brookridge Systems Acquisition
On October 31, 1995, the Partnership acquired substantially all of the assets of
seven cable television systems serving the communities and surrounding areas of
Brookshire, Huffman, Tarkenton, Prairie View, Ace, Livingston, and Cut & Shoot,
Texas (the "Brookridge Systems"). Because detailed financial statements
reflecting the prior owner's operations are not available, the Managing General
Partner is providing the following information concerning the Brookridge
Systems. As of May 31, 1996, the Brookridge Systems served a total of 3,621
subscribers, or 15.6% of the Partnership's total subscriber base. Because of
their close proximity to the
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Partnership's New Caney profit center, system administration and technical
operations for the Huffman, Cut & Shoot, Tarkenton, Livingston, and Ace systems
(as of May 31, 1996 - 2,566 subscribers) were consolidated into the New Caney
office facility, enabling the Partnership to close an office site used by the
previous operator. System operations for the Prairie View and Brookshire systems
(as of May 31, 1996 - 1,055 subscribers) are managed as a separate operating
group. The restructuring of operations created significant operating
efficiencies, including the elimination of duplicative office facilities and
associated general and administrative expenses, and a 65% reduction in the
number of employees.
In addition to improvements in the administrative and technical operating
efficiencies, the channel lineups for the Brookridge Systems were enhanced,
increasing the number of channels and programming options offered to the
systems' subscribers. On March 1, 1996 the rates charged to the Brookridge
Systems' subscribers were increased by amounts ranging from $.50 to $2.50,
bringing the current monthly rates for a standard basic package to a range of
$25.50 to $28.00.
SALE PRICE OF THE SYSTEMS
The Appraised Value of the Systems of $30,318,000 determined by Daniels appears
fair and reasonable to the General Partners. Nevertheless, the General Partners
have determined to increase the value of the Systems for purposes of the
proposed transaction with Northland. This increase has been arbitrarily
determined by the General Partners, and is not based on any formula or
recognized valuation method. The aggregate value of the Systems, for purposes of
the proposed transaction, thus will be $32,000,000, which represents an increase
of $1,682,000 over Appraised Value.
The primary reason that the General Partners chose to use a gross valuation in
excess of the appraised value is the General Partners' belief that the Systems
are more valuable to Northland than to an independent purchaser. The General
Partners believe that the ownership or potential for ownership by Northland of
other cable television systems in the vicinity of the Systems makes the Systems
a more valuable proposition to Northland than to other potential buyers. Third
parties would not experience such economies of scale. The proximity of the
Partnership's Systems to other cable systems managed by Northland would enable
all of such systems to share, for example, certain customer service, technical
and administrative personnel.
A third party purchaser would also be forced to bear transition costs that
Northland would not be required to bear. For example, Northland's engineers are
currently familiar with the technical aspects of the Systems, and Northland's
management is familiar with the Partnership's on-site operations and
administrative staff. A third party purchaser presumably would be required to
devote additional management, administrative, human resources and technical
attention to the operation of the Systems while gaining the degree of
familiarity with the Systems that Northland has attained.
REGULATION OVERVIEW
The Partnership's business is subject to intensive regulation at the federal and
local levels, and to a lesser degree, at the state level. The FCC, the principal
federal regulatory agency with jurisdiction over cable television, is
responsible for implementing federal policies such as rate regulation, cable
system relations with other communications media, cross-ownership, signal
carriage, equal employment opportunity and technical performance. Portions of
the regulatory framework that impact the Partnership's operations are summarized
below.
The 1992 Cable Act
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Cable Act"), which significantly
increased regulation of the cable television industry. The 1992 Cable Act became
generally effective on December 4, 1992,
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although certain provisions became effective at later dates. The 1992 Cable Act
represented a significant change in the regulatory framework under which cable
television systems operate and has had and likely will continue to have a
significant impact on the cable industry and the Partnership's business.
From the effective date of the Cable Communications Policy Act of 1984 until the
enactment of the 1992 Cable Act, rates for cable services were unregulated for
substantially all of the Partnership's systems. The 1992 Cable Act and the rules
of the FCC promulgated thereunder instituted rate regulation for certain cable
television services and equipment in communities not subject to "effective
competition" as defined in the legislation. Effective competition is defined in
the 1992 Cable Act to exist only where (i) fewer than 30 percent of the
households in the franchise area subscribe to the cable service of a cable
system; (ii) there are at least two unaffiliated multichannel video programming
distributors serving the franchise area meeting certain penetration criteria; or
(iii) a multichannel video programming distributor is available to 50 percent of
the homes in the franchise area and is operated by the franchising authority.
Because none of the Partnership's systems were subject to effective competition
under this definition, they became subject to rate regulation for basic service
by local franchising authority officials under the oversight of the FCC and
subject to rate regulation for their remaining programming services (other than
those offered for a per- channel or per-program charge) by the FCC.
The 1992 Cable Act required each cable system to establish a basic service tier
consisting, at a minimum, of all local broadcast signals and all non-satellite
delivered distant broadcast signals which the system wishes to carry, and all
public, educational and governmental access programming.
Cable systems may not require subscribers to purchase any service tier other
than the basic service tier as a condition of access to video programming
offered on a per-channel or per-program basis. Cable systems are allowed a
10-year phase-in period to the extent necessary to implement the required
technology to facilitate such access. The FCC may grant extensions of the
10-year time period, if deemed necessary.
The 1992 Cable Act also provided that the consent of most television stations
(except satellite-delivered television stations that were provided to the cable
television industry as of May 1, 1991, and noncommercial stations) would be
required before a cable system could retransmit their signals. Alternatively, a
television station could elect to exercise must-carry rights. Stations are bound
by such elections for a three-year period. Must-carry rights entitle a local
broadcast station to demand carriage on a cable system, and a system generally
is required to devote up to one-third of its channel capacity for the carriage
of local stations. Litigation challenging the constitutionality of the mandatory
broadcast signal carriage requirements of the 1992 Cable Act is currently
pending before the United States Supreme Court. The must- carry rules will
remain in effect during the pendency of the proceedings before the Supreme
Court. If
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<PAGE> 28
must-carry requirements withstand judicial review, the requirements may cause
displacement of more attractive programming. If and to the extent broadcast
stations electing to forego must-carry status for the next election period
commencing January 1, 1997 require significant monetary payments for cable
system carriage of their signals, the cost of such signal carriage may adversely
affect the Partnership's operations.
In addition, the 1992 Cable Act (i) requires cable programmers under certain
circumstances to offer their programming to present and future competitors of
cable television such as multichannel multipoint distribution services ("MMDS"),
satellite master antenna systems ("SMATV") and direct broadcast satellite system
operators; (ii) prohibits new exclusive contracts with program suppliers without
FCC approval; (iii) bars municipalities from granting exclusive franchises and
from unreasonably refusing to grant additional competitive franchise; (iv)
permits municipal authorities to operate a cable system without a franchise; (v)
regulates the ownership by cable operators of other media such as MMDS and
SMATV; and (vi) prohibits a cable operator from charging a customer for any
service or equipment that the subscriber has not affirmatively requested.
In response to the 1992 Cable Act, the FCC has imposed or will impose new
regulations in the areas of customer service, technical standards, compatibility
with other consumer electronic equipment such as "cable ready" television sets
and video cassette recorders, equal employment opportunity, privacy, rates for
leased access channels, obscene or indecent programming, limits on national
cable system ownership concentration, standards for limiting the number of
channels that a cable television system operator could program with programming
services controlled by such operator and disposition of a customer's home
wiring.
The 1992 Cable Act and subsequent FCC rulings have generally increased the
administrative and operational expenses of cable television systems as a result
of additional regulatory oversight by the FCC and local franchise authorities.
There have been several lawsuits filed by cable operators and programmers in
federal court challenging various aspects of the 1992 Cable Act. The litigation
concerning the must-carry rules is described above. Appeals also have been filed
in connection with litigation resulting from the FCC's rate regulation
rulemaking decisions. The Partnership cannot determine at this time the outcome
of pending FCC rulemakings, the litigation described herein, or the impact of
any adverse judicial or administrative decisions on the Partnership's system or
business.
The 1996 Act
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act") was
enacted which dramatically changed federal telecommunications laws and the
future competitiveness of the telecommunications industry. Many of the changes
called for by the 1996 Act will not take effect until the FCC issues new
regulations which, in some cases, may not be completed for a few years. Because
of this, the full impact of the 1996 Act on the Partnership's operations cannot
be determined at this time. A summary of certain provisions affecting the
Partnership's operations follows:
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<PAGE> 29
Regulation of rates other than the basic service tier has been eliminated for
small cable systems served by small companies. Small cable systems are those
having 50,000 or fewer subscribers served by companies with fewer than one
percent of national cable subscribers (approximately 600,000). The Partnership
qualifies as a small company and all of the Partnership's cable systems qualify
as small cable systems. Basic service tier rates remain subject to regulation by
the local franchising authority under most circumstances until effective
competition exists. The 1996 Act expands the definition of effective competition
to include the offering of video programming services directly to subscribers in
a franchised area by the local exchange carrier, its affiliates, or any
multichannel video programming distributor which uses the facilities of the
local exchange carrier. No penetration criteria exists that triggers the
presence of effective competition under these circumstances.
The 1996 Act allows telephone companies to offer video programming directly to
customers in their service areas immediately upon enactment. They may provide
video programming as a cable operator fully subject to the 1996 Act, or a
radio-based multichannel programming distributor not subject to any provisions
of the 1996 Act, or through non-franchised "open video systems" offering
non-discriminatory capacity to unaffiliated programmers, subject to selected
provisions of the 1996 Act.
The 1996 Act also addresses various other aspects of providing cable television
service including prices for equipment, discounting of rates to multiple
dwelling units, lifting of anti-trafficking restrictions, cable- telephone cross
ownership provisions, pole attachment rate formulas, rate uniformity, program
access, scrambling and censoring of public, educational and governmental access
channels and leased access channels.
Copyright
Cable television systems are subject to federal copyright licensing, covering
carriage of television broadcast signals. In exchange for paying a percentage of
their revenues to a federal copyright royalty pool, cable television operators
obtain a compulsory license to retransmit copyrighted materials from broadcast
signals. Existing Copyright Office regulations require that compulsory copyright
payments be calculated on the basis of revenue derived from any service tier on
which broadcast television signals are transmitted. Although the FCC has no
formal jurisdiction over this area, it has recommended to Congress to eliminate
the compulsory copyright scheme altogether. The Copyright Office has similarly
recommended such a repeal. Without the compulsory license, cable television
operators would need to negotiate rights from the copyright owners for each
program carried on each broadcast station in each cable system's channel lineup.
Such negotiated agreements could increase the cost to cable television operators
of carrying broadcast signals.
Local Regulation
Cable television systems are generally operated pursuant to franchises, permits
or licenses issued by a municipality or other local government entity. Each
franchise generally contains provisions governing fees to be paid to the
franchising authority, sale or transfer of the franchise, territory of the
franchise, design and technical performance of the system, use and occupancy of
public
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<PAGE> 30
streets and number and types of cable television services provided. Franchises
are usually issued for fixed terms and must periodically be renewed. There can
be no assurance that the franchises for the Partnership's systems will be
renewed as they expire, although the Partnership believes that its cable systems
generally have been operated in a manner that satisfies the standards of the
1984 Cable Act, as amended by the 1992 Act, for franchise renewal.
Summary
The foregoing does not purport to be a summary of all present and proposed
federal, state and local regulations and legislation relating to 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 Partnership can be predicted at this time.
ACQUISITION OF SYSTEMS BY NORTHLAND
If the proposal is approved, the Partnership will be authorized to enter into an
agreement with Northland to (i) sell to Northland the undivided portion of the
Systems that is attributable to the Limited Partners' and the Administrative
General Partner's collective interest in the Partnership, and (ii) distribute
in-kind to Northland the undivided portion of the Systems that is attributable
to the Managing General Partner's interest in the Partnership. Net proceeds from
the sale of the LPs' Interest and the AGP's Interest will be distributed solely
to the Limited Partners and the Administrative General Partner. Closing will be
subject to certain terms and conditions, including the availability of
sufficient debt financing to Northland. The Managing General Partner believes
that such terms and conditions will be satisfied. If Closing does not occur
within 180 days of the date of the Special Meeting, the Agreement will be
terminated without penalty. Following Closing, which is expected to occur in
early January 1997, the Partnership will be dissolved, wound-up and terminated
pursuant to the terms of the Partnership Agreement.
At closing, Northland will purchase the LPs' Interest and the AGP's Interest
from the Partnership by (i) making an initial payment to the Partnership equal
to that amount which, after retiring Partnership liabilities attributable to the
LPs' Interest and the AGP's Interest, will enable the Partnership to distribute
to the Limited Partners an amount equal to $750 for each $1,000 invested, and
(ii) delivering to the Partnership a promissory note in principal amount equal
to the remaining balance of the aggregate purchase price for the LPs' Interest
and the AGP's Interest.
The aggregate amount to be distributed to the Limited Partners, as a group, in
connection with the acquisition of the Systems by Northland will be equal to the
amount of cash that would be distributable to the Limited Partners collectively
assuming the liquidation of the Partnership following the sale of the Systems to
a third party, as of the date of Closing, for a gross cash purchase price equal
to $32,000,000. Such amount will be determined in accordance with the
Partnership Agreement. In determining the amount distributable to the Limited
Partners collectively, the Gross Valuation generally will be (i) reduced by
Partnership liabilities
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<PAGE> 31
attributable to the Limited Partners' collective interest in the Systems and by
the net value of the portion of the Systems attributable to the collective
interests of the General Partners and (ii) increased by the Limited Partners'
collective interest in any net Partnership assets other than the Systems.
Distributions to Limited Partners will be made in three installments. The
initial distribution of $750 for each $1,000 invested will be made within 30
days after the date of Closing. The General Partners believe that the initial
distribution will occur in late January 1997. The balance of distributions to be
made to the Limited Partners, anticipated to approximate a total of $589 per
$1,000 investment, will be made as and when payments are made by Northland to
the Partnership pursuant to the Note. The Note will have a two-year term, with
two equal payments of principal, plus accrued interest, due annually commencing
on the first anniversary of the Closing. The Note will bear interest at a per
annum rate of six percent (6%), and will be subordinated to Northland's senior
debt. Assuming that Closing occurs in January 1997, distributions to the Limited
Partners are expected to approximate $303 per $1,000 investment in January 1998
and $286 per $1,000 investment in January 1999. These payment estimates include
both principal and interest. The principal amount of the Note will be subject to
adjustment from time to time for the Limited Partners' and Administrative
General Partner's share of any post-Closing adjustments, claims, liquidation
expenses and undisclosed liabilities for which the Partnership is liable.
DETERMINATION BY NORTHLAND NOT TO CLOSE
If the proposed transaction is approved, Northland will have no obligation to
consummate the transaction. The ability of Northland to consummate the
transaction will be subject to certain contingencies, including obtaining bank
financing. Although Northland has obtained an informal financing commitment on
terms that would enable it to finance the acquisition, no loan agreement has yet
been signed. Moreover, the obligation of the lender to provide necessary funding
will be subject to a variety of conditions. The Managing General Partner
believes, however, that any lender-imposed conditions to the acquisition will be
satisfied and that the necessary funds will be made available. If so, Closing is
expected to occur in January 1997.
If the proposals described in this Proxy Statement are approved and the Closing
does not occur, the Partnership will continue to own and operate the Systems. In
such event, the Systems will not be sold without again obtaining the approval of
Limited Partners in accordance with the Partnership Agreement.
TERMS OF THE TRANSACTION
General Partners have proposed that the Partnership dispose the Systems
based on the Gross Valuation of $32,000,000. The value of Partnership assets
other than the Systems and the amount of Partnership liabilities as of the date
of dissolution are incapable of definitive calculation at this time. The actual
net proceeds distributed and federal income tax consequences to Limited Partners
thus will vary from the estimated amounts set forth in this Proxy Statement.
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<PAGE> 32
A vote in favor of the transaction described in this Proxy Statement shall be
deemed to constitute consent to any such variation.
Because Northland is the acquiring entity, the undivided portion of the Systems
attributable to the Managing General Partner's interest in the Partnership will
be distributed to the Managing General Partner in-kind, rather than sold for
cash. This procedure reduces the amount of cash required by the acquiring
entity, in that the cash price payable for the Systems is reduced by the value
of the Managing General Partner's interest in the Systems. Subject to adjustment
as described below, the total amount of funds and other consideration to be used
in connection with the transaction will consist of the Gross Valuation of
$32,000,000. Northland anticipates that it will obtain the cash funds required
to purchase the LPs' Interest and the AGP's Interest from lenders, although
Northland cannot be assured that such funds will be made available.
As a consequence of the in-kind distribution to the Managing General Partner,
net proceeds from the sale of the Systems will be distributed solely to the
Limited Partners and to the Administrative General Partner, ratably in
accordance with the requirements of the Partnership Agreement, subject to
certain adjustments.
The amount of such proceeds will be increased by the Limited Partners' and the
Administrative General Partner's share of Partnership assets other than the
Systems, and will be reduced Partnership liabilities. In essence, the
Partnership Agreement currently requires that all distributions be made, and
that all liabilities be shared, as follows: first, until the Limited Partners
receive cumulative distributions equal to their capital contributions, 99% to
the Limited Partners and 1% to the Managing General Partner; and, thereafter,
75% to the Limited Partners; 5% to the Administrative General Partner; and 20%
to the Managing General Partner. Because the Limited Partners have received
cumulative distributions equal to $700 per $1,000 investment, the first
$2,221,667 of distributions will be allocated $2,199,450 to the Limited Partners
(in cash) and $22,217 to the Managing General Partner (in kind). Remaining cash
distributions to the Limited Partners, as a group, and the Administrative
General Partner will be equal to 75% and 5%, respectively, of (i) the Gross
Valuation less $2,221,667, plus (ii) the value of Partnership assets other than
the Systems, less (iii) Partnership liabilities. The amount of cash to be
distributed to the Managing General Partner will be equal to 20% of the value of
Partnership assets other than the Systems, less 20% of Partnership liabilities.
Following Closing, the Partnership will remain liable for any post-Closing
adjustments, claims, liquidation expenses and undisclosed liabilities. All such
liabilities, including liabilities to Northland arising out of the sale of the
Systems or otherwise, will be shared by the Partners ratably in accordance with
the Partnership Agreement (that is, 75% to the Limited Partners, 5% to the
Administrative General Partner, and 20% to the Managing General Partner). See
"Projected Cash Available from Liquidation".
FAIRNESS OF THE PROPOSED TRANSACTION
The General Partners believe the terms of the proposed transaction are
reasonable and fair to the Limited Partners. In setting the Gross Valuation for
the Systems, the General Partners have
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<PAGE> 33
relied on the Daniels Appraisal attached hereto as Exhibit C and their own
conclusions as to the value of the Systems. In relying on the Daniels Appraisal,
neither the General Partners nor any other parties evaluating the fairness of
the proposed transaction received any information other than a copy of the
Daniels Appraisal. In particular, none of these parties received or reviewed the
actual forecasts prepared by Daniels in arriving at the valuation contained in
the Daniels Appraisal. In arriving at its determination of the Gross Valuation,
the General Partners considered a range of possible valuations, from the
appraised value, at the low end, to valuations as high as $33,500,000. The
General Partners ultimately arrived at $32,000,000 as the Gross Valuation, based
on the appraisal, their assessment of the synergies likely to result from the
sale of the Systems to an affiliate, and their review of the financial results
of the Partnership.
Although the Appraised Value and the Gross Valuation represent estimates of the
amount that an independent third party would pay for the Systems, the actual
price that any such party may be willing to pay could be in excess of the
Appraised Value and the Gross Valuation. Accordingly, there is a possibility
that the Limited Partners will receive less from the proposed transaction with
Northland than they would receive if bids were solicited from independent third
parties and the Systems were sold to such a third party. However, a sale of the
Systems to a third party could involve significant brokerage commissions and
other transaction costs not applicable to the proposed transaction with
Northland which would result in lower net proceeds to the Limited Partners.
In determining the fairness of the proposed transaction, the General Partners
carefully considered a number of factors. In favor of the proposed transaction
were the price to be paid by Northland, which is in excess of the appraised
value, and the opportunity for the Limited Partners to liquidate their
investment. Against the proposed transaction were the fact of an inside
transaction, under which Northland would acquire the Systems, and the General
Partners' decision not to solicit bids from independent third parties. No other
material factors were considered.
For example, in the absence of an established market in which units of limited
partnership interests are being traded, the General Partners did not consider
current market prices for the units, nor historical market prices. Having
obtained an appraisal from Daniels, the General Partners did not believe it
worthwhile to consider the net book value, going concern value or liquidation
value of the Partnership. The General Partners have made no effort to solicit
offers from unaffiliated entities in connection with the proposed transaction.
No firm offer has been made by an unaffiliated entity for a merger or
consolidation of the Partnership, the sale or transfer of all or a substantial
part of the assets of the Partnership, or a sale of partners' interests in the
Partnership allowing the purchaser thereof to exercise control over the
Partnership. Accordingly, these factors were not considered by the General
Partners.
The General Partners concluded that independent third-party buyers were unlikely
to be willing to acquire the Systems at the same price as that payable by
Northland and that, even if they were, the Partnership would incur brokerage and
other transactional costs which may be to the Partnership's detriment. In
reaching their decision as to fairness, the General Partners ascribed the most
weight to the fact that the valuation of the transaction exceeds the appraised
value of the Systems, and then ascribed weight to the structuring of the
transaction so that approval of a majority in interest of the Limited Partners
is required. (Units of limited partnership interest held and voted by the
Managing General Partner will be included in determining whether the requisite
approval has been obtained.)
Issues of fairness were primarily considered by John S. Whetzell, the President
of the Managing General Partner, and John S. Simmers. Mr. Simmers is a general
partner of the Administrative General Partner and the Executive Vice President
and Chief Operating Officer of FN Equities, Inc., the corporate general partner
of the Administrative General Partner. In each case, Messrs. Whetzell and
Simmers considered these issues in collaboration with members of their
respective
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boards of directors and senior officers. In analyzing the fairness issue,
discussions by such persons focused on the conflicts of interest faced by the
Managing General Partner. Partnership management determined at the outset that
concurrence by the Administrative General Partner, which would be less affected
by the conflicts than the Managing General Partner, would be required with
respect to decisions made regarding the proposed transaction. Management also
recognized that procedural and substantive safeguards would be required to
protect the Limited Partners in light of such conflicts. Management ultimately
determined that the appraisal and voting procedures described in this Proxy
Statement would provide the Limited Partners with adequate safeguards against
the conflicts of interest. The appraisal and voting procedures represent the
only steps taken to provide safeguards to the Limited Partners in connection
with the proposed transaction. The determination that the proposed transaction
is fair, as well as the decision to recommend that Limited Partners vote in
favor of the proposed transaction, was unanimous among management personnel of
both of the General Partners. Insofar as such personnel also are officers or
partners of the general partners of the Administrative General Partner, such
general partners may also be said to have considered the proposed transaction.
See "Certain Affiliates of the Partnership." In addition, Northland
Telecommunications Corporation has independently determined that the
transaction is fair to the Limited Partners; in making this determination, it
has adopted the analysis contained in the Daniels Appraisal as its own, and
this has served as the sole basis for its determination.
The General Partners have not retained and will not retain an unaffiliated
representative to act on behalf of the Limited Partners for the purpose of
negotiating the terms of the proposed transaction, or preparing a report or
opinion concerning the fairness of such transaction. The General Partners
believe that the retention of any such person would cause the Partnership to
incur unnecessary expense. The General Partners have relied upon Daniels'
reputation and independence in ensuring that the proposed transaction is fair to
Limited Partners. In addition, from a fairness standpoint, the proposed
liquidation is structured so that the approval of a majority in interest of the
Limited Partners is required.
CERTAIN CONSEQUENCES OF THE TRANSACTION
DISSOLUTION PROCEDURES
If the Limited Partners approve of the disposition of the Systems and the
Closing occurs, the General Partners shall proceed with the distribution of
proceeds in accordance with the Partnership Agreement provisions for
dissolution, winding-up and termination.
Each of the Limited Partners shall be furnished with a statement which shall set
forth the assets and liabilities of the Partnership as of the date of Closing.
Within 30 days following the Closing, the Partnership shall make the initial
distribution to the Limited Partners and the Administrative General Partner.
Additional distributions will be made as and when Northland makes payments on
the Note.
Following the final distribution, which is expected to occur in January 1999,
each of the Limited Partners shall be furnished with a final Schedule K-1. Upon
completion of the foregoing distribution plan, Limited Partners shall cease to
be partners of the Partnership, and the General Partners, as the sole remaining
partners of the Partnership, shall file a certificate of cancellation of the
Partnership.
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<PAGE> 35
See "Projected Cash Available From Liquidation" for certain financial
information regarding the anticipated effect that the proposed transaction will
have on Limited Partners.
NO DISSENTERS' RIGHTS
Dissenter's appraisal rights are not available to partners under Washington law
with respect to a sale of substantially all of the Partnership's assets and
subsequent liquidation. Appraisal rights will not be voluntarily accorded to
dissenting partners in connection with the proposed transaction.
Dissenting partners are protected under state law by virtue of the fiduciary
duty of the General Partners to act with prudence in the business affairs of the
Partnership on behalf of both the General Partners and the Limited Partners.
Records of the Partnership are available for inspection by Limited Partners upon
reasonable notice and during reasonable business hours. Neither the General
Partners nor the Partnership will bear the costs of a Limited Partner who
desires to obtain counsel or appraisal services.
TAX CONSIDERATIONS
There are certain material tax consequences to the Limited Partners resulting
from the proposed transaction. See "Federal Income Tax Consequences." In order
to avoid the additional expense, the Partnership has not obtained a tax opinion
in connection with the proposed transaction. The table below sets forth certain
estimated federal income tax consequences per $1,000 investment. The table
relates only to persons who purchased units in the initial offering, and does
not reflect estimated federal income tax consequences for those persons who
received their interests through transfer from other Limited Partners.
The table below sets forth the amount of long-term capital gain and ordinary
income which is expected to result from the disposition of the Systems and the
liquidation of the Partnership. The dollar amounts reflect allocations as
required pursuant to the Partnership Agreement. As of October 15, 1996, there
were 14,663 units of limited partnership interest outstanding at $500 per unit.
ALL FIGURES SET FORTH IN THE TABLE ARE NECESSARILY IMPRECISE AND REPRESENT ONLY
THE GENERAL PARTNERS' ESTIMATE OF CERTAIN TAX EFFECTS, assuming that the Limited
Partners have no other capital gains or passive activity transactions. Actual
tax consequences will depend on the individual Limited Partner's tax situation.
All Limited Partners are strongly encouraged to review the following table, the
"Federal Income Tax Consequences" section of this Proxy Statement, and their
individual tax situations with their personal tax advisors.
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<PAGE> 36
Tax Results from Disposition of the Systems and Resulting Liquidation
(Per $1,000 Investment)
<TABLE>
<S> <C>
Overall Ordinary Loss Per $1,000 Investment (1) (2) ($86)
Overall Long-Term Capital Gain Per $1,000 Investment (2) (3) $1,425
</TABLE>
(1) Assumes that depreciation recapture per $1,000 investment will be equal
to $551. Limited Partners may be able to offset some or all of the
income with suspended tax basis losses. If those losses are available,
a Limited Partner may be entitled to use $637 of suspended tax basis
losses per $1,000 investment.
(2) If available, current or suspended passive activity losses from other
passive activities (other than suspended tax basis losses) may also be
used to offset income or gain.
(3) Aggregate of capital gain and loss from the disposition of assets and
liquidation of the Partnership. Assumes that the Limited Partners'
remaining basis in the Partnership may be used upon termination of the
Partnership to offset capital gain from the disposition of the Systems
of $437 per $1,000 investment.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations outlined above, the
proposed transaction has state income tax consequences.
The state of California, wherein one of the Systems is located, imposes an
income tax on the net income earned by nonresidents from property or a business
in California. Therefore, the state of California requires the withholding of
funds for income or franchise taxes by a partnership when it makes a
distribution in excess of $1,500 income to a domestic nonresident partner.
Domestic nonresident partners include individuals who are nonresidents of
California and corporations, estates, trusts, LLCs and partnerships, that are
not qualified to do business in California or do not have a permanent place of
business in California.
Partnerships are required to withhold at a rate of seven percent (7%) of
distributions of income from California sources made to domestic nonresident
partners. Accordingly, Limited Partners are liable for payment of California
state income tax on a portion of the net income generated by Partnership
operations, including the income to be generated by the proposed transaction.
The Partnership will withhold from distributions in connection with the proposed
transaction such California income tax to be paid on behalf of the nonresident
Limited Partners. Limited Partners should consult their own tax advisors
concerning the application of California income tax laws and other state and
local laws to their specific situation.
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<PAGE> 37
CERTAIN CONSEQUENCES OF LIMITED PARTNERS'
DETERMINATION NOT TO SELL
If a majority in interest of the Limited Partners do not approve the proposed
transaction, the Partnership will continue to own and operate the Systems. The
General Partners are unable to determine whether the future fair market value of
the Systems, and their operating income, will increase over time, or whether
future cash flow, refinancings or sales, if any, will yield a return to Limited
Partners that is greater than that possible through the proposed transaction.
See "Management' s Discussion and Analysis of Financial Condition and Results of
Operations."
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<PAGE> 38
PROJECTED CASH AVAILABLE FROM LIQUIDATION
If Closing occurs, the Limited Partners are expected to receive the same amount
of cash they would receive if the Systems were sold at the Gross Valuation to an
unaffiliated third party in accordance with the procedures described in the
Partnership Agreement. However, a sale to a third party could involve
significant brokerage commissions and other increased transaction costs which
would result in lower net proceeds to the Limited Partners. In the event that
the Systems were to be sold to an independent third party at a price in excess
of the Gross Valuation, such sale might result in net proceeds to Limited
Partners sufficiently higher to offset transaction costs. In any event, if the
Closing occurs, the amount of cash distributed to Limited Partners shall not be
less than the amount they would receive if the Systems were sold to an
unaffiliated third party at the Gross Valuation.
The table below sets forth the amount of cash projected for distribution to
Limited Partners assuming that the Partnership disposes of the Systems based on
the Gross Valuation of $32,000,000, without payment of any cable brokerage
commission, and fully liquidates. The projected net cash available assumes that
the transaction occurs on June 30, 1996, and thus reflects payments of principal
and interest on Partnership indebtedness and certain accrued receipts and costs
as of June 30, 1996. The table also shows projected net cash available for
distribution based on a $1,000 capital contribution by a Limited Partner. THE
AMOUNT OF CASH ACTUALLY DISTRIBUTED TO THE LIMITED PARTNERS WILL VARY FROM THESE
PROJECTIONS. THE AMOUNT OF THE VARIANCE WILL DEPEND UPON A VARIETY OF FACTORS,
INCLUDING BUT NOT LIMITED TO THE ACTUAL DATE OF CLOSING, THE RESULTS OF
OPERATIONS OF THE PARTNERSHIP PRIOR TO SUCH DATE, AND THE EXTENT OF ANY
CURRENTLY UNKNOWN LIABILITIES THAT ACCRUE PRIOR TO SUCH DATE. IN ANY EVENT, THE
AMOUNT OF THE VARIANCE COULD BE SIGNIFICANT. Although there is no maximum
quantifiable amount of the variance, the variance has been projected as being up
to five percent of the Gross Valuation.
The figures presented take into account, where applicable, the projected costs
associated with the sale of the Systems, including proxy solicitation expenses,
and estimated general and administrative and operating expenses. Partnership
assets other than the Systems (such as cash on hand and accounts receivable)
have been included in the table in computing the projected net cash available.
Although the figures are presented on a pro forma basis as if the transaction
occurred on June 30, 1996, the General Partners do not anticipate that any
events will occur between June 30, 1996 and the Closing date that will
materially affect the figures.
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<PAGE> 39
PROJECTED CASH AVAILABLE IF CLOSING OCCURS
PARTNERSHIP PROJECTED CASH VALUE:
<TABLE>
<S> <C> <C>
Gross Valuation for Systems (1) $ 32,000,000
Plus (Less):
Cash on Hand, Receivables & Other Assets (2) 1,009,549
Appraisal Expenses (3) (25,000)
Transaction and Proxy Costs (4) (55,000)
Partnership Administrative Costs (5) (50,000)
Debt Repayment to Others (6) (20,873,477)
Miscellaneous Costs (7) (100,000)
Projected Net Cash Value (8) $ 11,906,072
LIMITED PARTNERS' PROJECTED CASH AVAILABLE (9) $ 9,462,754
------------
Per $1,000 Capital Contribution - INITIAL DISTRIBUTION FROM CLOSING $ 750
Per $1,000 Capital Contribution - DISTRIBUTION FROM FIRST NOTE PAYMENT,
INCLUDING INTEREST $ 303
Per $1,000 Capital Contribution - DISTRIBUTION FROM FINAL NOTE PAYMENT,
INCLUDING INTEREST $ 286
Per $1,000 Capital Contribution - PREVIOUSLY RECEIVED CASH DISTRIBUTION $ 700
------------
TOTAL OVERALL POTENTIAL RETURN OVER THE LIFE OF
THE PARTNERSHIP PER $1,000 LIMITED PARTNER CAPITAL
CONTRIBUTION $ 2,039
California Non-Resident Tax Paid on Behalf of the Limited Partners, Treated as a
Cash Distribution (THIS APPLIES ONLY TO CALIFORNIA
NON-RESIDENT LIMITED PARTNERS) (10) $ (7)
</TABLE>
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<PAGE> 40
(1) The sale of the Systems is conditioned upon Northland obtaining
financing from an institutional lender sufficient to consummate the
sale. Northland does not currently have a commitment for such
financing.
(2) Consists of the Partnership's (i) cash on hand of $627,048, (ii)
accounts receivable of $258,089, and (iii) prepaid expenses of
$124,412, all of which were determined as of June 30, 1996.
(3) Under its agreement with Daniels, the Partnership is obligated to pay
Daniels a fee equal to $25,000 and to reimburse Daniels for its
out-of-pocket expenses.
(4) Estimated costs of this proxy solicitation and closing of the
transaction, including legal fees and expenses of approximately
$45,000, printing costs of approximately $4,000, mailing expenses of
approximately $3,000, and Security and Exchange Commission filing fees
of approximately $3,000. The Partnership will be responsible for all
such costs. No auditing or solicitation costs are expected to be
incurred in connection with the proposed transaction.
(5) General and administrative, auditing, accounting, legal, reporting and
other costs have been estimated through the final distribution, which
is assumed to occur in January 1999. It is estimated that approximately
$25,000 of this amount will be payable to the Managing General Partner
for its services in the dissolution and winding up of the Partnership.
(6) Consists of (i) notes payable of $19,333,406 to the Partnership's
lender, (ii) advances, deferred expenses and fee reimbursements of
$40,020 payable to the Managing General Partner net of amounts due from
affiliates, and (iii) accounts payable, accrued expenses and other
liabilities of $1,500,051, all of which were determined as of June 30,
1996.
(7) Estimated amount to be set aside to cover miscellaneous costs.
(8) "Projected Net Cash Value" includes the Partners' distributive share of
cash and the value of Northland's in-kind distribution of assets.
(9) The difference between "Projected Net Cash Value" and "Limited
Partners' Projected Cash Available" represents the projected value of
(i) the assets distributed to Northland in-kind, plus the Managing
General Partner's share of non-system assets, less the Managing General
Partner's share of liabilities, and (ii) the projected cash available
for distribution to the Administrative General Partner, all as such
General Partners' shares are determined after the Limited Partners
receive 100% return on their aggregate capital contributions. The
tables below are illustrative:
Excess of Limited Partners Capital Contributions over Prior Cash Distributions:
<TABLE>
<CAPTION>
Per Per $1,000
Unit Investment Aggregate
---- ---------- ----------
<S> <C> <C> <C>
Original Capital Contribution $500 $1,000 $7,331,500
Prior Cash Distributions $350 $ 700 5,132,056
---- ------ ----------
Excess $150 $ 300 $2,199,450
==== ====== ==========
</TABLE>
Distibution of Projected Net Cash Value:
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
---------- ---------- ----------
<S> <C> <C> <C>
Section 16(d)(3): Distributions to
Limited Partners equal to the excess
of capital contributions over prior
cash distributions ($150 per limited
partnership unit) $ -0- $2,199,450 $2,199,450
Section 16(d)(4): Distributions to the
General Partners equal to 1.01% of the
amount distributable pursuant to
Section 16(d)(3) 22,217 -0- 22,217
Section 16(d)(5): Balance distributed
75% to the Limited Partners and 25%
to the General Partners 2,421,101 7,263,304 9,684,405
---------- ----------- -----------
Distribution of Projected Net Cash
Value $2,443,318 $9,462,754 $11,906,072
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
(10) See "Certain Consequences of the Transaction -- State Tax
Considerations."
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<PAGE> 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The purpose of the proposed transaction is to provide Limited Partners the
opportunity to receive significant cash distributions upon the disposition of
the Systems. The proposed transaction is not a result of insufficient working
capital or declining results of operations. It is the opinion of the General
Partners that the Partnership's operations provide sufficient capital resources
to maintain its current operations on an ongoing basis. Although quarterly cash
distributions are not currently being made to Limited Partners, it is
anticipated that quarterly distributions could possibly be reinstated in the
future if the proposed transaction is not consummated. The amounts and timing of
such future distributions are dependent in part on the Partnership's ability to
increase cash flow from operations through rate increases and subscriber growth.
Results of Operations
Six Months ended June 30, 1996 and 1995
Total revenues reached $4,326,394 for the six months ended June 30, 1996,
representing an increase of approximately 45% over the same period in 1995. Of
these revenues, $3,192,049 (74%) is derived from basic service charges, $481,168
(11%) from premium services, $94,657 (2%) from installation charges, $176,484
(4%) from tier services, and $382,036 (9%) from other sources. The overall
revenue increase is primarily attributable to acquisitions of cable television
systems in September and October, 1995. These acquisitions represented
approximately 6,900 additional basic subscribers and 2,675 additional premium
subscribers, a 42% and 43% increase, respectively. Also contributing to the
revenue gain were basic rate increases placed into effect on October 1, 1995 in
systems representing 86% of the total basic subscribers. These increases
averaged approximately 4.3%.
As of June 30, 1996, the Systems served approximately 22,900 basic subscribers,
8,030 premium subscribers and 4,250 tier subscribers.
Operating expenses totaled $544,746 for the six months ended June 30, 1996,
representing an increase of approximately 45% over the same period in 1995. The
overall increase in operating expenses was attributable to the cable television
system acquisitions which increased the number of employees, vehicles in service
and leased poles to which the cable plant is attached. The Partnership had 37
employees as of June 30, 1996 compared to 30 employees at June 30, 1995.
General and administrative expenses totaled $1,155,234 for the six months ended
June 30, 1996, representing an increase of approximately 55% over the same
period in 1995. The acquisition of cable television systems in late 1995
impacted several areas proportionately, including wages, copyright and franchise
fees, billing expenses, property taxes and insurance, management fees and
general office expenses such as utilities and telephone costs. Additionally, net
bad debt
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<PAGE> 42
expense increased from $21,750 to $66,000 for the six months ended June 30, 1995
and 1996, respectively.
Programming expenses totaled $ 980,339 for the six months ended June 30, 1996,
representing an increase of approximately 58% over the same period in 1995.
Programming costs are generally paid for each service on a per subscriber basis.
A substantial portion of this increase was attributable to the cable system
acquisitions in late 1995 which raised the number of basic and premium
subscribers by 42% and 43%, respectively. Additionally, various new channels of
programming were added to several other owned cable systems and costs charged by
the various program suppliers increased in 1996. This resulted in an increase in
average monthly programming costs per basic subscriber from $5.99 to $6.50 for
the six months ended June 30, 1995 and 1996, respectively.
Depreciation and amortization expense increased approximately 37% as compared to
the same period in 1995 as a result of the acquisitions of additional cable
television systems. The increase was partially offset as certain assets of the
Partnership were fully depreciated or amortized during 1996.
Interest expense for the six months ended June 30, 1996, increased approximately
144% as compared to the same period in 1995. The average bank debt outstanding
increased from $9,636,769 during the six months ended June 30, 1995 to
$19,333,406 for the same period in 1996. This increase in average outstanding
debt was attributable to borrowings made in late 1995 to finance the acquisition
of cable television systems.
Results of Operations
1995 and 1994
Total revenue reached $6,617,205 for the year ended December 31, 1995,
representing an increase of approximately 17% over 1994. This increase is
primarily due to the acquisition of cable television systems, in September 1995
and October 1995, respectively. The Partnership experienced a 4% increase in
revenue (exclusive of the activity for the acquired systems) which is
attributable to a 2% increase in basic subscribers, rate increases placed into
effect during the second quarter 1995, and increases in advertising revenue.
These increases were offset by a 5% decrease in revenue for the Chowchilla,
California system resulting from the elimination of the Easton, California
headend in January 1995. Of the 1995 revenue, $4,717,279 (71%) is derived from
subscriptions to basic service, $764,484 (12%) from subscriptions to premium
services, $366,870 (6%) from subscriptions to tier services, $148,911 (2%) from
installation charges, $205,405 (3%) from service contracts and $414,256 (6%)
from other sources.
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<PAGE> 43
The following table displays historical average rate information for various
services offered by the Partnership's systems (amounts per subscriber per
month):
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Basic Rate $ 22.41 $ 21.41 $ 20.95 $ 20.15 $ 19.02
Tier Rate 6.00 5.62 5.50 5.05 5.05
HBO Rate 11.35 11.10 11.10 10.65 10.65
Cinemax Rate 7.65 7.65 7.65 7.65 7.65
Showtime Rate 10.00 9.80 9.80 9.43 9.43
Movie Channel Rate 9.60 9.60 9.65 9.65 9.65
Disney Rate 7.50 7.50 7.65 7.65 7.30
Additional Outlet
Rate -- -- -- 3.48 3.48
Service Contract
Rate 3.00 3.10 3.20 -- --
</TABLE>
Operating expenses totaled $838,545 for 1995, representing a decrease of
approximately 1% as compared to 1994. This operating expense decrease was due to
a reduction in pole rental expense resulting from a retroactive charge in the
previous year and a decrease in system maintenance expense. The decrease was
offset by an increase in salary and benefit costs as a result of the cable
system acquisitions and cost of living increases. Salary and benefit costs are
the major component of operating expenses. Employee wages are reviewed annually
and, in most cases, increased based on cost of living adjustments and other
factors.
General and administrative expenses totaled $1,740,021 for 1995, representing an
increase of approximately 17% over 1994. Approximately two-thirds of the
increase is attributable to expenses associated with the cable system
acquisitions. The remaining increase is due to increases in revenue based
expenses, such as franchise and management fees. Significant administrative
expenses are based on Partnership revenues, therefore, as the Partnership's
revenues increase, the trend of increased administrative expenses is expected to
continue.
Programming expenses totaled $1,394,806 for 1995, representing an increase of
approximately 27% over 1994. This is due to the additional subscribers as a
result of the cable system acquisitions, increased payroll and other costs
related to local programming and advertising support, addition of new channels,
and increases in costs charged by the various program suppliers. Programming
expenses mainly consist of payments made to the suppliers of various cable
programming services. As these costs are based on the number of subscribers,
future subscriber increases will cause the trend of programming expense
increases to continue. In addition, rate increases from program suppliers, as
well as new fees due to the launch of additional channels, will contribute to
the trend of increased programming costs.
Depreciation and amortization expense decreased from $1,653,369 to $1,381,435 in
1995 (approximately 16%). This is due to fixed assets related to the formation
of the Partnership becoming fully depreciated, offset by depreciation and
amortization on plant, equipment and intangible assets acquired with the
purchase of the cable systems and depreciation on assets placed into service
during 1995.
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<PAGE> 44
Interest expense increased from $601,948 to $1,005,691 in 1995 (approximately
67%). The Partnership's average debt balance increased from $10,197,000 in 1994
to $14,559,000 in 1995. In addition, the Partnership's effective interest rate
increased from 5.90% in 1994 to 6.91% in 1995.
Liquidity and Capital Resources
The Partnership's cable television systems are located in and around eight
operating groups, including Flint/Tyler, New Caney, Whitewright, Hillsboro,
Kaufman, Waterwood and Prairie View, Texas and Chowchilla, California. The
principal physical properties of the Systems consist of system components
(including antennas, coaxial cable, electronic amplification and distribution
equipment), motor vehicles, miscellaneous hardware, spare parts and real
property, including office buildings and land on which towers and antennas are
located. The General Partners believe that the Partnership's cable plant passes
all areas which are currently economically feasible to service. Future line
extensions depend upon the density of homes in the area as well as available
capital resources for the construction of new plant.
Currently, the Partnership's primary source of liquidity is cash provided from
operations and borrowing capacity under its revolving credit facility.
Short-term liabilities are paid primarily through cash flow generated by
long-term assets and, to some extent, credit available under existing lines of
credit, particularly in periods of significant capital expenditures. "Current
assets," as that term is defined under generally accepted accounting principles,
is not the primary source of liquidity used by the Partnership to satisfy its
short-term obligations. Net cash provided by operating activities was $993,690
for the six months ended June 30, 1996 and $1,834,074 and $1,809,339 for the
years ended December 31, 1995 and 1994 respectively. Operating activities and
credit capacity are expected to provide sufficient liquidity to meet future
investing and financing needs of the Partnership, which consist primarily of
capital expenditures and principal and interest payments due under the long term
loan facility. The general and limited partners have no future obligation to
make additional capital contributions to the Partnership.
Should the Partnership's future working capital needs exceed cash provided from
operating activities and its borrowing capacity, several alternative sources of
additional funding exist, including renegotiation of the Partnership's current
loan agreement to provide additional borrowing capacity, deferral of management
fees and certain operating costs payable to the Managing General Partner, and
the seeking of a loan from the Managing General Partner. It is not anticipated
that these alternative sources of working capital will be needed. In any event,
the General Partners are not obligated to defer payments due to them or to make
loans to the Partnership.
The Partnership currently has a $23,000,000 revolving credit and term loan
facility with The First National Bank of Chicago, Chicago, Illinois. The
indebtedness is secured by a first lien position on all present and future
assets of the Partnership. As of June 30, 1996, this loan facility had an
outstanding balance of $19,333,406. Graduated principal plus interest payments
are due quarterly until maturity on December 31, 2003. Pursuant to its loan
agreement, the Partnership is subject to certain restrictive covenants,
consisting primarily of the maintenance of certain financial ratios, including a
maximum ratio of senior debt to annualized operating cash flow of 5.75 to 1 and
a minimum ratio of annualized operating cash flow to pro forma debt service of
1.15 to 1. Based on the Partnership's ratio of senior debt to annualized
operating cash flow at June 30, 1996 approximately $135,000 of the remaining
credit available under the revolving credit facility could be borrowed for
working capital purposes. Future availability will vary with the
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<PAGE> 45
Partnership's leverage. Breach of these financial covenants constitutes an event
of default, upon the happening of which the lender is entitled to accelerate the
loan and enforce legal remedies, including foreclosure upon the Partnership's
assets. As of December 31, 1995 the Partnership was not in compliance with the
requirements for limited partnership distributions made and the outstanding
balance on a hold back note payable to the seller of a cable system. The
Partnership has received a waiver from its lender for these covenant violations.
The waivers granted by the lender apply specifically to the violations which
occurred during 1995 and shall remain in effect with respect to these specific
events throughout the term of the loan agreement. The Partnership was in
compliance with all required covenants at June 30, 1996. Based on management's
analysis, the Partnership expects to meet all restrictive covenants during the
remaining term of the loan agreement.
The Partnership manages its exposure to changes in interest rates by entering
into certain fixed rate agreements with its lender. At June 30, 1996 the
Partnership had outstanding two interest rate swap agreements with its lender
having a total notional principal amount of $14,000,000. These agreements
effectively fix the rate of interest on this amount at 5.96% (weighted average),
plus an applicable margin based on certain financial covenants (3.0% margin at
June 30, 1996). Both interest rate swap agreements expire in September 1997. At
June 30, 1996 the Partnership would have received approximately $2,500 to settle
these agreements, based on the fair value estimated by its lender. Interest
rates on the remaining amounts outstanding under the credit facility are as
follows: $5,300,000 fixed at a LIBOR rate of 8.5% expiring August 9, 1996; and
$33,406 bearing interest at the lender's prime rate (8.25% at June 30, 1996)
plus an applicable margin of 1.75%.
The Partnership estimates that total capital expenditures for 1996 will be
approximately $1,600,000 of which $460,000 was incurred during the six months
ended June 30, 1996. These expenditures have included plant extensions to a new
development in Chowchilla, California and initial phases of plant upgrades in
the Whitewright and New Caney, Texas systems. Future 1996 expenditures include
the completion of these initial upgrade phases. The Partnership has no material
commitments for capital expenditures.
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<PAGE> 46
FEDERAL INCOME TAX CONSEQUENCES
The following constitutes a general summary of the financial income tax
consequences of a disposition of Partnership assets. This summary is based upon
the Internal Revenue Code of 1986 (the "Code"), as amended by the Revenue Act of
1987, the Technical and Miscellaneous Revenue Act of 1988, the Omnibus Budget
Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of 1990, and
the Revenue Reconciliation Act of 1993 (collectively referred to as the "Tax
Acts"). It is not possible to discuss all of the provisions of the Code and the
Tax Acts in this Proxy Statement. Moreover, in many areas the Code and Tax Acts
specifically authorize the Treasury Department to promulgate regulations to
govern certain transactions and it is not known what positions any such
regulations not yet issued will take. The following constitutes a general
summary of some of the provisions of the Tax Acts. ALL LIMITED PARTNERS ARE
STRONGLY ENCOURAGED TO REVIEW THE CODE, THE TAX ACTS, AND THE "FEDERAL INCOME
TAX CONSEQUENCES" SECTION OF THIS PROXY STATEMENT WITH THEIR PERSONAL TAX
ADVISORS.
TAX CONSEQUENCES OF DISPOSITION OF THE SYSTEMS AND LIQUIDATION OF PARTNERSHIP
Upon the disposition of the Systems, taxable income will be recognized by the
Partnership to the extent that the amount of proceeds received from such
disposition exceeds the adjusted tax basis of the assets disposed of. The
taxable gain from the sale will be allocated among the Partners in accordance
with the Partnership Agreement. The allocation of gain to the Limited Partners
will increase each Limited Partner's adjusted tax basis in the Partnership and
increase his or her "amount at risk" with respect to the Partnership's activity.
Accordingly, a Limited Partner will be entitled to deduct, up to the amount of
the gain, "suspended tax basis losses" which were allocated to him or her in
previous years but were nondeductible in those years because of tax basis
limitations on the deductibility of those losses. In addition, suspended or
current passive activity losses from other passive activities of the taxpayer
may be used to offset gain from the disposition of the Systems. See "Tax
Consequences of a Decision Not to Sell" below for a discussion of passive
activity loss limitations and suspended losses.
The Systems should be treated as a "Section 1231 asset" and, therefore, a
Partner's share of gain or loss on the sale of the Systems will be combined with
any other Section 1231 gain or loss incurred by that Partner in that taxable
year and his or her net Section 1231 gain or loss will be taxed as capital gain
or ordinary loss, as the case may be. However, Section 1231 gain may be
converted into ordinary income to the extent the taxpayer has net Section 1231
losses in the five most recent tax years. The tax treatment of Section 1231
gains will depend on the tax situation of each individual Limited Partner. In
addition, cost recovery deductions which have been taken with respect to the
Systems will be subject to recapture as ordinary income upon the sale to the
extent of gain on the sale, and each Limited Partner will be allocated a share
of recapture in proportion to the amount of depreciation giving rise to the
recapture which was allocated to the Limited Partner. A Limited Partner will
also
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<PAGE> 47
recognize gain or loss upon the liquidation of the Partnership following the
disposition of the Systems to the extent that the cash distributed in the
liquidation exceeds or is less than the Limited Partner's adjusted tax basis in
his or her interest. See "Other Tax Law Changes" below for a discussion of the
applicable tax rates for ordinary income and capital gains.
Neither the Partnership nor any Partner is allowed to deduct or to amortize the
amounts paid for syndication expenses, that is, amounts which were paid or
incurred by the Partnership in connection with the issuance and marketing of the
units of limited partnership interest, including sales commission costs. Upon
liquidation of the Partnership, the Treasury Regulations provide that the
Partnership may not deduct the capitalized syndication expenses. However, there
is uncertainty in the law concerning whether the Limited Partners may claim a
capital loss for the remaining portion of their tax basis in the Partnership
which is attributable to the capitalized syndication costs. For purposes of the
calculations presented in the "Tax Results from Sale of the Systems" section of
this Proxy Statement, the General Partners have assumed that the Limited
Partners' remaining basis in the Partnership may be used upon the termination of
the Partnership to offset capital gain from the sale of the Systems. The IRS may
contend, however, that the Limited Partners are not entitled to claim such a
capital loss because they should have reduced their basis in their Partnership
interests for the syndication fees, as expenditures of the Partnership which are
not deductible in computing its taxable income and not properly chargeable to
capital accounts, and the IRS may, in fact, contend that the Limited Partners
should recognize an additional amount of capital gain. EACH INDIVIDUAL LIMITED
PARTNER SHOULD CONSULT WITH HIS OR HER INDIVIDUAL TAX ADVISOR WITH RESPECT TO
HIS OR HER TREATMENT OF SYNDICATION COSTS UPON TERMINATION OF THE PARTNERSHIP.
UNRELATED BUSINESS TAXABLE INCOME
Unrelated business taxable income ("UBTI") will be generated by the sale of the
Systems to Limited Partners that are qualified retirement plans and tax exempt
trusts ("Plans") as defined by the Code and subject to the Employment Retirement
Income Security Act of 1974 (i.e., IRAs, Keoghs, Pension Plans, etc.).
Generally, partnership allocations of ordinary income, Section 1231 gains, and
capital gains will result in UBTI to Plans and generate an unrelated business
income tax. The Code allows an exempt entity a specific deduction for UBTI of up
to $1,000 per year and thus, the annual UBTI generated by the Plan will be taxed
to the extent it exceeds $1,000. In addition, should the Plan have net operating
loss and suspended basis loss carryovers, the UBTI may be reduced by these
carryover losses first.
To illustrate the impact of UBTI to Plans as the result of the proposed sale of
the Partnership assets, the following is an analysis which assumes that a $5,000
IRA investment is the sole UBTI investment of the IRA. It is also assumed that a
limited partner has properly reflected the use of net operating loss carryovers
generated in the early years of the partnership, has properly limited losses
recognized to the extent of the tax basis in the partnership interest and has
properly
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<PAGE> 48
recognized UBTI with respect to cash distributions in excess of basis.
INITIAL NCP-FOUR IRA INVESTMENT - $5,000
<TABLE>
<CAPTION>
<S> <C>
Cash distributions received over the life
of the partnership ($2,039 per $1,000 investment) $ 10,195
UBTI tax liability - 1997 (795)
UBTI tax liability - 1998 (53)
UBTI tax liability - 1999 (53)
--------
NET CASH AFTER TAXES TO IRA INVESTOR $ 9,294
========
</TABLE>
This analysis indicates that due to loss carryovers and the annual UBTI
exemption referred to above, an IRA investor would not be subject to UBTI tax
until the initial year of sale (1997) and thereafter on the installment payments
(1998 and 1999). In addition, should the IRA be able to utilize a capital loss
in 1999, the remaining basis in the partnership in the year of termination would
result in a $448 tax benefit due to the capital loss (not shown).
TAX CONSEQUENCES OF A DECISION NOT TO SELL
The general consequences of a decision not to sell and to continue to operate as
a Partnership are that each Limited Partner will continue to be allocated their
share of the Partnership's income, deduction, gain and loss, and will be
distributed their share of cash available for distribution, as determined under
the Partnership Agreement. In general, income or loss from operations of the
Partnership constitute ordinary income or loss, and are allocated to Limited
Partners in accordance with the Partnership Agreement. Cash distributions to
Limited Partners are not taxable unless they exceed the adjusted tax basis of
the Limited Partner's Partnership interest. Further, Limited Partners may not
deduct losses allocated to them to the extent the losses exceed the adjusted
tax basis of their Partnership interest. These unused losses may be carried
forward and utilized in future years, subject to the same limitation based on
the tax basis of the Partnership interest.
With respect to the deductibility of Partnership losses by a Limited Partner,
the Code does not allow a taxpayer to use losses and credits from a business
activity in which he or she does not materially participate (e.g., a limited
partner in a limited partnership) to offset other income such as salary, active
business income, dividends, interest, royalties and capital gains. However, such
passive activity losses can be used to offset passive activity taxable income
from another limited partnership. In addition, disallowed losses and credits
from one tax year may be suspended and carried forward by a taxpayer
indefinitely and used to offset income from passive activities in the future.
The disallowed losses will also be allowed in full when the taxpayer recognizes
gain or loss upon a taxable disposition of his or her entire interest in the
passive activity. Limited Partners should also note that the Treasury Department
prescribed regulations which will recharacterize certain income as "portfolio"
income and restrict the offset of that income by losses from a passive activity.
These regulations could impact the use of passive activity losses or income from
the Partnership. For example, the Treasury Department has issued regulations
holding that interest earned on
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<PAGE> 49
Partnership cash balances represents portfolio income, and thus may not be
offset by passive activity losses.
LIMITED PARTNERS SHOULD ALSO NOTE THAT THE EFFECT OF PASSIVE ACTIVITY LOSS
LIMITATIONS MAY VARY FROM ONE TAXPAYER TO ANOTHER DEPENDING UPON HIS OR HER
INDIVIDUAL TAX SITUATION. THEREFORE, EACH LIMITED PARTNER SHOULD CONSULT HIS OR
HER OWN PROFESSIONAL TAX ADVISOR WITH RESPECT TO THE APPLICATION OF THE PASSIVE
ACTIVITY LOSS LIMITATIONS TO HIS OR HER PARTICULAR TAX SITUATION.
With respect to the recovery of capital expenditures, eligible personal property
placed in service after December 31, 1986 is assigned to a three-year class,
five-year class, seven-year class, ten-year class, or twenty-year class. The
depreciation method applicable to the three-year, five-year, seven-year and
ten-year classes is the 200 percent declining balance method. The cost of
non-residential real property is recovered using the straight-line method over
39 years. Partnership equipment which is placed in service after December 31,
1986 is classified as seven-year or five-year property and the purchase price
for that equipment is depreciated over the applicable period.
The Code has eliminated the investment tax credit for all property placed in
service after December 31, 1985, subject to certain transitional rules which do
not currently apply to the Partnership.
OTHER TAX LAW CHANGES
The Code and Tax Acts generally provides for five taxable income brackets and
five tax rates (15%, 28%, 31%, 36%, and 39.6%) for years after 1992. The
benefits of certain itemized deductions and personal exemptions are phased out
for certain higher income taxpayers. In addition, long-term capital gains are
taxed at a maximum rate of 28 percent, but the deductibility of capital losses
continue to be restricted as under prior law.
The Tax Acts increased the alternative minimum tax rate from 24% to 26% and 28%,
depending on the level of the alternative minimum taxable income, and expanded
the tax preference items included in the alternative minimum tax calculation.
Accelerated depreciation on all property placed in service after 1986 is a
preference to the extent different from alternative depreciation (using the 150
percent declining balance method over longer lives for personal property).
Certain other tax preferences also have been modified and new preference items
added. The alternative minimum tax exemption amount is increased to $45,000 for
joint filers and $33,750 for unmarried
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<PAGE> 50
individuals. A taxpayer paying alternative minimum tax after 1986 is allowed a
tax credit for the alternative minimum tax liability attributable to timing
differences. In general, this minimum tax credit can be carried forward and used
against the taxpayer's regular tax liability to the extent the taxpayer's
regular tax liability exceeds his or her minimum tax liability.
An individual taxpayer generally is not allowed a deduction for investment
interest expense in excess of investment income. Investment interest expense
includes all interest paid or accrued on indebtedness incurred or continued to
purchase or carry property held for investment. Investment interest does not
include interest that is taken into account in determining a taxpayer's income
or loss from a passive activity provided, however, that interest expense which
is properly attributable to portfolio income from the passive activity is
treated as investment interest.
Personal interest is not deductible except for interest expense for debt
incurred on a taxpayer's principal or second residence, subject to certain
restrictions. In Notice 89-35, the IRS ruled that, in general, the character of
debt incurred by a partnership to make distributions to partners would be
determined by the use of the distributed proceeds by the partners unless the
partnership elects to allocate the distributed debt and related interest expense
to one or more partnership expenditures made during the year of the
distribution. The election is not available to the extent the distributed debt
proceeds exceed partnership expenditures during the year.
Net long-term capital gains are not considered investment income for purposes of
deducting investment interest expense. A taxpayer may elect to include such
gains in investment income if he or she agrees to forego the benefits of the
maximum rate of 28% on long-term captial gains.
See "Tax Consequences of a Decision Not to Sell" above for discussion of passive
activity loss limitations, changes in depreciation and elimination of investment
tax credit.
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<PAGE> 51
CONFLICTS OF INTEREST
FIDUCIARY RESPONSIBILITIES
The General Partners are accountable to the Partnership as fiduciaries and
consequently must exercise good faith in the resolution of any conflicts of
interest and in handling the Partnership's business. Their fiduciary duties
arise out of state law. The extent of a general partner's fiduciary
responsibilities is a changing area of the law, and Limited Partners who have
questions concerning these responsibilities should consult with their own
counsel. In discharging their obligations to the Partnership, the General
Partners must take into account the specific duties, obligations and limitations
imposed upon them by the Partnership Agreement.
Conflicts of Interest
The General Partners are subject to substantial conflicts of interest arising
out of their relationship with the Partnership and the proposed transaction.
For example, assuming that the requisite approval of Limited Partners is
obtained, Northland will be granted the authority to acquire the Systems from
the Partnership. The terms of the transaction have been determined by the
General Partners. Neither the Administrative General Partner nor any affiliate
of the Administrative General Partner will be granted any right to acquire
Systems. The Managing General Partner has faced a substantial conflict of
interest in determining such terms. In addition, the Managing General Partner
faced a significant conflict of interest in determining not to solicit bids from
independent third parties, but to propose that it acquire the Systems itself.
Notwithstanding the factors described above under "Proposed Transaction --
Market Factors," the fair market value and net cash flow of the Systems may
increase over time. Therefore, it is possible that Limited Partners would
receive a greater return on their investment if the Partnership continues to own
and operate the Systems, instead of consummating the proposed transaction.
Similarly, if the Systems are acquired by Northland, Northland may experience a
rate of return on its investment in excess of that experienced by the
Partnership.
Although the General Partners believe that the Gross Valuation for the Systems
is fair and reasonable, and that the disposition of the Systems in accordance
with the terms and conditions described in this Proxy Statement will assist the
Partnership in meeting its investment objectives, the General Partners have
faced substantial conflicts of interest in determining to present these
proposals to the Limited Partners. There can also be no assurance that the
Limited Partners would not receive a greater return on their investment if the
General Partners solicited bids for the Systems from third parties.
Although Daniels, the appraiser of the Systems, is not affiliated with the
General Partners or the Partnership, the General Partners and their affiliates
have frequently entered into material contracts with Daniels for the purchase or
sale of cable television systems in transactions where Daniels or its affiliates
acted either as broker or as principal, and the General Partners expect that
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<PAGE> 52
they and their affiliates will enter into similar transactions with Daniels or
its affiliates in the future. Because the Limited Partners have not and will not
participate in either the appraisal process or the selection of Daniels as the
appraiser, there can be no assurance that a different appraisal procedure or a
different appraiser would not generate a higher valuation of the Systems.
The Managing General Partner holds 20 units of limited partnership interest
(representing 0.1% of the total) and intends to vote IN FAVOR of the proposed
transaction. Units of limited partnership interest held and voted by the
Managing General Partner will be included in determining whether the requisite
approval has been obtained. Both General Partners will receive substantial
distributions (in cash or in kind) upon consummation of the proposed
transaction. See "Projected Cash Available from Liquidation."
The General Partners have not retained and do not intend to retain an
unaffiliated representative to act on behalf of the Limited Partners for the
purpose of negotiating the terms, or preparing a report or opinion concerning
the fairness of, the proposed transaction.
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<PAGE> 53
OVERVIEW OF PARTNERSHIP BUSINESS AND PROPERTIES
BUSINESS
Northland Cable Properties Four Limited Partnership (the "Partnership")
is a Washington limited partnership consisting of two general partners (the
"General Partners") and 1,028 limited partners as of July 31, 1996. Northland
Communications Corporation, a Washington corporation, is the Managing General
Partner of the Partnership (referred to herein as the "Managing General
Partner"). FN Equities Joint Venture, a California general partnership, is the
Administrative General Partner of the Partnership (the "Administrative
General Partner").
The Managing General Partner was formed in March 1981 and is
principally involved in the ownership and management of cable television
systems. The Managing General Partner currently manages the operations and is
the General Partner for cable television systems owned by 6 limited
partnerships. The Managing General Partner is also the parent company of
Northland Cable Properties, Inc. which was formed in February 1995 and is
principally involved in direct ownership of cable television systems. The
Managing General Partner is a subsidiary of Northland Telecommunications
Corporation ("NTC"). Other subsidiaries of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and
principally involved in the direct ownership of cable television
systems. Owner of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and
principally involved in the production and development of
local programming.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 as the
holding company for the following entities:
CABLE TELEVISION BILLING, INC. - formed in June 1987 and
principally involved in the development and production of
computer software used in connection with the billing and
financial recordkeeping for cable systems owned or managed by
Northland or Northland Cable Television, Inc.
NORTHLAND INVESTMENT CORPORATION - formed in 1988 and
principally involved in the underwriting of Northland
sponsored limited partnership securities offerings.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and
principally involved in the production and development of
video commercial advertisements.
NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company for
the following entity:
STATESBORO MEDIA, INC. - formed in April 1995 and principally
involved in acquiring and operating an AM radio station
serving the community of Statesboro, GA and surrounding areas.
The Partnership was formed on January 2, 1985 and began operations in
1985 with the acquisition of several cable television systems in Texas and
California (the "Systems"). In September 1995, the Partnership acquired the
cable television systems in and around Kaufman, Oak Grove, Hillsboro, New
Waverly and Waterwood, TX (the "SLT System"). In October 1995, the Partnership
purchased the cable television systems in and around Huffman Prairie View,
Waller, Cut and Shoot, Brookshire, Tarkenton, Ace, Simonton and Fulshear, TX
(the "Brookridge System"). As of July 31, 1996, the total number of basic
subscribers served by the Systems was 22,910, and the partnership's penetration
rate (basic subscribers as a percentage of homes passed) was approximately 56%
as compared to an industry average of approximately 64%, as reported by PAUL
KAGAN ASSOCIATES, INC.
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<PAGE> 54
The Partnership has 42 non-exclusive franchises to operate the Systems.
The franchises, which will expire at various dates through the year 2012, have
been granted by county, city and other local governmental authorities in the
areas in which the Systems operate. Annual franchise fees are paid to the
granting governmental authorities. These fees vary between 2% and 5% of 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 Partnership serves the communities and surrounding areas of
Flint/Tyler, New Caney, Whitewright, Kaufman, Hillsboro and Prairie View, Texas,
as well as Chowchilla, California. The following is a description of these
areas:
Flint/Tyler, TX: The S.W. Tyler and S.E. Tyler systems serve most of
the suburban areas to the southeast, south and southwest of Tyler, TX. This east
Texas area is known for its tree-lined lakes which offer year-round fishing,
swimming, skiing and other water-related sports during the summer months. The
area's largest lakes are Lake Palestine and Lake Tyler. The Tyler area enjoys a
mild subtropical climate. This allows farmers and gardeners to plant in both
spring and fall due to the area's long growing season of 259 days. Tyler also
features a 22-acre municipally-owned rose garden which is renowned for its
38,000 rose bushes and 450 rose varieties. Certain information regarding the
Tyler, TX system as of July 31, 1996 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 7,909
Tier Subscribers 1,886
Premium Subscribers 2,354
Estimated Homes Passed 12,000
</TABLE>
New Caney, TX: The New Caney system serves the communities and
surrounding areas of Patton Village, Splendora, Woodbranch Village, Roman
Forest, Waterwood, New Waverly, Huffman and New Caney, TX. This system is
approximately forty miles north of Houston, TX and has very easy access to
Houston Intercontinental Airport. Certain information regarding the New Caney,
TX system as of July 31, 1996 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 7,393
Tier Subscribers 2,332
Premium Subscribers 2,802
Estimated Homes Passed 12,890
</TABLE>
Whitewright, TX: The cities of Whitewright, Van Alstyne, Savoy, Bells,
Howe, Tom Bean and Trenton, as well as the city of Sherman, Texas, are located
in a region that is referred to as the "Texoma Region." The Texoma Region
includes Lake Texoma, a large 89,000-acre lake which has over 600 miles of sandy
beaches, an 11,000-acre wildlife refuge and 43 park areas. The wide variety of
recreational opportunities has created a popular resort area attracting more
than 11,000,000 visitors each year. Certain information regarding the
Whitewright, TX system as of July 31, 1996 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 1,733
Premium Subscribers 461
Estimated Homes Passed 4,180
</TABLE>
Kaufman, TX: The Kaufman system includes the community of Oak Grove and
is located in north central Texas, approximately 32 miles southeast of Dallas,
Texas. Major industries in the area include manufacturing and health care.
Trinity Valley College is located in the area. Certain information regarding the
Kaufman, TX system as of July 31, 1996 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 1,399
Premium Subscribers 688
Estimated Homes Passed 2,080
</TABLE>
47
<PAGE> 55
Hillsboro, TX: The Hillsboro system is located in north central Texas,
approximately 65 miles south of Dallas, Texas. Major industries in the area
include retail, manufacturing and health care. In addition, Hill College is
located in the area. Certain information regarding the Hillsboro, TX system as
of July 31, 1996 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 1,591
Premium Subscribers 418
Estimated Homes Passed 3,055
</TABLE>
Prairie View, TX: The Prairie View system is located northwest of
Houston, Texas and includes the community of Waller, Texas. Prairie View is a
branch location of Texas A & M University, one of the largest universities in
southeast Texas. Certain information regarding the Prairie View, TX system as of
July 31, 1996 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 910
Premium Subscribers 320
Estimated Homes Passed 2,100
</TABLE>
Chowchilla, CA: The Chowchilla system serves the communities of and
contiguous areas surrounding Chowchilla, Planada, Riverdale, and LeGrand, which
are all located in the San Joaquin Valley in west-central California. The San
Joaquin Valley is one of the nation's leading agricultural areas. The alluvial
deposits from the San Joaquin and Chowchilla rivers over the centuries have made
the valley ideally suited for fruits, nuts, vegetables, cotton and grain. The
climate is warm and dry with temperatures that approach 100 degrees in July and
August. The winters are mild with only occasional frosts. In recent years, the
valley has become increasingly popular because of its climate and access to
recreational areas, with many rivers, lakes and close proximity to the Sierra
National Forest and Yosemite National Park. Certain information regarding the
Chowchilla, CA system as of July 31, 1996 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 1,975
Premium Subscribers 943
Estimated Homes Passed 4,260
</TABLE>
The Partnership had 36 employees as of July 31, 1996. Management of
these systems is handled through offices located in the towns of Flint, New
Caney, Whitewright, Texas and Chowchilla, California. The Kaufman, Hillsboro and
Prairie View, Texas systems share the costs of offices maintained by affiliates
of the Partnership pursuant to the terms of operating management agreements.
Pursuant to the Agreement of Limited Partnership, the Partnership reimburses the
Managing General Partner for time spent by the Managing General Partner's
accounting staff on Partnership accounting and bookkeeping matters.
The Partnership's cable television business is not considered seasonal.
The business of the Partnership 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 Partnership's business is subject to renegotiation 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 Partnership did not engage in any research and development activities.
Partnership revenues are derived primarily from monthly payments
received from cable television subscribers. Subscribers are divided into three
categories: basic subscribers, tier subscribers and premium 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. "Tier subscribers" are households that subscribe to an additional level
of certain satellite programming services, such as Cartoon Network, CNBC
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<PAGE> 56
or American Movie Classics. "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, Disney or
The Movie Channel.
COMPETITION
Due to factors such as the non-exclusivity of the Partnership's
franchises, recent regulatory changes and Congressional action, the rapid pace
of technological developments, and the adverse publicity received by the cable
industry regarding the lack of competition, there is a substantial likelihood
that the Partnership's systems will be subject to a greater degree of
competition in the future.
OTHER ENTERTAINMENT ALTERNATIVES: The Partnership's systems compete
with other communications and entertainment media, including conventional
over-the-air television broadcasting stations. Cable television service was
first offered as a means of improving television reception in markets where
terrain factors or remoteness from major cities limited the availability of
over-the-air television broadcasts. In some of the areas served by the
Partnership's systems, several of the broadcast television channels can be
adequately received off-air. The extent to which cable television service is
competitive with broadcast stations depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than available off-air.
Cable television systems also are susceptible to competition from other
video programming delivery systems (discussed below), from other forms of home
entertainment such as video cassette recorders, and, in varying degrees, from
sources of entertainment in the communities served, including motion picture
theaters, live theater and sporting events.
OVERBUILDS: Recent federal legislation and court decisions have
increased the likelihood that incumbent cable operators will face instances of
"overbuilding". Overbuilding occurs when a cable operator who is not affiliated
with the incumbent franchise holder applies for and receives a second franchise
from the local franchising authority and constructs a cable system in direct
competition with that of the incumbent. None of the Partnership's franchises
provide for exclusivity. Overbuilding typically occurs where the overbuilder
believes it can attract a profitable share of the incumbent operator's customer
base. Overbuilding also may occur if the local franchising authority authorizes
construction of a governmentally owned and operated cable system. At present
none of the Partnership's cable systems are overbuilt. Given the regulatory
developments making it easier for overbuilders, both private and governmental
entities, to enter the marketplace, there can be no assurances that overbuilder
competition will not occur in the future.
WIRELESS SERVICES: Services A variety of services, often generically
referred to as "wireless" cable, distribute video programming via
omnidirectional low-power microwave signals from a stationary transmitter to
customers at fixed locations. For many years such services faced governmental
restrictions on the types of programming they could distribute and were
generally prevented, by regulatory and technological reasons, from
distributing the quantity of programming distributed by cable operators.
Wireless operators also faced difficulty in obtaining access to certain
programming produced by vendors affiliated with the Cable industry.
In recent years, the Federal Communications Commission (the "FCC") has
adopted policies for authorizing new technologies and providing a more favorable
regulatory environment for certain existing wireless technologies. Such policies
have the potential to create additional competition for cable television
systems. The FCC recently amended its regulations to enable multi-channel,
multi-point distribution services ("MMDS"), to compete more effectively with
cable television systems by making available additional channels to the MMDS
industry.
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<PAGE> 57
There can be no assurance that future competition brought about by
MMDS, LMDS and other wireless technologies will not have a material adverse
effect on Partnership operations. Recent Congressional legislation, among other
things, is designed to make programming that is currently available to the cable
television industry available to other technologies to foster the growth of
alternative video programming delivery services.
SATELLITE DELIVERED SERVICES: Additional competition exists from
private cable television systems serving condominiums, apartment complexes and
other private residential developments. The operators of these private systems,
generally referred to as Satellite Master Antenna Television ("SMATV")
providers, often enter into exclusive agreements with apartment building owners
or homeowner's associations that preclude operators of franchised cable
television systems from serving residents of such private complexes. Due to the
widespread availability of reasonably priced satellite signal reception dishes
or earth stations, SMATV systems now can offer both improved reception of local
televisions station and many of the same satellite-delivered programming
services that are offered by franchised cable television systems. Moreover,
SMATV systems generally are free of the regulatory burdens imposed on franchised
cable television systems. Although a number of states and some municipalities
have enacted laws and ordinances to afford operators of franchised cable
television systems access to private complexes, several of such laws and
ordinances have been challenged successfully in the courts, and others are under
attack. Because the Partnership generally has been able to enter into access
agreements with owners of private complexes, in Management's opinion, successful
challenges to access statutes would not have a material adverse effect on the
operations of the Partnership.
Reasonably priced earth stations designed for private home use now
enable individual households to receive many of the satellite-delivered
programming services formerly available only to cable television subscribers.
Many satellite programmers now encode their signals in order to allow reception
only by means of authorized decoding equipment.
Direct broadcast satellite ("DBS") service consists of satellite
services that focus on delivering programming services directly to homes using
high-power signals transmitted by satellites to receiving facilities located on
the premises of subscribers. With an antenna as small as 18 inches, a DBS
customer can receive a hundred or more programming signals. Several companies
have high-powered DBS systems in place. These DBS operators use video
compression technology to increase the channel capacity of their systems to
provide a package of movies, broadcast stations and other programming services
competitive with those of cable television systems.
Using a national base of subscribers, it is possible that DBS companies
may be able to offer new and highly specialized services which may not be
available to the cable television industry, but as channel capacity and
penetration of cable television systems increase, the cable industry is expected
to have the ability to offer additional services as well. Because DBS systems
deliver their services using satellite technology, they may not be able to
provide services that are of local interest to their subscribers, and may not be
able to maintain a local presence, which is considered a significant advantage
in developing and maintaining subscriber support. The extent to which DBS
systems will be competitive with the services provided by cable television
systems will depend, among other things, on the ability of DBS operators to
finance substantial start-up costs and to create their own programming or to
obtain access to existing programming. Recent federal legislation requires cable
programmers under certain circumstances to offer their
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<PAGE> 58
programming to operators of DBS, MMDS and other multi-channel video systems at
not unreasonably discriminatory prices.
The Partnership has not experienced any significant subscriber loss to
DBS. There can be no assurance, however, that future competition brought about
by DBS will not have a material adverse impact on Partnership operations.
TELEPHONE COMPANIES: Federal law, FCC regulations and the 1982 federal
court consent decree (the "Modified Final Judgment") that settled the 1974
antitrust suit against AT&T all limit in various ways the provision of video
programming and other information services by telephone companies. Federal law
codifies FCC cross-ownership regulations which, among other things, prohibit
local telephone exchange companies including the seven Regional Bell Operating
Companies ("RBOCs"), from providing video programming directly to subscribers
within their local exchange service areas, except in rural areas or by specific
waiver of FCC rules. These statutory provisions and corresponding FCC
regulations are of particular competitive importance because these telephone
companies already own much of the plant necessary for cable television
operations, such as poles, underground conduits, associated rights-of-way and
connections to the home.
In July 1991, the U.S. District Court responsible for the Modified
Final Judgment lifted the prohibition on the provision of information services
by the RBOCs. As a result, the RBOCs were allowed to acquire or construct cable
television systems outside of their own service areas. Another federal court
held that the cable/telco cross-ownership prohibitions unconstitutionally
abridge the First Amendment rights of the RBOCs and other telephone companies.
Several RBOCs have entered into agreements to purchase cable television systems
outside their service areas. Management believes that such purchases of existing
cable television systems do not represent a significant competitive threat to
the Partnership
In July 1992, the FCC voted to authorize additional competition to
cable television by video programmers using broadband common carrier facilities
constructed by telephone companies. The FCC allowed telephone companies to take
ownership interests of up to 5% in such programmers. Several telephone companies
have sought approval from the FCC to build such "video dialtone" systems and
several experimental systems have been approved by the FCC. No such systems were
proposed in a community in which the Partnership holds a cable franchise.
Recent Federal laws have significantly changed the restrictions on
telephone companies with respect to their ability to own and operate video
programming delivery systems within their own service areas. See "Proposed
Transaction-Regulation Overview."
There can be no assurance that future competition brought on by
telephone company participation in the cable television industry will not have a
material adverse effect on the Partnership's operations.
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<PAGE> 59
PROPERTIES
The Partnership's cable television systems are located in and around
Chowchilla, California and Flint/Tyler, Whitewright, New Caney, Kaufman,
Hillsboro and Prairie View, Texas. The principal physical properties of the
Systems consist of system components (including antennas, coaxial cable,
electronic amplification and distribution equipment), motor vehicles,
miscellaneous hardware, spare parts and real property, including land and
buildings. The Partnership's cable plant passed approximately 40,565 homes as of
July 31, 1996. Management believes that the Partnership's plant passes all
areas which are currently economically feasible to service. Future line
extensions depend upon the density of homes in the area as well as available
capital resources for the construction of new plant. (See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources".)
On September 15, 1995, the Partnership acquired substantially all of
the operating assets and franchise rights of cable systems serving approximately
3,500 subscribers in or around the communities of Kaufman, Oak Grove, Hillsboro,
New Waverly and Waterwood, all in the state of Texas. The purchase price for
these systems was $4,492,254, of which $4,226,896 was paid at the closing date.
The balance represents an unsecured, subordinated hold-back note, bearing
interest at the prime rate. A portion of the hold-back note was paid in June
1996. As of July 31, 1996, $56,841 remained on the note representing certain
post-closing adjustments the responsibility for which is being negotiated
between the Partnership and seller. The purchase was financed by borrowings
under the Partnership's revolving credit and term loan facility.
On October 31, 1995, the Partnership acquired substantially all
operating assets and franchise rights of the Brookridge system which serves
approximately 3,600 subscribers and the purchase price was $5,585,900 of which
$5,306,510 was paid at the closing date. The balance was paid in April 1996,
net of purchase price and other adjustments, under the terms of an
unsecured, subordinated, non-interest bearing hold-back note. The purchase was
financed by borrowings under the Partnership's revolving credit and term loan
facility.
On February 16, 1996, the Partnership acquired substantially all
operating assets and franchise rights of the cable television system serving
approximately 220 subscribers in and around LeGrand, California. The purchase
price was $271,478 of which $257,978 was paid at the closing date and the
balance of $13,500 was deposited into an escrow account and made available to
the seller in June, 1996.
LEGAL PROCEEDINGS
None.
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<PAGE> 60
CERTAIN AFFILIATES OF THE PARTNERSHIP
The Partnership is a Washington limited partnership with no directors or
officers. The Managing General Partner of the Partnership is Northland
Communications Corporation, a Washington corporation ("NCC"); the Administrative
General Partner of the Partnership is FN Equities Joint Venture, a California
general partnership (the "Administrative General Partner").
NCC is a wholly-owned subsidiary of Northland Telecommunications Corporation, a
Washington corporation ("NTC"). The principal business of NCC historically has
been locating cable television systems, negotiating for their acquisition,
forming limited partnerships to own the systems, arranging for the sale of
limited partnership interests to investors, managing the partnerships, and
liquidating partnership assets upon dissolution. The principal business of NTC
is that of a holding company. The address of the principal executive offices of
each of NCC and NTC is 1201 Third Avenue, Suite 3600, Seattle, Washington 98101.
The sole partners of the Administrative General Partner are FN Equities, Inc.
("FNE"), a wholly-owned subsidiary of FNI International, Inc. ("FNIII"), FN
Network Partners, Ltd., a California limited partnership ("FNPL"), and John
Simmers, an affiliate of FNE and FNIIE. The principal business of each of the
Administrative General Partner and FNE is to provide administrative services as
administrative general partner of cable television limited partnerships. FNPL is
an investment partnership. The principal business of FNIII is that of a holding
company. The address of the principal executive offices of each of the
Administrative General Partner, FNE, FNPL and FNIII is 2780 Sky Park Drive,
Suite 300, Torrance, California 90505.
The following table sets forth the executive officers and directors of NTC:
NAME POSITION
- ---- --------
John S. Whetzell Board Chairman and President
Richard I. Clark Director, Vice President, Treasurer and Assistant
Secretary
John E. Iverson Director and Assistant Secretary
James A. Penney Vice President and Secretary
James E. Hanlon Divisional Vice President
Richard J. Dyste Vice President, Technical Services
Gary S. Jones Vice President
H. Lee Johnson Divisional Vice President
Arlen E. Prentice Director
Milton A. Barrett, Jr. Director
Arthur H. Mazzola Director
Travis H. Keeler Director
JOHN S. WHETZELL. Mr. Whetzell is the founder of Northland Communications
Corporation and has been President since its inception and a Director since
March 1982. Mr. Whetzell became Chairman of the Board of Directors in December
1984. He also serves as President and
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<PAGE> 61
Chairman of the Board of Northland Telecommunications Corporation, Northland
Cable Television, Inc., Northland Cable Services Corporation, Cable Ad-Concepts,
Inc. Cable Television Billing, Inc. and Northland Cable News, Inc. He has been
involved with the cable television industry for over 21 years and currently
serves as a director on the board of the Cable Telecommunications Association, a
national cable television association. 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 which 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. Mr. Iverson is the Assistant Secretary of Northland
Communications Corporation and has served on the Board of Directors since
December 1984. He also serves on the Board of Directors of Northland
Telecommunications Corporation and each of its subsidiaries. He is currently a
partner in the law firm of Ryan, Swanson & Cleveland, Northland's general
counsel. He is a member of the Washington State Bar Association and American Bar
Association and has been practicing law for more than 33 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.
ARLEN I. PRENTICE. Since July 1985, Mr. Prentice has served on the Board of
Directors of Northland Telecommunications Corporation, and he served on the
Board of Directors of Northland Communications Corporation between March 1982
and July 1985. Since 1969, Mr. Prentice has been Chairman and Chief Executive
Officer of Kibble & Prentice, a diversified financial services firm. Kibble &
Prentice has four divisions, which include Estate Planning and Business
Insurance, Financial Planning and Investments, Employee Benefit Services, and
Property and Casualty Insurance. Mr. Prentice is a Chartered Life Underwriter,
Chartered Financial Consultant, past President of the Million Dollar Round Table
and a registered representative of Investment Management and Research. Mr.
Prentice has a Bachelor of Arts degree from the University of Washington.
MILTON A. BARRETT, JR. Since April 1986, Mr. Barrett has served on the Board of
Directors of Northland Telecommunications Corporation. In 1995 he retired from
the Weyerhaeuser Company after 34 years with that company. At the time of his
retirement he was a Vice President of Sales and Marketing as well as chairman of
Weyerhaeuser's business ethics committee. Mr. Barrett is a graduate of Princeton
University magna cum laude and of the Harvard University Graduate School of
Business Administration.
RICHARD I. CLARK. Mr. Clark has served as Vice President of Northland since
March 1982. He has served on the Board of Directors of both Northland
Communications Corporation and Northland Telecommunications Corporation since
July 1985. He also serves as Vice President
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<PAGE> 62
and Director of Northland Cable Services Corporation, Cable Ad-Concepts, Inc.
Cable Television Billing, Inc. and Northland Cable News, Inc. Mr. Clark was
elected Treasurer in April 1987, prior to which he served as Secretary from
March 1982. He also serves as a registered principal, President and director of
Northland Investment Corporation. Mr. Clark was an original incorporator of
Northland and 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 17 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
programs, and he has prepared documents for major cable television companies in
franchising and budgeting projects though the application of these programs. In
1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a
Bachelor of Arts degree in accounting.
ARTHUR H. MAZZOLA. Mr. Mazzola was elected to the Board of Directors of
Northland Telecommunications Corporation in April 1987. For the past two years,
Mr. Mazzola has served as a Business Development Coordinator for the Bank of
California. From 1991 to 1995, Mr. Mazzola served as a general business
consultant in private practice. From 1985 to 1990, he was Senior Vice President
of Benjamin Franklin Leasing Company, Inc., an equipment lease financing
company. Prior to his association with Benjamin Franklin Leasing Company, Mr.
Mazzola served as President of Federal Capital Corporation and Trans Pacific
Lease Co., Inc. Both of these companies also engaged exclusively in equipment
lease financing. Mr. Mazzola is a past Board Chairman and current Trustee of the
Pacific Northwest Ballet Association and current Board Member of the Dante
Alighieri Society. Mr. Mazzola attended Boston University School of Business in
1943 where he studied economics.
TRAVIS H. KEELER. Mr. Keeler was elected to the Board of Directors of Northland
Telecommunications Corporation in April 1987. Since May 1985, he has served as
President of Overall Laundry Services, Inc., an industrial laundry and garment
rental firm. Mr. Keeler received a Bachelor of Arts degree from the University
of Washington in 1962.
JAMES E. HANLON. Since June 1985, Mr. Hanlon has been a Divisional Vice
President for Northland's Tyler, Texas regional office and is currently
responsible for the management of systems serving approximately 92,900 basic
subscribers in Texas, Alabama and Mississippi. He also serves as Vice President
for Northland Cable News, Inc. Prior to his association with Northland, he
served as Chief Executive of M.C.T. Communications, a cable television company,
from 1981 to June 1985. His responsibilities included supervision of the
franchise, construction and operation of a cable television system located near
Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of the CATV Division
of Buford Television, Inc., and from 1973 to 1979, he served as President and
General Manager of Suffolk Cablevision in Suffolk County, New York. Mr. Hanlon
has also served as Vice President and Corporate Controller of Viacom
International, Inc. and Division Controller of New York Yankees, Inc. Mr. Hanlon
has a Bachelor of Science degree in Business Administration from St. Johns
University.
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<PAGE> 63
JAMES A. PENNEY. Mr. Penney is Vice President and General Counsel for Northland.
He has served as Vice President and General Counsel for Northland
Telecommunications Corporation, Northland Communications Corporation and
Northland Cable Television, Inc. since September 1985 and was elected Secretary
in April 1987. He also serves as Vice President and General Counsel for
Northland Cable Services Corporation, Cable Ad-Concepts, Inc. Cable Television
Billing, Inc. and Northland Cable News, Inc. Mr. Penney is responsible for
advising all Northland systems with regard to legal and regulatory matters, and
also is involved in the acquisition and financing of new cable systems. From
1983 until 1985 he was associated with the law firm of Ryan, Swanson &
Cleveland, Northland's general counsel. Mr. Penney holds a Bachelor of Arts
degree from the University of Florida and a Juris Doctor from The College of
William and Mary, where he was a member of The William and Mary Law Review.
GARY S. JONES. Mr. Jones is Vice President for Northland. Mr. Jones joined
Northland in March 1986 as Controller and has been Vice President of Northland
Telecommunications Corporation, Northland Communications Corporation and
Northland Cable Television, Inc. since October 1986. He also serves as Vice
President for Northland Cable Services Corporation, Cable Ad-Concepts, Inc.
Cable Television Billing, Inc. and Northland Cable News, Inc. 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. Mr. Dyste has served as Vice President-Technical Services of
Northland Telecommunications Corporation, Northland Communications Corporation
and Northland Cable Television, Inc. since April 1987. He also serves as Vice
President for Cable Ad-Concepts, Inc. and Northland Cable News, Inc. During
1995, he was responsible for the management of systems serving approximately
48,600 basic subscribers in California, Idaho, Oregon and Washington. Mr. Dyste
is a past president and a current member of the Mount Rainier Chapter of the
Society of Cable Television 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. Mr. Johnson has served as Divisional Vice President for
Northland's Statesboro, Georgia Regional Office since March 1994. He is
responsible for the management of systems serving over 50,400 basic subscribers
in Georgia, Mississippi, North Carolina and South Carolina. He also serves as
Vice President for Northland Cable News, Inc. Mr. Johnson served as Regional
Manager for several Northland Systems from 1986 to 1994 until his promotion to
Divisional Vice President. Prior to his association with Northland, Mr. Johnson
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 nearly 27 years and is a
current member of the Society of Cable Television Engineers. He is a graduate of
Swainsboro Technical Institute and
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<PAGE> 64
has attended numerous training seminars, including courses sponsored by Jerrold
Electronics, Scientific Atlanta and The Society of Cable Television Engineers.
The following table sets forth the executive officers and directors of FNE:
NAME POSITION
- ---- --------
Miles Z. Gordon President and Director
John S. Simmers Vice President, Secretary and Director
Harry M. Kitter Treasurer
The business address for all of the above is the address of the principal
executive offices of FNE.
MILES Z. GORDON. Mr. Gordon is President of FNE and President and Chief
Executive Officer of Financial Network Investment Corporation ("FNIC"), and has
held those positions since 1983. From 1979 through April 1983 he was President
of University Securities Corporation. In 1978, Mr. Gordon was engaged in the
private practice of law, and from 1973 through 1978 he was employed by the
Securities and Exchange Commission. He presently serves as Chairman of the
Securities Industry Association Independent Contractor Firms Committee. Mr.
Gordon was also Chairman and a member of the NASD District Business Conduct
Committee and a former member of the NASD Board of Governors. He is past
president of the California Syndication Forum and has also served on several
committees for the Securities Industry Association.
JOHN S. SIMMERS. Mr. Simmers is Vice President and Secretary of FNE and
Executive Vice President and Chief Operating Officer of FNIC and has held those
positions since 1983. From June 1980 through April 1983 he was Executive Vice
President of University Securities Corporation, Vice President of University
Capital Corporation, and Vice President of University Asset Management Group.
From 1974 through May 1980 he was employed by the National Association of
Securities Dealers.
HARRY M. KITTER. Mr. Kitter is Treasurer of FNE and Controller for FNIC and has
held those positions since 1983. Prior to this association from 1981 to 1983 he
was employed as the Los Angeles Internal Audit Manager at the Pacific Stock
Exchange. From 1978 to 1981, he was Senior Accountant at Arthur Young & Co.,
C.P.A. He holds an MBA from the University of Pittsburgh and a bachelor's degree
in economics from Lafayette College, Easton, Pennsylvania.
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<PAGE> 65
The following table sets forth the officers and directors of FNIII:
NAME POSITION
- ---- --------
Miles Z. Gordon Director and Executive Officer
John S. Simmers Director and Executive Officer
John D. Cartwright Director
Gerald W. Brown Director
Harold G. Nahigian Director
Edward R. Hunt, Sr. Director
John L. Kassab Director
For biographies of Messers. Gordon and Simmers, please see the entries above for
FNE.
GERALD W. BROWN is President of Coordinated Management Corporation, Koll Center
Bellevue, 500 108th Avenue, NE, #225, Bellevue, Washington. Mr. Brown has held
this position since February 1985. Previously he was Marketing Director of
University Securities Corporation from January 1979 to January 1983, and Sales
Manager for American Bankers Life from June 1975 to December 1978.
JOHN D. CARTWRIGHT is President of John D. Cartwright & Associates, a financial
planning firm, a position he has held since August 28, 1980. The address of John
D. Cartwright & Associates is 1025 W. 190th Street #120, Gardena, California
90248.
EDWARD R. HUNT is a financial planner and an Independent Contractor with FNIC.
Previously he was a Registered Principal with University Securities Corporation
from June 1978 to August 1983. His address is 3447 Atlantic Avenue, #110, Long
Beach, CA 90807.
JOHN L. KASSAB is also a financial planner and an Independent Contractor with
FNIC. Previously he was Marketing Director of University Securities Corporation
from July 1978 to July 1983. His address is P.O. Box 1690, Colfax, California
95713.
HAROLD G. NAHIGIAN is President of Nationwide Investments and Insurance, Inc.,
3807 Wilshire Blvd. #1040, Los Angeles, California 90010-3145, a position he has
held since August 1979. Previously he was Senior Vice President of University
Securities Corporation from June 1980 to May 1983.
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<PAGE> 66
PLAN OF SOLICITATION
SPECIAL MEETING
The Special Meeting of Limited Partners of the Partnership will be held on
December 18, 1996 at 3:00 p.m., local time, at the office of Northland
Communications Corporation, 1201 Third Avenue, Suite 3600, Seattle, Washington
98101. The purpose of the meeting is to vote regarding the proposed liquidation
of the Systems and the acquisition of such Systems by Northland. All Limited
Partners are invited to attend the meeting and are urged to submit a proxy even
if they will be able to attend the meeting.
FORM OF PROXY
A form of the proxy hereby solicited is set forth as Exhibit A to this Proxy
Statement. Actual, execution-ready proxy forms accompany this Proxy Statement.
By submitting a marked and executed proxy, a Limited Partner appoints John S.
Whetzell and Richard I. Clark, or either of them, with full power of
substitution, his or her attorney-in-fact to vote his or her interest as a
Limited Partner at the Special Meeting with respect to approval or disapproval,
as the Limited Partner specifies, of the disposition and related actions
described in such proxy, as well as all actions necessary or appropriate to
effect such transaction if the requisite percentage interest of Limited Partners
vote to approve such transaction. Messrs. Whetzell and Clark serve as President
and Vice President/Treasurer, respectively, of the Managing General Partner.
VOTING AND REVOCATION OF PROXY
All proxies will be voted in the manner indicated thereon by the Limited
Partner. The proposal described in this Proxy Statement is an integrated
transaction. Therefore, Limited Partners may not vote for or against individual
elements of the proposed transaction, but must vote either for or against the
proposed transaction as a whole. Each Limited Partner is entitled to one vote
for each limited partnership unit held. There are 14,663 units of limited
partnership interest outstanding. Signed proxies returned by Limited Partners
who do not specify whether they wish to approve the proposed transaction will be
voted for approval of such transaction. If no proxy is received from a Limited
Partner and the Limited Partner does not vote in person at the Special Meeting
of Limited Partners, the Limited Partner will be deemed to have voted against
approval of the proposal set forth in the proxy.
Once given, a proxy may be revoked either by delivering to the Managing General
Partner, prior to the vote to be taken at the Special Meeting, a proxy dated
subsequent to the date of the proxy previously given or by personally appearing
at the Special Meeting and prior to the commencement of the meeting delivering
to the Managing General Partner notice in writing that the proxy already given
is being revoked.
Only persons who are Limited Partners of record of the Partnership at the close
of business on October 15, 1996 will be permitted to vote or grant proxies.
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<PAGE> 67
All questions as to the validity, form, eligibility, time of receipt, and
acceptance of any proxies will be determined by the General Partners in their
sole discretion, which determination will be final and binding.
Solicitation may be in person, by telephone, mail, or other means. The General
Partners and their directors, officers, partners and employees may solicit the
vote of Limited Partners.
INCORPORATION BY REFERENCE
The Partnership filed an Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 and Quarterly Reports on Form 10-Q for the fiscal quarters
ended March 31, 1996 and June 30, 1996 pursuant to requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"). These reports, and any
subsequent filings made by the Partnership pursuant to the Exchange Act prior
to the date of the meeting of Limited Partners, are incorporated herein by this
reference.
FINANCIAL STATEMENTS
Included in this Proxy Statement are the Partnership's audited financial
statements for the years ended December 31, 1995 and 1994, and unaudited
financial statements for the six months ended June 30, 1996 and 1995. Financial
statements for prior years and periods have previously been distributed to the
Limited Partners on an ongoing basis. Also included in this Proxy Statement are
audited balance sheets and associated materials for the Managing General Partner
and for Northland Telecommunications Corporation and Northland Cable Television,
Inc. for the years ended December 31, 1995 and 1994, and for the Administrative
General Partner as of June 30, 1996, as well as unaudited financial statements
for Northland Telecommunications Corporation and Northland Cable Television,
Inc. for the six months ended June 30, 1996 and 1995. Any Limited Partner
seeking additional information regarding financial statements should contact
the Managing General Partner.
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<PAGE> 68
NORTHLAND CABLE PROPERTIES FOUR LIMITED
PARTNERSHIP
FINANCIAL STATEMENTS
AS OF JULY 31, 1996 AND DECEMBER 31, 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Four Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Four Limited Partnership (a Washington limited partnership) as of July 31, 1996
and December 31, 1995, and the related statements of operations, changes in
partners' deficit and cash flows for the seven-month period ended July 31, 1996
and the two years ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties
Four Limited Partnership as of July 31, 1996 and December 31, 1995, and the
results of its operations and its cash flows for the seven-month period ended
July 31, 1996 and the two years ended December 31, 1995, in conformity with
generally accepted accounting principles.
Seattle, Washington,
September 9, 1996
<PAGE> 70
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
BALANCE SHEETS -- JULY 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 386,966 $ 384,304
Accounts Receivable 275,079 378,621
Prepaid Expenses 166,167 86,313
----------- -----------
Total current assets 828,212 849,238
----------- -----------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 25,752,302 24,772,312
Less--accumulated depreciation (14,173,933) (13,265,067)
----------- -----------
11,578,369 11,507,245
Franchise agreements (net of accumulated
amortization of $1,032,264 in 1996 and
$899,053 in 1995) 1,569,655 1,801,801
Noncompetition agreements and other
intangibles (net of accumulated
amortization of $581,780 in 1996 and
$496,982 in 1995) 860,520 915,850
----------- -----------
Total investment in cable
television properties 14,008,544 14,224,896
----------- -----------
Total assets $14,836,756 $15,074,134
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,192,750 $ 801,634
Due to General Partner and affiliates 323,724 116,345
Deposits 43,024 44,184
Subscriber prepayments 169,973 185,835
Notes payable-current portion 1,410,180 1,132,438
----------- -----------
Total current liabilities 3,139,651 2,280,436
Notes payable 17,980,067 18,656,737
----------- -----------
Total liabilities 21,119,718 20,937,173
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' DEFICIT:
General partners -
Contributed capital, net (51,616) (50,875)
Accumulated deficit (73,176) (69,717)
----------- -----------
(124,792) (120,592)
----------- -----------
Limited partners-
Contributed capital, net - 14,663 units
in 1996 and 1995 1,086,099 1,159,414
Accumulated deficit (7,244,269) (6,901,861)
----------- -----------
(6,158,170) (5,742,447)
----------- -----------
Total liabilities
and partners' deficit $14,836,756 $15,074,134
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 71
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE SEVEN MONTHS ENDED JULY 31, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (345,867) $ 191,542 $ (69,278)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 1,145,162 1,381,435 1,653,369
Loss on disposal of assets 2,655 55,299 13,087
(Increase) decrease in operating assets:
Accounts receivable 103,542 (193,261) 10,199
Prepaid expenses (79,854) (30,103) 12,571
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 391,116 311,840 134,928
Due to General Partner and affiliates 207,379 57,494 37,529
Deposits (1,160) 12,189 (1,035)
Subscriber prepayments (15,862) 47,639 17,969
---------- ----------- ----------
Net cash provided by operating activities 1,407,111 1,834,074 1,809,339
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (854,909) (769,176) (509,415)
Purchases of cable television systems (268,750) (10,229,571) -
Hold-back note payable - 455,769 -
---------- ----------- ----------
Net cash used in investing activities (1,123,659) (10,542,978) (509,415)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - 19,333,406 -
Principal payments on notes payable (167,182) (9,784,068) (824,866)
Distributions to partners (74,056) (297,022) (297,808)
Loan fees and other costs incurred (39,552) (510,000) -
Repurchase of limited partnership units - - (41,000)
---------- ----------- ----------
Net cash provided by (used in) financing activities (280,790) 8,742,316 (1,163,674)
---------- ----------- ----------
INCREASE IN CASH 2,662 33,412 136,250
CASH, beginning of year 384,304 350,892 214,642
---------- ----------- ----------
CASH, end of year $ 386,966 $ 384,304 $ 350,892
========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 908,088 $ 978,220 $ 601,973
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 72
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE SEVEN MONTHS ENDED JULY 31, 1996
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE $5,042,253 $6,617,205 $5,657,619
---------- ---------- ----------
EXPENSES:
Operating (including $50,490, $52,395 and $32,848
paid to affiliates in 1996, 1995 and 1994,
respectively)
655,563 838,545 848,919
General and administrative (including $548,877,
$681,345 and $570,155 paid to affiliates in
1996, 1995 and 1994, respectively)
1,383,092 1,740,021 1,486,927
Programming (including $65,723, $38,016 and $45,818
paid to affiliaties in 1996, 1995 and 1994,
respectively)
1,163,257 1,394,806 1,101,474
Depreciation and amortization 1,145,162 1,381,435 1,653,369
---------- ---------- ----------
4,347,074 5,354,807 5,090,689
---------- ---------- ----------
Operating income 695,179 1,262,398 566,930
OTHER INCOME (EXPENSE):
Interest income 2,691 5,601 3,827
Interest expense (1,041,082) (1,005,691) (601,948)
Other expense - (15,467) (25,000)
Loss on disposal of assets (2,655) (55,299) (13,087)
---------- ---------- ----------
Net income (loss) $ (345,867) $ 191,542 $ (69,278)
========== ========== ==========
ALLOCATION OF NET INCOME (LOSS):
General partners $ (3,459) $ 1,915 $ (693)
========== ========== ==========
Limited partners $ (342,408) $ 189,627 $ (68,585)
========== ========== ==========
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
$ (23) $ 13 $ (5)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 73
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE SEVEN MONTHS ENDED JULY 31, 1996 AND
THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------- ----------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1993 $(115,866) $(5,233,607) $(5,349,473)
Repurchase of limited partnership units
- (41,000) (41,000)
Cash distributions ($20 per limited partnership
unit) (2,978) (294,830) (297,808)
Net loss (693) (68,585) (69,278)
--------- ----------- -----------
BALANCE, December 31, 1994 (119,537) (5,638,022) (5,757,559)
Cash distributions ($20 per limited partnership
unit) (2,970) (294,052) (297,022)
Net income 1,915 189,627 191,542
--------- ----------- -----------
BALANCE, December 31, 1995 (120,592) (5,742,447) (5,863,039)
Cash distributions ($5 per limited partnership
unit) (741) (73,315) (74,056)
Net loss (3,459) (342,408) (345,867)
--------- ----------- -----------
BALANCE, July 31, 1996 $(124,792) $(6,158,170) $(6,282,962)
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 74
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1996
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Four Limited Partnership (the Partnership), a
Washington limited partnership, was formed on January 2, 1985. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on April 19, 1985, by acquiring cable television
systems in the city of Sherman, Texas. Additional systems were acquired in San
Joaquin, California, and Tyler, Texas. In September of 1995, the Partnership
acquired cable television systems serving the areas of Hillsboro, Kaufman, New
Waverly, Waterwood and Oak Grove, Texas. In October of 1995, the Partnership
acquired cable television systems serving the areas of Huffman, Prairie View,
Cut and Shoot, Brookshire, Tarkenton, Ace, Simonton and Fulshear, Texas. In
February of 1996, the Partnership acquired the cable television system serving
LeGrand, California. The Partnership has 42 nonexclusive franchises to operate
the cable systems for periods which will expire at various dates through the
year 2012.
Northland Communications Corporation is the Managing General Partner (the
General Partner) of the Partnership. The General Partner and its affiliates
also own and operate cable television systems. In addition, the General
Partner manages cable television systems for other limited partnerships for
which it is the General Partner.
FN Equities Joint Venture is the Administrative General Partner of the
Partnership.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' deficit. No limited partner is obligated to
make any additional contribution to partnership capital.
The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to partnership capital.
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate of
the Administrative General Partner and other offering costs are recorded as a
reduction of limited partners' capital.
<PAGE> 75
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Depreciation
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
<TABLE>
<S> <C>
Buildings 20 years
Distribution plant 10 years
Other equipment 5-10 years
</TABLE>
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocates the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net
tangible assets acquired; then, to the franchise and other determinable
intangible costs; then, any excess would have been allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements and noncompetition agreements and other
intangibles are being amortized using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Franchise agreements 12-23 years
Noncompetition agreements and
other intangibles 5-15 years
</TABLE>
Revenue Recognition
The Partnership recognizes revenue in the month service is provided to
customers and accounts for advance payments on services to be rendered as
subscriber prepayments.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities, 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.
Reclassifications
Certain reclassifications have been made to conform prior years' data with the
current year presentation.
<PAGE> 76
3. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner manages the Partnership and receives a fee for its services
equal to 6% of the gross revenues of the Partnership, excluding revenues from
the sale of cable television systems or franchises. The amount of management
fees charged by the General Partner was $309,567 for the seven months ended
July 31, 1996, and $396,408 and $339,457 for the years ended December 31, 1995
and 1994, respectively.
Income Allocation
All items of income, loss, deduction and credit are allocated 99% to the
limited partners and 1% to the general partners until the limited partners have
received aggregate cash distributions in an amount equal to aggregate capital
contributions. Thereafter, the general partners receive 25% and the limited
partners are allocated 75% of partnership income, losses and distributions. In
any year after the limited partners have received cumulative cash distributions
equal to 100% of their contributions, the limited partners will receive cash
distributions equal to at least 50% of the net taxable income allocated to them
prior to any cash distribution to the general partners. Any distributions
other than from cash flow, such as from the sale or refinancing of a system or
upon dissolution of the Partnership, will be determined according to
contractual stipulations in the Partnership Agreement.
The limited partners' total initial contributions to capital were $7,500,000
($500 per limited partnership unit). As of July 31, 1996, $5,223,574 ($356 per
limited partnership unit) has been distributed to the limited partners and the
Partnership has repurchased $154,500 of limited partnership units (267 units at
$500 per unit and 70 units at $300 per unit).
Reimbursements
The General Partner provides certain centralized services to the Partnership
and other affiliated entities. As set forth in the Partnership Agreement, the
Partnership reimburses the General Partner for the cost of those services
provided by the General Partner to the Partnership. These services include
engineering, marketing, management services, accounting, bookkeeping, legal,
copying, office rent and computer services.
The amounts billed to the Partnership for these services are based on the
General Partner's cost. The cost of certain services is charged directly to
the Partnership, based upon actual time spent by employees of the General
Partner. The cost of other services is allocated to the Partnership, and other
affiliated entities, based upon their relative size, revenue and other factors.
Amounts charged to the Partnership by the General Partner for these services
were $242,852 for the seven months ended July 31, 1996, and $324,511 and
$270,988 for the years ended December 31, 1995 and 1994, respectively.
For the seven months ended July 31, 1996, and for the years ended December 31,
1995 and 1994, the Partnership paid billing service fees to an affiliate,
amounting to $40,264, $42,444 and $37,481, respectively.
<PAGE> 77
The Partnership has entered into an operating management agreements with
affiliates managed by the General Partner. Under the terms of these
agreements, the affiliate serves as the managing agent for one of the
Partnership's cable television systems and is reimbursed for certain operating,
administrative and programming expenses. The Partnership paid $50,231, $29,856
and $20,590 under the terms of these agreements during the seven months ended
July 31, 1996, and for the years ended December 31, 1995 and 1994,
respectively.
During 1994, the Partnership served as the managing agent for an affiliate's
cable television system and was reimbursed for certain operating and
programming expenses. The Partnership received $23,272 under the terms of this
agreement during 1994.
In September 1994, the Partnership began paying monthly program license fees to
Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the
rights to distribute programming developed and produced by NCN. Total license
fees paid to NCN during the seven months ended July 31, 1996, and for the years
ended December 31, 1995 and 1994 were $40,767, $24,619 and $40,002,
respectively.
Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner, was formed
in 1993 and began operations in 1994. CAC was organized to assist in the
development of local advertising markets and management and training of local
sales staffs. CAC billed the Partnership $17,183, $14,296 and $11,950 for the
seven months ended July 31, 1996, and for the years ended December 31, 1995 and
1994, respectively, for these services.
Due to General Partner and Affiliates
The liability to the General Partner and affiliates consists of the following:
<TABLE>
<CAPTION>
July 31, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Management fees $125,558 $ 40,574
Reimbursable operating costs
and other 18,738 39,016
Due to affiliates, net 179,428 36,755
-------- --------
$323,724 $116,345
======== ========
</TABLE>
<PAGE> 78
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
July 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
Land and buildings $ 349,392 $ 346,392
Distribution plant 23,358,602 23,009,700
Other equipment 1,409,901 1,382,604
Construction in progress 634,407 33,616
----------- -----------
25,752,302 24,772,312
Less--accumulated depreciation 14,173,933 13,265,067
----------- -----------
$11,578,369 $11,507,245
=========== ===========
</TABLE>
Replacements, renewals and improvements are capitalized. Maintenance and
repairs are charged to expense as incurred.
5. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
July 31, December 31,
1996 1995
------------ -----------
<S> <C> <C>
Revolving credit and term loan agreement, collateralized by a first
lien position on all present and future assets of the Partnership.
Interest rates vary based on certain financial covenants; currently
8.92% (weighted average). Graduated principal payments plus
interest are due quarterly until maturity on December 31, 2003.
$19,333,406 $19,333,406
Unsecured, subordinated hold-back note, bearing interest at the prime
rate, currently 8.75%. 56,841 237,658
Unsecured, subordinated, non-interest bearing hold-back note.
- 218,111
----------- -----------
$19,390,247 $19,789,175
=========== ===========
</TABLE>
<PAGE> 79
Annual maturities of notes payable after July 31, 1996, are as follows:
<TABLE>
<S> <C>
Remainder 1996 $ 733,511
1997 1,353,340
1998 1,546,672
1999 2,030,008
2000 2,610,010
2001 3,093,345
Thereafter 8,023,361
-----------
$19,390,247
===========
</TABLE>
Under the terms of the revolving credit and term loan agreement, the
Partnership has agreed to restrictive covenants which require the maintenance
of certain ratios, including a maximum Leverage Ratio of 5.75 to 1, a minimum
Pro Forma Debt Service Ratio of 1.15 to 1 and a minimum Interest Coverage Ratio
of 1.75 to 1.
The Partnership has entered into interest rate swap agreements to reduce the
impact of changes in interest rates. Interest rate swap transactions generally
involve the exchange of fixed and floating interest payment obligations without
the exchange of the underlying principal amounts. At July 31, 1996, the
Partnership had outstanding two interest rate swap agreements with its
creditor, having a notional principal amount of $14,000,000. These agreements
effectively change the Partnership's interest rate exposure to a fixed rate of
5.96% (weighted average), plus an applicable margin based on certain financial
covenants (the margin at July 31, 1996 was 3.0%). Both interest rate swap
agreements expire in September of 1997. At July 31, 1996, the Partnership
would have received approximately $9,000 to settle these agreements, based on
the fair value estimated by the counterparty.
The counterparty to the Partnership's interest rate swap agreements is the
Partnership's creditor. The Partnership is exposed to credit risk to the
extent of nonperformance by this counterparty; however, management believes the
risk of incurring losses due to credit risk is remote. The notional amount of
the instruments discussed above reflects the extent of involvement in the
instruments, but does not represent the Partnership's exposure to market risk.
Considerable judgment is required to develop the estimates of fair value; thus,
the estimates provided above are not necessarily indicative of the amounts that
could be realized in a current market exchange.
6. INCOME TAXES:
Income taxes have not been recorded in the accompanying financial statements
because they are obligations of the partners. The federal and state income tax
returns of the Partnership are prepared and filed by the General Partner.
The tax returns, the qualification of the Partnership as such for tax purposes
and the amount of distributable partnership income or loss are subject to
examination by federal and state taxing authorities. If such examinations
result in changes with respect to the Partnership's qualification or in changes
with respect to the income or loss, the tax liability of the partners would
likely be changed accordingly.
<PAGE> 80
Taxable (loss) income to the limited partners was approximately $(1,016,000),
$321,000 and $846,000 for the seven-month period ended July 31, 1996, and the
two years ended December 31, 1995 and 1994, and is different from that reported
in the statements of operations due to the difference in depreciation expense
allowed for tax purposes and that amount recognized under generally accepted
accounting principles. There were no other significant differences between
taxable income and the net income (loss) reported in the statements of
operations.
In general, under current federal income tax laws, a limited partner's
allocated share of tax losses from a partnership is allowed as a deduction on
his individual income tax return only to the extent of the partner's adjusted
basis in his partnership interest at the end of the tax year. Any excess
losses over adjusted basis may be carried forward to future tax years, and are
allowed as a deduction to the extent the partner has an increase in his
adjusted basis in the partnership through either an allocation of partnership
income or additional capital contributions to the partnership.
In addition, the current tax law does not allow a taxpayer to use losses from a
business activity in which he does not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset other
income such as salary, active business income, dividends, interest, royalties
and capital gains. However, such losses can be used to offset other income
from passive activities. Disallowed losses can be carried forward indefinitely
to offset future income from passive activities. Disallowed losses can be used
in full when the taxpayer recognizes gain or loss upon the disposition of his
entire interest in the passive activity.
7. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership rents tower sites, office facilities and pole attachments under
leases accounted for as operating leases. Rental expense included in
operations was $133,788, $169,945 and $190,215 for the seven months ended July
31, 1996, and the years ended December 31, 1995 and 1994, respectively.
Minimum lease payments to the end of the lease terms are as follows:
<TABLE>
<S> <C>
Remainder 1996 $ 14,729
1997 32,905
1998 28,734
1999 25,220
2000 24,470
2001 17,720
Thereafter 45,650
--------
$189,428
========
</TABLE>
<PAGE> 81
Franchise Agreement
During the next twelve-month period, the franchises of Merced and Fresno,
California, located in the Chowchilla system, are due to expire. Approximately
21% of the Partnership's basic subscribers at July 31, 1996, were in these
franchise areas. The Partnership has undertaken the franchise renewal process
in accordance with the Cable Communications Policy Act of 1984 and expects the
franchises will be renewed.
Effects of Regulation
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the Federal
Communications Commission (FCC) adopted rules implementing rate regulation and
certain other provisions of the 1992 Act, which became effective September 1,
1993. On February 22, 1994, the FCC adopted further rate regulation rules
requiring additional reductions, which became effective May 15, 1994, and
revised the benchmarks and formulas used to calculate such rates. Also in
February, the FCC's initial rules governing cost-of-service showings were
adopted, with an effective date of May 15, 1994. Cable operators may pursue
cost-of-service showings to justify charging rates for regulated services in
excess of those established by the FCC in its benchmark regulatory scheme.
On May 5, 1995, the FCC announced the adoption of a simplified set of rate
regulation rules applicable to small cable systems, defined as a system serving
15,000 or fewer subscribers, owned by small companies, defined as a company
serving 400,000 or fewer subscribers. Under the FCC's definition, the
Partnership is a small company and each of the Partnership's cable systems are
small systems. Maximum permitted rates under these revised rules are dependent
on several factors, including the number of regulated channels offered, the net
asset basis of plant and equipment used to deliver regulated services, the
number of subscribers served and a reasonable rate of return.
It is management's opinion that, in all material respects, the rates in effect
in the Partnership's cable systems are within the maximum allowable rates
permitted under the FCC's small cable system rules.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became
law. The 1996 Act will eliminate all rate controls on cable programming
service tiers of small cable systems, defined by the 1996 Act as systems
serving fewer than 50,000 subscribers, owned by operators serving fewer than 1%
of all subscribers in the United States (approximately 600,000 subscribers).
All of the Partnership's cable systems qualify as small cable systems. Many of
the changes called for by the 1996 Act will not take effect until the FCC
issues new regulations, a process that could take from several months to a few
years depending on the complexity of the required changes and the statutory
time limits. Because of this, the full impact of the 1996 Act on the
Partnership's operations cannot be determined at this time.
<PAGE> 82
8. CABLE TELEVISION SYSTEM ACQUISITION:
On September 15, 1995, the Partnership acquired substantially all of the
operating assets and franchise rights of cable systems serving approximately
3,500 subscribers in or around the communities of Kaufman, Oak Grove,
Hillsboro, New Waverly and Waterwood, all in the state of Texas. The purchase
price for these systems was $4,492,254, of which $4,226,896 was paid at the
closing date. The balance represents an unsecured, subordinated hold-back
note, bearing interest at the prime rate. A portion of the hold-back note was
paid in June 1996. As of July 31, 1996, $56,841 remained on the note. This
represents certain post-closing adjustments whose responsibility is being
negotiated between the Partnership and seller.
On October 31, 1995, the Partnership acquired substantially all operating
assets and franchise rights of the cable television systems in or around
Huffman, Prairie View, Waller, Cut and Shoot, Brookshire, Tarkenton, Ace,
Simonton and Fulshear, all in the state of Texas (the Brookridge system). The
Brookridge system serves approximately 3,600 subscribers and the purchase price
was $5,585,900 of which $5,306,510 was paid at the closing date. The balance
was paid in June 1996, net of any purchase price and other adjustments, under
the terms of an unsecured, subordinated, non-interest bearing hold-back note.
Pro forma operating results (unaudited) of the Partnership for 1995, assuming
the acquisitions of the systems described above had been made at the beginning
of the year, follow:
<TABLE>
<CAPTION>
For the year ended
December 31,
1995
------------------
(unaudited)
<S> <C>
Revenue $ 8,799,777
-----------
Net loss $(1,101,961)
-----------
Net loss per limited partnership unit $ (74)
-----------
</TABLE>
On February 16, 1996, the Partnership acquired substantially all operating
assets and franchise rights of the cable television system serving
approximately 220 subscribers in or around LeGrand, California. The purchase
price was $268,750, of which $255,250 was paid at the closing date and the
balance of $13,500 was deposited to an escrow account available to the seller,
net of any post-closing adjustments on June 15, 1996. The impact of this
purchase is not material to the operations of the Partnership.
<PAGE> 83
9. SALE OF ASSETS:
An affiliate of the General Partner is negotiating to acquire the operating
assets of the Partnership. The proposed purchase price will be based on an
independent appraisal and the purchase will be subject to the approval of the
limited partners. If the limited partners' approval is obtained, it is
anticipated that this purchase will be completed in 1997.
<PAGE> 84
NORTHLAND CABLE PROPERTIES FOUR LIMITED
PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
<PAGE> 85
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Four Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Four Limited Partnership (a Washington limited partnership) as of December 31,
1995 and 1994, and the related statements of operations, changes in partners'
deficit and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties Four
Limited Partnership as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- ------------------------
Seattle, Washington,
March 4, 1996
<PAGE> 86
<TABLE>
<CAPTION>
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994
ASSETS
1995 1994
------ -----
<S> <C> <C>
CASH $ 384,304 $ 350,892
ACCOUNTS RECEIVABLE 378,621 135,960
PREPAID EXPENSES 86,313 56,210
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 24,772,312 16,209,792
Less--accumulated depreciation (13,265,067) (12,415,608)
----------- -----------
11,507,245 3,794,184
Franchise agreements (net of
accumulated amortization of
$899,053 in 1995 and $770,734
in 1994) 1,801,801 329,130
Noncompetition agreements and
other intangibles (net of
accumulated amortization of
$496,982 in 1995 and $489,328
in 1994) 915,850 78,969
----------- -----------
Total investment in cable
television properties 14,224,896 4,202,283
----------- -----------
Total assets $15,074,134 $ 4,745,345
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' DEFICIT
1995 1994
------ -----
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 801,634 $ 489,794
Due to General Partner and affiliates 116,345 58,851
Deposits 44,184 31,995
Subscriber prepayments 185,835 138,196
Notes payable 19,789,175 9,784,068
----------- -----------
Total liabilities 20,937,173 10,502,904
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' DEFICIT:
General partners-
Contributed capital, net (50,875) (47,905)
Accumulated deficit (69,717) (71,632)
----------- -----------
(120,592) (119,537)
----------- -----------
Limited partners-
Contributed capital, net - 14,663
units in 1995 and 1994 1,159,414 1,453,466
Accumulated deficit (6,901,861) (7,091,488)
----------- -----------
(5,742,447) (5,638,022)
----------- -----------
Total liabilities and
partners' deficit $15,074,134 $ 4,745,345
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 87
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE $ 6,617,205 $ 5,657,619 $ 5,406,112
----------- ----------- -----------
EXPENSES:
Operating (including $52,395,
$32,848 and $33,084 paid to
affiliates in 1995, 1994 and 1993,
respectively) 838,545 848,919 735,936
General and administrative
(including $681,345, $570,155 and
$548,091 paid to affiliates in
1995, 1994 and 1993, respectively) 1,740,021 1,486,927 1,409,693
Programming 1,394,806 1,101,474 1,011,566
Depreciation and amortization 1,381,435 1,653,369 1,617,971
----------- ----------- -----------
5,354,807 5,090,689 4,775,166
----------- ----------- -----------
Operating income 1,262,398 566,930 630,946
OTHER INCOME (EXPENSE):
Interest income 5,601 3,827 8,374
Interest expense (1,005,691) (601,948) (731,802)
Other expense (15,467) (25,000) --
Loss on disposal of assets (55,299) (13,087) --
----------- ----------- -----------
Net income (loss) $ 191,542 $ (69,278) $ (92,482)
=========== =========== ===========
ALLOCATION OF NET INCOME (LOSS):
General partners $ 1,915 $ (693) $ (925)
=========== =========== ===========
Limited partners $ 189,627 $ (68,585) $ (91,557)
=========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 13 $ (5) $ (6)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
<PAGE> 88
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
---------- ------------ -----------
<S> <C> <C> <C>
BALANCE, December 31, 1992 $(111,948) $(4,817,780) $(4,929,728)
Repurchase of limited partnership
units -- (28,000) (28,000)
Cash distributions ($20 per limited
partnership unit) (2,993) (296,270) (299,263)
Net loss (925) (91,557) (92,482)
--------- ----------- -----------
BALANCE, December 31, 1993 (115,866) (5,233,607) (5,349,473)
Repurchase of limited partnership
units -- (41,000) (41,000)
Cash distributions ($20 per limited
partnership unit) (2,978) (294,830) (297,808)
Net loss (693) (68,585) (69,278)
--------- ----------- -----------
BALANCE, December 31, 1994 (119,537) (5,638,022) (5,757,559)
Cash distributions ($20 per limited
partnership unit) (2,970) (294,052) (297,022)
Net income 1,915 189,627 191,542
--------- ----------- -----------
BALANCE, December 31, 1995 $(120,592) $(5,742,447) $(5,863,039)
========= =========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
<PAGE> 89
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 191,542 $ (69,278) $ (92,482)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 1,381,435 1,653,369 1,617,971
Loss on disposal of assets 55,299 13,087 --
(Increase) decrease in operating assets:
Accounts receivable (193,261) 10,199 (7,606)
Prepaid expenses (30,103) 12,571 831
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 311,840 134,928 13,266
Due to General Partner and affiliates 57,494 37,529 (14,170)
Deposits 12,189 (1,035) 1,401
Subscriber prepayments 47,639 17,969 (15,764)
------------ ----------- -----------
Net cash provided by operating activities 1,834,074 1,809,339 1,503,447
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (769,176) (509,415) (494,810)
Purchases of cable television systems (10,229,571) -- --
Hold-back note payable 455,769 -- --
------------ ----------- -----------
Net cash used in investing activities (10,542,978) (509,415) (494,810)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 19,333,406 -- --
Principal payments on notes payable (9,784,068) (824,866) (955,071)
Distributions to partners (297,022) (297,808) (299,263)
Loan fees and other costs incurred (510,000) -- --
Repurchase of limited partnership units -- (41,000) (28,000)
------------ ----------- -----------
Net cash provided by (used in) financing activities 8,742,316 (1,163,674) (1,282,334)
------------ ----------- -----------
INCREASE (DECREASE) IN CASH 33,412 136,250 (273,697)
CASH, beginning of year 350,892 214,642 488,339
------------ ----------- -----------
CASH, end of year $ 384,304 $ 350,892 $ 214,642
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 978,220 $ 601,973 $ 760,223
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 90
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Four Limited Partnership (the Partnership), a
Washington limited partnership, was formed on January 2, 1985. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on April 19, 1985, by acquiring cable television
systems in the city of Sherman, Texas. Additional systems were acquired in San
Joaquin, California, and Tyler, Texas. In September of 1995, the Partnership
acquired cable television systems serving the areas of Hillsboro, Kaufman, New
Waverly, Waterwood and Oak Grove, Texas. In October of 1995, the Partnership
acquired cable television systems serving the areas of Huffman, Prarie View, Cut
and Shoot, Brookshire, Tarkenton, Ace, Simonton and Fulshear, Texas. The
Partnership has 41 nonexclusive franchises to operate the cable systems for
periods which will expire at various dates through the year 2012.
Northland Communications Corporation is the Managing General Partner (the
General Partner) of the Partnership. The General Partner and its affiliates also
own and operate cable television systems. In addition, the General Partner
manages cable television systems for other limited partnerships for which it is
the General Partner.
FN Equities Joint Venture is the Administrative General Partner of the
Partnership.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' deficit. No limited partner is obligated to
make any additional contribution to partnership capital.
The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to partnership capital.
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate of
the Administrative General Partner and other offering costs are recorded as a
reduction of limited partners' capital.
<PAGE> 91
-2-
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Depreciation
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
Buildings 20 years
Distribution plant 10 years
Other equipment 5-10 years
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocates the total contract purchase price of cable television
systems acquired as follows: first, to the estimated fair value of net tangible
assets acquired; then, to the franchise and other determinable intangible costs;
then, any excess would have been allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements and noncompetition agreements and other
intangibles are being amortized using the straight-line method over the
following estimated useful lives:
Franchise agreements 12-23 years
Noncompetition agreements and
other intangibles 5-15 years
Revenue Recognition
The Partnership recognizes revenue in the month service is provided to customers
and accounts for advance payments on services to be rendered as subscriber
prepayments.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, 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.
Reclassifications
Certain reclassifications have been made to conform prior years' data with the
current year presentation.
<PAGE> 92
-3-
3. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner manages the Partnership and receives a fee for its services
equal to 6% of the gross revenues of the Partnership, excluding revenues from
the sale of cable television systems or franchises. The amount of management
fees charged by the General Partner was $396,408, $339,457 and $324,367 during
1995, 1994 and 1993, respectively.
Income Allocation
All items of income, loss, deduction and credit are allocated 99% to the limited
partners and 1% to the general partners until the limited partners have received
aggregate cash distributions in an amount equal to aggregate capital
contributions. Thereafter, the general partners receive 25% and the limited
partners are allocated 75% of partnership income, losses and distributions. In
any year after the limited partners have received cumulative cash distributions
equal to 100% of their contributions, the limited partners will receive cash
distributions equal to at least 50% of the net taxable income allocated to them
prior to any cash distribution to the general partners. Any distributions other
than from cash flow, such as from the sale or refinancing of a system or upon
dissolution of the Partnership, will be determined according to contractual
stipulations in the Partnership Agreement.
The limited partners' total initial contributions to capital were $7,500,000
($500 per limited partnership unit). As of December 31, 1995, $5,150,259 ($351
per limited partnership unit) has been distributed to the limited partners and
the Partnership has repurchased $154,500 of limited partnership units (267 units
at $500 per unit and 70 units at $300 per unit).
Reimbursements
The General Partner provides certain centralized services to the Partnership and
other affiliated entities. As set forth in the Partnership Agreement, the
Partnership reimburses the General Partner for the cost of those services
provided by the General Partner to the Partnership. These services include
engineering, marketing, management services, accounting, bookkeeping, legal,
copying, office rent and computer services.
The amounts billed to the Partnership for these services are based on the
General Partner's cost. The cost of certain services is charged directly to the
Partnership, based upon actual time spent by employees of the General Partner.
The cost of other services is allocated to the Partnership, and other affiliated
entities, based upon their relative size, revenue and other factors. Amounts
charged to the Partnership by the General Partner for these services were
$324,511, $270,988 and $266,449 for 1995, 1994 and 1993, respectively.
In 1995, 1994 and 1993, the Partnership paid billing service fees to an
affiliate, amounting to $42,444, $37,481 and $36,161, respectively.
<PAGE> 93
-4-
The Partnership has entered into an operating management agreement with an
affiliate managed by the General Partner. Under the terms of these agreements,
the affiliate serves as the managing agent for one of the Partnership's cable
television systems and is reimbursed for certain operating, administrative and
programming expenses. The Partnership paid $29,856, $20,590 and $23,788 under
the terms of these agreements during 1995, 1994 and 1993, respectively.
During 1994 and 1993 the Partnership served as the managing agent for an
affiliate's cable television system and was reimbursed for certain operating and
programming expenses. The Partnership received $23,272 and $30,408 under the
terms of these agreements during 1994 and 1993, respectively.
In September 1994, the Partnership began paying monthly program license fees to
Northland Cable News, Inc. (NCN), an affiliate of the General Partner, for the
rights to distribute programming developed and produced by NCN. Total license
fees paid to NCN during 1995 and 1994 were $24,619 and $40,002, respectively.
Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner, was formed
in 1993 and began operations in 1994. CAC was organized to assist in the
development of local advertising markets and management and training of local
sales staffs. CAC billed the Partnership $14,296 and $11,950 in 1995 and 1994,
respectively, for these services.
Due to General Partner and Affiliates
The liability to the General Partner and affiliates consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Management fees $ 40,574 $28,913
Reimbursable operating costs
and other 39,016 26,474
Due to affiliates 36,755 3,464
-------- -------
$116,345 $58,851
======== =======
</TABLE>
<PAGE> 94
-5-
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
------ -----
<S> <C> <C>
Land and buildings $ 346,392 $ 287,892
Distribution plant 23,009,700 14,714,120
Other equipment 1,382,604 1,168,295
Construction in progress 33,616 39,485
----------- -----------
24,772,312 16,209,792
Less--accumulated depreciation 13,265,067 12,415,608
----------- -----------
$11,507,245 $ 3,794,184
=========== ===========
</TABLE>
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
5. NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1994
------ -----
<S> <C> <C>
Revolving credit and term loan agreement,
collateralized by a first lien position on all
present and future assets of the Partnership.
Interest rates vary based on certain financial
covenants; currently 8.92% (weighted average).
Graduated principal payments plus interest are due
quarterly until maturity on December 31, 2003. $19,333,406 $ -
Unsecured, subordinated hold-back note, bearing
interest at the prime rate, currently 8.5%,
payable June 1996. 237,658 -
Unsecured, subordinated, non-interest bearing hold-
back note, payable April 1996. 218,111 -
Term loan, repaid in 1995, collateralized by a first
lien position on all present and future assets of
the Partnership. - 9,784,068
----------- ----------
$19,789,175 $9,784,068
=========== ==========
</TABLE>
<PAGE> 95
-6-
Annual maturities of notes payable after December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 $ 1,132,438
1997 1,353,388
1998 1,546,672
1999 2,030,008
2000 2,610,010
Thereafter 11,116,659
-----------
$19,789,175
===========
</TABLE>
Under the terms of the revolving credit and term loan agreement, the Partnership
has agreed to restrictive covenants which require the maintenance of certain
ratios, including a maximum Leverage Ratio of 5.75 to 1, a minimum Pro Forma
Debt Service Ratio of 1.15 to 1 and a minimum Interest Coverage Ratio of 1.75 to
1. As of December 31, 1995, the Partnership was not in compliance with the
requirements for limited partnership distributions made and the outstanding
balance on a hold-back note payable. The Partnership has received a waiver from
the creditor for these covenant violations. The waivers granted by the lender
apply specifically to the violations which occurred in 1995 and shall remain in
effect with respect to those specific events throughout the term of the loan
agreement. The General Partner submits quarterly debt compliance reports to the
Partnership's creditor under this agreement.
The Partnership has entered into interest rate swap agreements to reduce the
impact of changes in interest rates. Interest rate swap transactions generally
involve the exchange of fixed and floating interest payment obligations without
the exchange of the underlying principal amounts. At December 31, 1995, the
Partnership had outstanding two interest rate swap agreements with its creditor,
having a notional principal amount of $14,000,000. These agreements effectively
change the Partnership's interest rate exposure to a fixed rate of 5.96%
(weighted average), plus an applicable margin based on certain financial
covenants (the margin at December 31, 1995 was 3.0%). Both interest rate swap
agreements expire in September of 1997. At December 31, 1995, the Partnership
would have been required to pay approximately $173,000 to settle these
agreements, based on the fair value estimated by the counterparty.
The counterparty to the Partnership's interest rate swap agreements is the
Partnership's creditor. The Partnership is exposed to credit risk to the extent
of nonperformance by this counterparty; however, management believes the risk of
incurring losses due to credit risk is remote. The notional amount of the
instruments discussed above reflects the extent of involvement in the
instruments, but does not represent the Partnership's exposure to market risk.
Considerable judgment is required to develop the estimates of fair value; thus,
the estimates provided above are not necessarily indicative of the amounts that
could be realized in a current market exchange.
6. INCOME TAXES:
Income taxes have not been recorded in the accompanying financial statements
because they are obligations of the partners. The federal and state income tax
returns of the Partnership are prepared and filed by the General Partner.
The tax returns, the qualification of the Partnership as such for tax purposes
and the amount of distributable partnership income or loss are subject to
<PAGE> 96
-7-
examination by federal and state taxing authorities. If such examinations result
in changes with respect to the Partnership's qualification or in changes with
respect to the income or loss, the tax liability of the partners would likely be
changed accordingly.
Taxable income to the limited partners was approximately $321,000, $846,000 and
$710,000 for the three years in the period ended December 31, 1995, and is
different from that reported in the statements of operations due to the
difference in depreciation expense allowed for tax purposes and that amount
recognized under generally accepted accounting principles. There were no other
significant differences between taxable income and the net income (loss)
reported in the statements of operations.
In general, under current federal income tax laws, a limited partner's allocated
share of tax losses from a partnership is allowed as a deduction on his
individual income tax return only to the extent of the partner's adjusted basis
in his partnership interest at the end of the tax year. Any excess losses over
adjusted basis may be carried forward to future tax years, and are allowed as a
deduction to the extent the partner has an increase in his adjusted basis in the
partnership through either an allocation of partnership income or additional
capital contributions to the partnership.
In addition, the current tax law does not allow a taxpayer to use losses from a
business activity in which he does not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset other
income such as salary, active business income, dividends, interest, royalties
and capital gains. However, such losses can be used to offset other income from
passive activities. Disallowed losses can be carried forward indefinitely to
offset future income from passive activities. Disallowed losses can be used in
full when the taxpayer recognizes gain or loss upon the disposition of his
entire interest in the passive activity.
7. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership rents tower sites, office facilities and pole attachments under
leases accounted for as operating leases. Rental expense included in operations
was $169,945, $190,215 and $138,503 in 1995, 1994 and 1993, respectively.
Minimum lease payments to the end of the lease terms are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 $ 31,624
1997 21,005
1998 17,835
1999 16,920
2000 16,720
Thereafter 55,170
--------
$159,274
========
</TABLE>
<PAGE> 97
-8-
Effects of Regulation
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the Federal
Communications Commission (FCC) adopted rules implementing rate regulation and
certain other provisions of the 1992 Act, which became effective September 1,
1993. On February 22, 1994, the FCC adopted further rate regulation rules
requiring additional reductions, which became effective May 15, 1994, and
revised the benchmarks and formulas used to calculate such rates. Also in
February, the FCC's initial rules governing cost-of-service showings were
adopted, with an effective date of May 15, 1994. Cable operators may pursue
cost-of-service showings to justify charging rates for regulated services in
excess of those established by the FCC in its benchmark regulatory scheme.
On May 5, 1995, the FCC announced the adoption of a simplified set of rate
regulation rules applicable to small cable systems, defined as a system serving
15,000 or fewer subscribers, owned by small companies, defined as a company
serving 400,000 or fewer subscribers. Under the FCC's definition, the
Partnership is a small company and each of the Partnership's cable systems are
small systems. Maximum permitted rates under these revised rules are dependent
on several factors including the number of regulated channels offered, the net
asset basis of plant and equipment used to deliver regulated services, the
number of subscribers served and a reasonable rate of return.
It is management's opinion that, in all material respects, the rates in effect
in the Partnership's cable systems are within the maximum allowable rates
permitted under the FCC's small cable system rules.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became
law. The 1996 Act will eliminate all rate controls on cable programming service
tiers of small cable systems, defined by the 1996 Act as systems serving fewer
than 50,000 subscribers owned by operators serving fewer than 1% of all
subscribers in the United States (approximately 600,000 subscribers). All of the
Partnership's cable systems qualify as small cable systems. Many of the changes
called for by the 1996 Act will not take effect until the FCC issues new
regulations, a process that could take from several months to a few years
depending on the complexity of the required changes and the statutory time
limits. Because of this the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time.
8. CABLE TELEVISION SYSTEM ACQUISITION:
On September 15, 1995, the Partnership acquired substantially all of the
operating assets and franchise rights of cable systems serving approximately
3,500 subscribers in or around the communities of Kaufman, Oak Grove, Hillsboro,
New Waverly and Waterwood, all in the state of Texas. The purchase price for
these systems was $4,492,254, of which $4,226,896 was paid at the closing date.
The balance will be paid in June 1996, net of any purchase price and other
adjustments, under the terms of an unsecured, subordinated hold-back note
bearing interest at the prime rate. At December 31, 1995, the balance owing on
this note was $237,658. The purchase was financed by borrowings under the
Partnership's revolving credit and term loan facility.
<PAGE> 98
-9-
On October 31, 1995, the Partnership acquired substantially all operating assets
and franchise rights of the cable television systems in or around Huffman,
Prairie View, Waller, Cut and Shoot, Brookshire, Tarkenton, Ace, Simonton and
Fulshear, all in the state of Texas (the Brookridge system). The Brookridge
system serves approximately 3,600 subscribers and the purchase price was
$5,585,900 of which $5,306,510 was paid at the closing date. The balance will be
paid in April 1996, net of any purchase price and other adjustments, under the
terms of an unsecured, subordinated, non-interest bearing hold-back note. At
December 31, 1995, the balance owing on this note was $218,111. The purchase was
financed by borrowings under the Partnership's revolving credit and term loan
facility.
Pro forma operating results (unaudited) of the Partnership for 1995, assuming
the acquisitions of the systems described above had been made at the beginning
of year, follow.
<TABLE>
<CAPTION>
For the year ended
December 31,
1995
------------------
(unaudited)
<S> <C>
Revenue $ 8,799,777
===========
Net loss $(1,101,961)
===========
Net loss per limited partnership unit $ (74)
===========
</TABLE>
<PAGE> 99
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(PREPARED BY MANAGING GENERAL PARTNER)
<PAGE> 100
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(PREPARED BY MANAGING GENERAL PARTNER)
The accompanying unaudited Pro Forma Statement of Operations for the year ended
December 31, 1995 has been prepared to present the effect of the purchase by
Northland Cable Properties Four Limited Partnership ("the Partnership") of
substantially all of the operating assets and franchises of SLT Cable TV, Inc.
relating to the operation of cable systems in and around Hillsboro, Kaufman,
New Waverly, Oak Grove and Waterwood, Texas (the "SLT Systems").
The pro forma statement reflects the acquisition as if it had occurred on
January 1, 1995.
The Pro Forma Statement of Operations has been prepared by the Managing General
Partner of the Partnership based upon the historical financial statements of the
Partnership and SLT Cable TV, Inc. for the SLT Systems. Pro forma adjustments
are described in the accompanying notes. The Pro Forma Statement of Operations
may not be indicative of the results of operations that actually would have
occurred if the transaction had been in effect as of the beginning of the period
nor does it purport to indicate the results of future operations of the
Partnership. The Partnership also acquired the Brookridge system in October,
1995 for a purchase price of $5,585,900. The Brookridge system serves
approximately 3,600 subscribers. Historical financial statements for the
Brookridge system prior to the date of acquisition were not available. Therefore
this unaudited Pro Forma Statement of Operations does not present the effect of
the purchase of the Brookridge system as if such acquisition had occurred on
January 1, 1995. The Pro Forma Statement of Operations should be read in
conjunction with the audited and unaudited financial statements and notes
thereto of Northland Cable Properties Four Limited Partnership, included
elsewhere in this proxy statement.
<PAGE> 101
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(PREPARED BY MANAGING GENERAL PARTNER)
<TABLE>
<CAPTION>
As reported After purchase
-------------------------------------------------------------------------------
SLT Cable TV,
Inc. - Hillsboro,
Kaufman, New
Waverly, Oak Northland
Grove and Cable Pro Forma
Waterwood Properties Adjustments Pro Forma
Systems Four Total (Note 3) Combined
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SERVICE AND CONNECTION FEES $ 654,477 $ 6,617,205 $ 7,271,682 $ 7,271,682
OPERATING EXPENSES 595,307 3,973,372 4,568,679 39,268(2) 4,607,947
DEPRECIATION AND AMORTIZATION 197,821 1,381,435 1,579,256 128,301(1b) 1,707,557
-------------------------------------------------------------------------------
Income (Loss) from Operations (138,651) 1,262,398 1,123,747 (167,569 956,178
NONOPERATING INCOME (EXPENSE) (8,561) (65,165) (73,726) 8,561(1a) (65,165)
INTEREST EXPENSE 166,113 1,005,691 1,171,804 (166,113)(1a) 1,321,827
316,136 (1c)
-------------------------------------------------------------------------------
Net Income (Loss) before benefit for
income taxes (313,325) 191,542 (121,783) (309,031) (430,814)
BENEFIT FOR INCOME TAXES 93,045 - 93,045 (93,045)(1a) -
-------------------------------------------------------------------------------
Net Income (Loss) $ (220,280) $ 191,542 $ (28,738) $ (402,076) $ (430,814)
================================================================================
Net Income (Loss) Per Limited Partnership Unit $ 13 $ (2) $ (27) $ (29)
=========== =========== =========== ===========
</TABLE>
See notes to Pro Forma Statement of Operations
<PAGE> 102
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(PREPARED BY MANAGING GENERAL PARTNER)
1. The adjustments reflect the acquisition of the SLT Systems as if such
acquisition had occurred on January 1, 1995, rather than on September 15,
1995. The sources of funds for this acquisition are assumed to consist of
bank debt and an unsecured noninterest bearing note payable to the Seller.
The pro forma adjustments for the above transaction are as follows:
(a) To eliminate income and expenses associated with nonassumed assets
and liabilities of SLT Cable, TV, Inc., for the Hillsboro,
Kaufman, New Waverly, Oak Grove and Waterwood systems.
(b) To eliminate depreciation and amortization of the acquired systems
and record depreciation and amortization of cable television
property and equipment and franchises in accordance with the
Managing General Partner's policies.
(c) To record interest expense for the new debt associated with the
acquisition. The interest rate on the bank debt is assumed at the
bank's prime rate (varies from 8.5% to 9.00%) plus 1.75% per annum.
No draws are assumed during the period.
2. Adjusts operating expenses to reflect the Partnership Management Fee payable
to the Managing General Partner (Northland Communications Corporation) of 6%
of Gross Revenues.
3. The Pro Forma Statement of Operations does not include adjustments for the
acquisition of the Brookridge system (which occurred on October 31, 1995) as
if such purchases had occurred on January 1, 1995. Historical results of
operations prior to its acquisition date were not available. The Pro Forma
Statement of Operations includes results of operations for the Brookridge
system only for the period during which the Partnership owned the system in
1995.
<PAGE> 103
Based on the limited amount of historical information available,
including the number of subscribers served and the rates charged for various
levels of service during 1995, in addition to the actual revenues and operating
margins experienced during the Partnership's period of ownership in 1995, the
Managing General Partner derived an estimate of the impact on 1995 results of
operations as if the Brookridge system had been acquired by the Partnership on
January 1, 1995.
The pro forma operating results (unaudited) of the Partnership for 1995
incorporating the estimated impact of the Brookridge system acquisition as
described above in addition to the adjustments described in notes 1 and 2,
are as follows:
Revenue $8,799,777
==========
Net Loss ($1,101,961)
===========
Net Loss Per Limited Partnership Unit ($74)
===========
<PAGE> 104
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
FINANCIAL REPORT
JUNE 30, 1996
<PAGE> 105
INDEPENDENT AUDITOR'S REPORT
To the Partners
FN Equities Joint Venture
Torrance, California
Partners:
We have audited the accompanying balance sheet of FN Equities Joint Venture (a
California Partnership) as of June 30, 1996. This financial statement is the
responsibility of the Joint Venture's management. Our responsibility is to
express an opinion on this financial statement based on our audit. We did not
audit the financial statements of the four Northland Cable Properties Limited
Partnerships, the investments in which, as discussed in Note 2 to the financial
statement, are accounted for by the equity method of accounting. The financial
statements of the four Northland Cable Properties Limited Partnerships were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for the four Northland
Cable Properties Limited Partnerships, is based solely on he reports of the
other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement . An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
balance sheet referred to above presents fairly, in all material respects, the
financial position of FN Equities Joint Venture as of June 30, 1996 in
conformity with generally accepted accounting principles.
/s/ Singer, Lewak, Greenbaum & Goldstein LLP
Los Angeles, California
July 3, 1996
<PAGE> 106
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
BALANCE SHEET
As of June 30, 1996
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS $693
Cash ----
TOTAL ASSETS $693
====
PARTNERS' CAPITAL
PARTNERS' CAPITAL $693
----
TOTAL PARTNERS' CAPITAL $693
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 107
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
As of June 30, 1996
NOTE 1 - ORGANIZATION AND PARTNERS' INTERESTS
Formation and Banners
FN Equities Joint Venture (the Joint Venture), a California
Partnership, was formed on November 12, 1984. The Joint Venture was
formed to serve as the Administrative General Partner of certain
limited partnerships, as described in Note 3, involved in the
acquisition, construction, operation, sale, or other disposition of
cable television systems and to provide administrative services to
certain other limited partnerships.
Contributed Capital and Income Allocation
The three partners in the Joint Venture are John Simmers (Simmers); FN
Equities, Inc., a California corporation (FN); and FN Network Partners,
Ltd., a California limited partnership (NPL). The Joint Venture is
operated in accordance with the Amended and Restated Joint Venture
Agreement dated March 15, 1989 (the Joint Venture Agreement).
The initial capital contributions of each of the partners were as
follows: Simmers--no initial capital contribution, FN--$100,
NPL--$100,000. The Joint Venture Agreement provides that all additional
capital contributions shall be made by NPL, but no additional capital
contributions shall be required, nor shall any partner be entitled to a
return of any of his capital contribution without the agreement of all
the partners.
As defined in the Joint Venture Agreement, net income and net losses of
the Joint Venture shall be allocated among the partners in the
following proportions: 10% to Simmers and 90% to NPL.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments in Limited Partnerships
Investments in limited partnerships are carried on the equity method
whereby the Joint Venture records the investments at cost and, on an
ongoing basis, the investments are adjusted to reflect the Joint
Venture's share of the income or loss of the limited partnerships and
additional contributions to or withdrawals from the portfolio entities.
Income Taxes
Income taxes are the responsibility of the Joint Venture's individual
partners. Accordingly, no income taxes have been provided for in this
financial statement.
<PAGE> 108
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
As of June 30, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results could differ from
those estimates.
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS
At June 30, 1996, the Joint Venture was the Administrative General
Partner of the following partnerships (the Northern Partnerships):
Northland Cable Properties Four Limited Partnership (NCP4)
Northland Cable Properties Five Limited Partnership (NCP5)
Northland Cable Properties Six Limited Partnership (NCP6)
Northland Cable Properties Seven Limited Partnership (NCP7)
Northland Communications Corporation is the Managing General Partner of
each of the Northland Partnerships. The Northland Partnerships were
formed to acquire, develop, and operate cable television systems. Each
Northland Partnership owns non-exclusive franchises to operate cable
systems as follows:
<TABLE>
<CAPTION>
Number of Franchise area -
Franchises Various towns in: Expiration date
---------- ----------------- ---------------
<S> <C> <C> <C>
NCP4 41 Texas & California Various through 2012
NCP5 25 Texas & North Carolina Various through 2014
NCP6 24 Mississippi & North Carolina Various through 2017
NCP7 10 Texas and Washington Various through 2017
</TABLE>
Each Northland Partnership is operated under separate partnership
agreements which are similar to each other but not identical. In
general, items of income and loss are allocated 99% to the limited
partners and 1% to the general partners (not including the
Administrative General Partner) until the limited partners receive
aggregate cash distributions in an amount equal to their aggregate
capital contributions, at which time the general partners (including
the Administrative General Partner) are allocated 25% and the limited
partners are allocated 75% of partnership income, loss, and
distributions. This point had not been reached in NCP4, NCP5, NCP6 or
NCP7 at June 30, 1996, and accordingly, the Joint Venture had no
investment interest therein.
<PAGE> 109
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
As of June 30, 1996
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS (Continued)
Summarized financial information of the Northland Partnerships as of
June 30, 1996 is as follows:
<TABLE>
<CAPTION>
UNAUDITED (in 000s)
-------------------------------------------
NCP4 NCP5 NCP6 NCP7
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash $ 627 $ 1,139 $ 996 $ 799
Other assets 383 420 394 615
Intangible assets (net) 2,573 12,932 7,107 6,226
Investment in Cable TV
properties (net) 11,304 10,392 5,954 10,070
------- ------- ------- -------
Total Assets $14,887 $24,883 $14,451 $17,710
======= ======= ======= =======
Notes payable $19,660 $26,698 $13,417 $21,392
Other liabilities 1,520 1,574 1,507 1,450
------- ------- ------- -------
Total Liabilities 21,180 28,272 14,924 22,842
------- ------- ------- -------
Partners' (Deficit)
General (125) (246) (132) (153)
Limited (6,168) (3,143) (341) (4,979)
------- ------- ------- -------
Total Partners' (Deficit) (6,293) (3,389) (473) (5,132)
------- ------- ------- -------
Total Liabilities and
Partners' (Deficit) $14,887 $24,883 $14,451 $17,710
======= ======= ======= =======
</TABLE>
An affiliate of the Managing General Partner of the Northland
Partnership is negotiating to acquire the operating assets of NCP4. The
proposed purchase price will be based on an independent appraisal and
the purchase will be subject to the approval of the limited partners. If
the limited partners approval is obtained, it is anticipated that this
purchase will be completed in 1996.
<PAGE> 110
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Five Limited Partnership and Subsidiary:
We have audited the accompanying consolidated balance sheets of Northland Cable
Properties Five Limited Partnership and subsidiary (a Washington limited
partnership) as of December 31, 1995 and 1994, and the related consolidated
statements of operations, changes in partners' deficit and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties Five
Limited Partnership and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Seattle, Washington,
February 27, 1996
<PAGE> 111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Six Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Six Limited Partnership (a Washington limited partnership) as of December 31,
1995 and 1994, and the related statements of operations, changes in partners'
capital (deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties Six
Limited Partnership as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Seattle, Washington,
February 9, 1996
<PAGE> 112
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Seven Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Seven Limited Partnership (a Washington limited partnership) as of December 31,
1995 and 1994, and the related statements of operations, changes in partners'
capital (deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties
Seven Limited Partnership as of December 31, 1995 and 1994, and the results of
its operations and its cash flows for the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Seattle, Washington,
January 24, 1996
<PAGE> 113
NORTHLAND COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 - (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 1,596,473
Receivables from managed limited partnership 587,190
Accounts receivable 41,385
Unsecured net advance to parent & affiliates 13,615,517
Other 80,299
Investment in cable television properties:
Property and equipment, net of accumulated
depreciation of $307,287 2,620,805
Intangible assets, net of accumulated
amortization of $182,042 1,196,648
-------------------
Total investment in CATV properties 3,817,453
-------------------
Other property and equipment, net of accumulated
depreciation of $815,679 464,639
-------------------
Total assets $20,202,956
===================
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued expenses $ 409,202
Converter deposits 5,799
Subscriber prepayments 39,079
Due to managed limited partnership 557,847
Notes payable 2,856,653
Taxes payable 3,975,350
Accumulated deficit in managed limited partnership 683,938
-------------------
Total liabilities 8,527,869
-------------------
Shareholder's equity:
Common stock, issued and outstanding 63
Additional paid in capital 995,101
Retained earnings 10,679,922
-------------------
11,675,087
-------------------
Total liabilities and shareholder's equity $20,202,956
===================
</TABLE>
<PAGE> 114
NORTHLAND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
For the six months ended June 30,
--------------------------------------------------
1996 1995
------------------- ------------------
<S> <C> <C>
Managment Operations:
Management fees $ 1,236,618 $1,024,761
General and administrative, net of
reimbursed operating expenses (52,406) (85,902)
------------------- ------------------
Income from managment operations 1,184,212 938,859
------------------- ------------------
Cable Television Operations:
Service revenues 733,103 124,268
Operating expenses (74,716) (8,891)
General and administrative expenses (195,102) (30,682)
Programming expenses (190,196) (31,576)
------------------- ------------------
Income from cable television operations 273,089 53,119
------------------- ------------------
Income from operations before
depreciation and amortization 1,457,301 991,978
------------------- ------------------
Depreciation and amortization 279,729 82,685
------------------- ------------------
Income from operations 1,177,572 909,293
------------------- ------------------
Other income (expense):
Interest income 4,155 1,643
Interest expense (128,799) (22,551)
Equity in income of managed limited partnership 2,100 67
Other income (expense) - -
Gain on disposal of assets - -
------------------- ------------------
(122,545) (20,841)
------------------- ------------------
Income before income taxes 1,055,027 888,453
Income taxes - 1,500
------------------- ------------------
Net income $ 1,055,027 $ 886,953
=================== ==================
</TABLE>
<PAGE> 115
NORTHLAND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
For the six months ended June 30,
--------------------------------------------------
1996 1995
------------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,055,027 $ 886,953
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 279,729 82,685
Equity in income of managed limited partnership (2,100) (67)
(Increase) decrease in operating assets:
Receivables from managed limited partnership (175,178) (101,784)
Accounts receivable (1,682) (58,888)
Other 50,526 48,108
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses 174,075 219,664
Converter deposits (300) 6,267
Subscriber prepayments (7,161) 25,110
------------------- ------------------
Net cash from operating activities 1,372,936 1,108,047
------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable television system, less
holdback of $988,392 - (3,546,336)
Purchase of property and equipment, net (100,976) (66,536)
Cash distributions from managed limited partnership 17,341 5,226
------------------- ------------------
Net cash used in investing activities (83,635) (3,607,646)
------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Unsecured net advances to parent and affiliates,
including income taxes 13,158 (36,206)
Proceeds from borrowings under long term debt - 3,050,000
Principal payments on borrowings (107,039) (7,414)
Payments on hold-back note (23,190) -
Loan fees and other costs incurred - (2,063)
------------------- ------------------
Net cash from (used in) financing activities (117,071) 3,004,317
------------------- ------------------
INCREASE IN CASH 1,172,230 504,718
CASH, beginning of period 424,243 60,533
------------------- ------------------
CASH, end of period $ 1,596,473 $ 565,251
=================== ==================
</TABLE>
<PAGE> 116
NORTHLAND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY - (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Prepared by Management)
<TABLE>
<CAPTION>
Number of Additional Retained
Shares Amount Paid in Capital Earnings Total
------ ------ --------------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 10,000 $ 63 $ 995,101 $ 9,624,896 $10,620,060
Net income 1,055,027 1,055,027
----------- ----------- ----------- ----------- -----------
Balance, June 30, 1996 $ 10,000 $ 63 $ 995,101 $10,679,923 $11,675,087
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 117
NORTHLAND COMMUNICATIONS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITOR'S REPORT
<PAGE> 118
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Northland Communications Corporation:
We have audited the accompanying consolidated balance sheets of Northland
Communications Corporation (a Washington corporation and a wholly owned
subsidiary of Northland Telecommunications Corporation) and subsidiary as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in shareholder's equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Northland Communications
Corporation and subsidiary as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------------
Seattle, Washington,
March 21, 1996
<PAGE> 119
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
ASSETS
1995 1994
----- ----
<S> <C> <C>
CASH $ 424,243 $ 60,533
ACCOUNTS RECEIVABLE 39,703 -
RECEIVABLES FROM MANAGED
LIMITED PARTNERSHIPS 412,012 484,684
UNSECURED NET ADVANCES TO PARENT
AND AFFILIATES 13,628,675 12,281,180
OTHER 130,825 105,465
INVESTMENT IN CABLE TELEVISION
PROPERTIES:
Property and equipment, at cost 2,859,228 -
Less-- accumulated depreciation (162,221) -
----------- -----------
2,697,007 -
Franchise agreements (net of
accumulated amortization of
$70,735 in 1995) 1,078,647 -
Other intangibles (net of accumulated
amortization of $27,242 in 1995) 202,066 -
----------- -----------
Total investment in cable
television properties 3,977,720 -
----------- -----------
OTHER PROPERTY AND EQUIPMENT 1,248,204 1,099,404
Less-- accumulated depreciation (765,080) (671,191)
----------- -----------
483,124 428,213
----------- -----------
Total assets $19,096,302 $13,360,075
=========== ===========
</TABLE>
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
1995 1994
----- ----
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 235,127 $ 38,566
Subscriber prepayments 46,240 -
Deposits 6,099 -
Due to managed limited partnership 581,037 -
Notes payable 2,963,692 27,951
Taxes payable 3,975,350 3,766,250
Accumulated deficit in managed limited partnerships 668,697 488,119
----------- -----------
Total liabilities 8,476,242 4,320,886
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S EQUITY:
Common stock, par value $.00625 per share;
4,000,000 shares authorized;
10,000 shares issued and outstanding 63 63
Additional paid-in capital 995,101 995,101
Retained earnings 9,624,896 8,044,025
----------- -----------
Total shareholder's equity 10,620,060 9,039,189
----------- -----------
Total liabilities and shareholder's
equity $19,096,302 $13,360,075
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
<PAGE> 120
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
MANAGEMENT OPERATIONS:
<S> <C> <C>
Management fee revenue $2,061,528 $2,182,266
General and administrative expenses, net of
reimbursed operating expenses 193,863 501,148
---------- ----------
Income from management operations 1,867,665 1,681,118
---------- ----------
CABLE TELEVISION OPERATIONS:
Service revenues 863,274 -
Expenses, including reimbursements to affiliates-
Operating 75,735 -
General and administrative 148,005 -
Programming 204,337 -
---------- ----------
Income from cable television operations 435,197 -
---------- ----------
Income from operations before depreciation
and amortization 2,302,862 1,681,118
---------- ----------
DEPRECIATION AND AMORTIZATION EXPENSE 354,088 98,596
---------- ----------
Income from operations 1,948,774 1,582,522
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 16,252 7,699
Interest expense (156,624) (55,877)
(Loss) gain on sale of managed limited partnership
interests (23,588) 3,518,417
Equity in net income of managed limited
partnerships 6,657 260,788
Loss on disposal of assets - (18,134)
Other - (1,395)
---------- ----------
(157,303) 3,711,498
---------- ----------
Income before income taxes 1,791,471 5,294,020
PROVISION IN LIEU OF INCOME TAXES 210,600 1,807,827
---------- ----------
NET INCOME $1,580,871 $3,486,193
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 121
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
--------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, at December 31, 1993 10,000 $63 $995,101 $4,557,832 $ 5,552,996
Net income - - - 3,486,193 3,486,193
------ --- -------- ---------- -----------
BALANCE, at December 31, 1994 10,000 63 995,101 8,044,025 9,039,189
Net income - - - 1,580,871 1,580,871
------ --- -------- ---------- -----------
BALANCE, at December 31, 1995 10,000 $63 $995,101 $9,624,896 $10,620,060
====== === ======== ========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 122
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,580,871 $ 3,486,193
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation and amortization 354,088 98,596
Loss on disposal of assets - 18,134
Loss (gain) on sale of managed limited
partnership interests 23,588 (3,518,417)
Equity in net income of managed limited
partnerships (6,657) (260,788)
(Increase) decrease in operating assets:
Receivables from managed limited
partnerships 72,672 (413,828)
Accounts receivable (39,703) -
Other (15,634) (8,745)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 152,642 (1,829)
Subscriber prepayments 19,728 -
Deposits 6,099 -
----------- -----------
Net cash provided by (used in) operating
activities 2,147,694 (600,684)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable television system, less holdback
of $581,037 (3,434,566) -
Purchases of property and equipment (315,610) (82,212)
Cash distributions from managed limited partnerships 223,330 71,332
Proceeds from disposition of assets - 3,000
----------- -----------
Net cash used in investing activities (3,526,846) (7,880)
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Unsecured net advances to parent and affiliates,
including income taxes $(1,138,395) $562,685
Proceeds from notes payable 3,050,000 -
Principal payments on notes payable (113,259) (26,019)
Loan fees (55,484) -
----------- --------
Net cash provided by financing activities 1,742,862 536,666
----------- --------
INCREASE (DECREASE) IN CASH 363,710 (71,898)
CASH, beginning of year 60,533 132,431
----------- --------
CASH, end of year $ 424,243 $ 60,533
=========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 155,197 $ 59,357
=========== ========
Cash paid during the year for state income taxes $ 1,500 $ 7,827
=========== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE> 123
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Formation and Business
Northland Communications Corporation (NCC), a Washington corporation, is the
managing general partner of six limited partnerships which own and operate cable
television systems throughout the western United States, Texas, Mississippi,
North Carolina, Alabama and Georgia. Northland Cable Properties, Inc. (NCP,
Inc.), a Washington corporation, was formed in 1995 to own and operate cable
television systems. NCP, Inc. is a wholly owned subsidiary of NCC. NCP, Inc.
currently has eight non-exclusive franchises to operate cable television systems
which expire at various dates through 2010. NCC and NCP, Inc. are collectively
referred to as the Company.
The Company and its affiliates, Northland Cable Television, Inc. and subsidiary
(NCTV); Northland Cable Services Corporation and subsidiaries (NCSC); and
Northland Media, Inc. and subsidiary (NMI) are wholly owned subsidiaries of
Northland Telecommunications Corporation and subsidiaries (NTC). NCTV was formed
to own and operate cable television systems. Northland Cable News, Inc. (NCN)
was formed to develop and distribute programming to affiliated entities. NCN is
a wholly owned subsidiary of NCTV. NCSC is the parent company of Cable
Television Billing, Inc. (CTB), Northland Investment Corporation (NIC) and Cable
Ad-Concepts, Inc. (CAC). CTB provides billing services to cable systems owned
and managed by limited partnerships and wholly owned systems of the Company and
NCTV. NIC acts as the managing underwriter of affiliated limited partnership
offerings. CAC develops and produces video commercial advertisements to be
cablecast on Northland affiliated cable systems. NMI was formed as a holding
company to own certain non-cable related assets.
Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of NCC
and NCP, Inc. Significant intercompany accounts and transactions have been
eliminated.
Acquisition of Cable Television Systems
Cable television system acquisitions are accounted for as purchase transactions
and their cost is allocated as follows: first, to the estimated fair market
value of net tangible assets acquired; then, to the franchise and other
determinable intangible costs; and then, any excess is allocated to goodwill.
<PAGE> 124
-2-
Depreciation -- Depreciation of property and equipment is provided using the
straight-line method over the following estimated service lives.
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold
improvements 5-20 years
Furniture and fixtures 10 years
Vehicles 5 years
Intangible Assets -- Costs assigned to franchise agreements and other intangible
assets are amortized using the straight-line method over the following estimated
useful lives.
Franchise agreements 7-15 years
Other intangible assets 5 years
Revenue Recognition -- Cable television service revenue is recognized in the
month service is provided to customers. Advance payments on cable services to be
rendered are recorded as subscriber prepayments. Revenue for management services
provided to managed limited partnerships is recorded on the accrual method in
the month service is provided.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount 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.
Reclassifications
Certain reclassifications have been made to conform the prior year's data to the
current year presentation.
2. INCOME TAXES:
The operations of the Company and its affiliates are included in a consolidated
federal income tax return filed by NTC. For financial reporting purposes, the
provision in lieu of income taxes is computed as if the Company filed a separate
federal income tax return.
Taxes payable include amounts currently payable, as well as deferred income
taxes payable. Deferred income taxes primarily relate to differences in
computing the equity in net income or losses of managed limited partnerships and
in computing depreciation as reported for financial reporting and income tax
purposes.
Deferred income taxes are determined on the asset and liability method in
accordance with Statement of Financial Accounting Standards (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 financial statement and the tax bases of
assets and liabilities.
<PAGE> 125
-3-
The primary components of taxes payable, as of December 31, 1995 and 1994, are
as follows:
<TABLE>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ - $ 874,000
Valuation allowance - (486,250)
---------- ----------
- 387,750
---------- ----------
Deferred tax liabilities:
Property and equipment 112,080 90,000
Accumulated deficit in managed limited partnerships 3,475,233 4,064,000
---------- ----------
3,587,313 4,154,000
---------- ----------
Deferred tax liabilities, net 3,587,313 3,766,250
Current taxes payable 388,037 -
---------- ----------
Taxes payable $3,975,350 $3,766,250
========== ==========
</TABLE>
During 1995, the Company fully realized its tax net operating loss carryforward
resulting from the sale in 1994 of certain partnerships for which it served as
general partner. This resulted in a tax benefit in 1995 of approximately
$400,000, for financial reporting purposes. The Company has elected not to
adjust the previously issued 1994 results for this amount.
3. TRANSACTIONS WITH MANAGED LIMITED PARTNERSHIPS AND OTHER RELATED PARTIES:
Management Fees
The Company receives a fee for managing the limited partnerships of 5% to 6% of
the partnerships' gross revenues, excluding revenues from the sale of cable
television systems or franchises. Under the terms of certain credit agreements,
the payment of management fees is only allowed upon a partnership's compliance
with certain covenants.
Reimbursed Operating Expenses
The Company provides certain centralized services to managed limited
partnerships and other affiliated entities. As set forth in the partnership and
intercompany agreements, the managed limited partnerships and affiliated
entities reimburse the Company for the cost of those services, which include
executive salaries, engineering, marketing, management services, accounting,
bookkeeping, legal, copying, office rent and computer services.
The amounts billed to managed limited partnerships and affiliated entities for
these services are based on the Company's cost. The cost of certain services is
charged directly to these entities, based upon the actual time spent by the
Company's employees. The cost of other services is allocated to these entities
based upon their relative size, revenue and other factors. Amounts charged to
managed limited partnerships and affiliated entities for these services were
$3,903,518 and $3,097,333 for 1995 and 1994, respectively.
<PAGE> 126
-4-
Accumulated Deficit in Managed Limited Partnerships
The Company is a general partner in limited partnerships that own and operate
cable television systems. All items of income, loss, deduction and credit are
allocated 99% to the limited partners and 1% to the Company, as general partner,
until the limited partners have received aggregate cash distributions in an
amount equal to aggregate capital contributions (plus, in some cases, a
preferred return). Thereafter, general partners receive 25% (20% at two
partnerships) and the limited partners are allocated 75% (80% at two
partnerships) of partnership income, losses and distributions.
Prior to the general partners' receiving cash distributions from operations for
any year, the limited partners must receive cash distributions in an amount
equal to at least 50% of the limited partners' allocable share of taxable net
income for such year. In the case of certain partnerships, the limitation is the
lesser of (i) 50% of the limited partners' allocable share of net income for
such year or (ii) the federal income tax payable on the limited partners'
allocable share of net income on the then highest marginal federal income tax
rate applicable to such net income.
Any distribution other than from cash flow, such as from the sale or refinancing
of a system or upon dissolution of the partnership, will be determined according
to the partnership agreements.
Upon a majority vote of the limited partners, the assets of the partnerships may
be sold to the Company. The price to be paid will be based upon an independent
appraisal. The Company is not obligated to purchase the interests offered.
Other Services
Affiliates of the Company charge fees to certain affiliated entities and managed
limited partnerships for providing program production, advertising and billing
services.
Receivables from (Payables to) Managed Limited Partnerships
Receivables from (payables to) managed limited partnerships consist of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
---- ----
<S> <C> <C>
Northland Cable Properties Two $ - $ 4,758
Northland Cable Properties Three - 7,200
Northland Cable Properties Four 79,601 55,387
Northland Cable Properties Five 91,259 74,666
Northland Cable Properties Six 92,041 74,384
Northland Cable Properties Seven 87,046 77,453
Northland Cable Properties Eight 34,402 49,216
Pend Oreille Cable TV (581,037) 134,525
Others 27,663 7,095
--------- --------
$(169,025) $484,684
========= ========
</TABLE>
<PAGE> 127
-5-
4. CABLE TELEVISION PROPERTY AND EQUIPMENT:
Cable television property and equipment at December 31, 1995 consists of the
following:
<TABLE>
<S> <C>
Buildings $ 30,000
Distribution plant 2,739,228
Other equipment 90,000
----------
2,859,228
Less-- accumulated depreciation (162,221)
----------
$2,697,007
==========
</TABLE>
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
5. OTHER PROPERTY AND EQUIPMENT
Other property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
----- ----
<S> <C> <C>
Furniture and fixtures $1,111,171 $ 962,371
Vehicles 137,033 137,033
---------- ----------
1,248,204 1,099,404
Less-- accumulated depreciation (765,080) (671,191)
---------- ----------
$ 483,124 $ 428,213
========== ==========
</TABLE>
6. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
---- ----
<S> <C> <C>
Term loan, collateralized by a first lien
position on all present and future assets
of NCP, Inc. Interest rates vary based on
certain financial covenants; currently 8.71%.
Graduated principal payments plus interest are
due quarterly, with the remaining outstanding
balance due on December 31, 1999. $2,950,000 $ -
Other 13,692 27,951
---------- -------
$2,963,692 $27,951
========== =======
</TABLE>
<PAGE> 128
-6-
Annual maturities of notes payable ending after December 31, 1995, are as
follows:
<TABLE>
<S> <C>
1996 $ 213,692
1997 280,000
1998 320,000
1999 2,150,000
----------
$2,963,692
==========
</TABLE>
Under the current term loan agreement, NCP, Inc. has agreed to restrictive
covenants which require the maintenance of certain ratios, including a Cash Flow
to Debt Service Ratio of 1.20 to 1 and a Funded Debt to Cash Flow Ratio of 4.75
to 1, among other restrictions. NCC submits quarterly debt compliance reports to
NCP, Inc.'s creditor under this agreement.
NCP, Inc. has entered into an interest rate swap agreement to reduce the impact
of changes in interest rates. Interest rate swap transactions generally involve
the exchange of fixed and floating interest payment obligations without the
exchange of the underlying principal amounts. At December 31, 1995, NCP, Inc.
had outstanding one interest rate swap agreement with its creditor, having a
notional principal amount of $2,950,000. This agreement effectively changes NCP,
Inc.'s interest rate exposure to a fixed rate of 5.71%, plus an applicable
margin based on certain financial covenants (the margin at December 31, 1995 was
3.00%). The interest rate swap agreement matures on June 30, 1997. At December
31, 1995, NCP, Inc. would have been required to pay approximately $21,500 to
settle this agreement, based on fair value estimates received from financial
institutions.
The counterparty to NCP, Inc.'s interest rate swap agreement is NCP, Inc.'s
creditor. NCP, Inc. is exposed to credit risk to the extent of nonperformance by
this counterparty; however, management believes the risk of incurring losses due
to credit risk is remote. The notional amount of the instruments discussed above
reflected the extent of involvement in the instruments, but did not represent
NCP, Inc.'s exposure to market risk. Considerable judgment is required to
develop the estimates of fair value; thus, the estimates provided above are not
necessarily indicative of the amounts that could be realized in a current market
exchange.
During 1994, an affiliate of the Company repaid all amounts outstanding under
the Company's then outstanding term loan, reducing amounts advanced to the
affiliate by the Company. For purposes of the consolidated statements of cash
flows, this has been treated as a noncash transaction.
7. EMPLOYEE BENEFIT ARRANGEMENTS:
NTC has a nonqualified stock option plan (the Plan) for certain key executives
of the Company. Under the terms of the Plan, options granted vest in incremental
amounts over specified time periods and are exercisable in the year vested, or
in any year thereafter, until termination of the Plan on March 31, 1997. The
exercise price of each option is $2.50. The Plan is administered by the
president of NTC. Since establishment of the Plan, 70,000 options have been
granted. At December 31, 1995 and 1994, no options were exercisable. During 1995
and 1994, options for 19,000 and 17,000 shares, respectively, were exercised. No
compensation expense was recognized when these options were exercised.
<PAGE> 129
-7-
The Company has a 401(k) retirement plan for the benefit of its employees.
Employees who have completed one year of service and who are at least 21 years
of age are eligible to participate in the plan.
In 1994, NTC established a discretionary regional managers stock bonus plan (the
Bonus Plan). The Bonus Plan is administered by the president of NTC. The
earliest bonus award date was January 1, 1996.
In 1995, NTC established a discretionary senior executive stock bonus plan,
which is based on total revenues generated by NTC and affiliates. The earliest
bonus award date is April 1996.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This statement affects, among other things, the valuation and
disclosure of stock-based transactions with employees. As the Company plans to
use the pro forma disclosure alternative, the Company does not anticipate any
material impact on its financial position, results of operations or cash flows.
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Company rents office space, certain tower sites and pole attachments under
agreements accounted for as operating leases. Rental expense (including
month-to-month leases) was approximately $462,000 and $389,000 in 1995 and 1994,
respectively, before reimbursements from managed limited partnerships and
affiliates. Future minimum lease payments for noncancelable leases are as
follows:
<TABLE>
<S> <C>
1996 $455,897
1997 450,411
1998 1,541
1999 1,541
2000 1,041
Thereafter 3,122
--------
$913,553
========
</TABLE>
Effects of Regulation
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the Federal
Communications Commission (FCC) adopted rules implementing rate regulation and
certain other provisions of the 1992 Act, which became effective September 1,
1993. On February 22, 1994, the FCC adopted further rate regulation rules
requiring additional reductions, which became effective May 15, 1994, and
revised the benchmarks and formulas used to calculate such rates. Also in
February, the FCC's initial rules governing cost-of-service showings were
adopted, with an effective date of May 15, 1994. Cable operators may pursue
cost-of-service showings to justify charging rates for regulated services in
excess of those established by the FCC in its benchmark regulatory scheme.
<PAGE> 130
-8-
On May 5, 1995, the FCC announced the adoption of a simplified set of rate
regulation rules applicable to small cable systems, defined as a system serving
15,000 or fewer subscribers, owned by small companies, defined as a company
serving 400,000 or fewer subscribers. Under the FCC's definition, the Company is
a small company and each of the Company's cable systems are small systems.
Maximum permitted rates under these revised rules are dependent on several
factors including the number of regulated channels offered, the net asset basis
of plant and equipment used to deliver regulated services, the number of
subscribers served and a reasonable rate of return. It is management's opinion
that, in all material respects, the rates in effect in the Company's cable
systems are within the maximum allowable rates permitted under the FCC's small
cable system rules.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became
law. The 1996 Act will eliminate all rate controls on cable programming service
tiers of small cable systems, defined by the 1996 Act as systems serving fewer
than 50,000 subscribers owned by operators serving fewer than 1% of all
subscribers in the United States (approximately 600,000 subscribers). All of the
Company's cable systems qualify as small cable systems. Many of the changes
called for by the 1996 Act will not take effect until the FCC issues new
regulations, a process that could take from several months to a few years
depending on the complexity of the required changes and the statutory time
limits. Because of this, the full impact of the 1996 Act on the Company's
operations cannot be determined at this time.
Contingencies and Guarantees
As general partner, the Company is liable for partnership losses in excess of
amounts invested by the limited partners. The Company is also contingently
liable for the debt obligations of the limited partnerships, which were
approximately $87,071,000 as of December 31, 1995.
9. UNSECURED NET ADVANCES TO PARENT AND AFFILIATES:
Unsecured net advances to parent and affiliates consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
---- ----
<S> <C> <C>
Northland Cable Services Corp. $ 6,197 $ 1,831
Northland Telecommunications Corporation 5,369,366 4,195,636
Northland Cable Television, Inc. 7,752,657 7,586,773
Cable Television Billing, Inc. 500,455 496,940
----------- -----------
$13,628,675 $12,281,180
=========== ===========
</TABLE>
<PAGE> 131
-9-
Following is a condensed consolidated balance sheet of Northland Cable
Television, Inc. and subsidiary at December 31, 1995:
<TABLE>
<S> <C>
Investment in cable television properties, net $72,464,372
Other assets 3,290,218
-----------
Total assets $75,754,590
===========
Bank notes payable $82,724,745
Unsecured advances payable to the Company 7,752,657
Other liabilities 7,057,150
Shareholder's deficit (21,779,962)
-----------
Total liabilities and shareholder's deficit $75,754,590
===========
</TABLE>
The Company has advanced amounts to Northland Cable Television, Inc. to meet
working capital and debt service requirements. Management is of the opinion that
these advances are realizable through NCTV's future cash flow or from the
underlying value of NCTV's cable television systems, which served approximately
80,000 basic subscribers as of December 31, 1995. Under the terms of an
intercompany borrowing arrangement, the Company's parent and its affiliates have
mutually agreed to repay all outstanding advances by December 31, 1997.
10. SALES OF MANAGED LIMITED PARTNERSHIPS:
During 1994, NCTV purchased the assets of three partnerships which were managed
by the Company and in which it was a general partner. The Company reported a
gain of approximately $3,500,000, before income taxes, from the sales. The
Company received its proportionate share of the partnerships' assets upon the
sales. These assets were transferred to NTC, which then transferred the assets
to NCTV. For purposes of the consolidated statements of cash flows, these
amounts have been treated as noncash transactions. During 1995, the Company
received approximately $208,000 from the limited partnerships, representing its
proportionate share of holdback notes payable by NCTV.
11. ACQUISITION OF CABLE TELEVISION SYSTEMS:
On May 31, 1995, NCP, Inc., acquired the assets of the Pend Oreille Cable TV
Limited Partnership, a limited partnership managed by the Company. The aggregate
purchase price of these assets was $4,450,000, which was reduced by $435,000,
representing the Company's proportionate share of the sales proceeds
distributable by the partnership. The acquisition was financed through
borrowings under NCP, Inc.'s term loan, working capital provided by the Company
and approximately $581,000 payable under the holdback provisions of the purchase
agreement on August 31, 1996, net of any post-closing adjustments.
<PAGE> 132
-10-
Pro forma consolidated operating results (unaudited) of the Company for 1995 and
1994, assuming the acquisition of the assets described above had been made at
the beginning of the respective periods, follow:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $3,473,000 $3,552,000
========== ==========
Net income $1,132,000 $1,144,000
========== ==========
</TABLE>
Pro forma results for 1994 have been adjusted to eliminate the gain on sale of
limited partnerships, on an after-tax basis.
<PAGE> 133
NORTHLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 3,861,402
Due from managed limited partnerships 35,983
Accounts receivable 1,298,162
Other assets 323,673
Investment in cable television properties:
Property and equipment, net of accumulated
depreciation of $22,408,890 38,004,280
Intangible assets, net of accumulated
amortization of $22,459,310 30,967,262
-----------------------
Total investment in CATV properties 68,971,543
-----------------------
Other property and equipment 654,952
-----------------------
Total assets $75,145,715
=======================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Accounts payable and accrued expenses $ 3,742,250
Subscriber prepayments and converter deposits 496,375
Accumulated deficit in managed limited partnerships 660,555
Notes payable 84,176,157
-----------------------
Total liabilities 89,075,336
-----------------------
Shareholders' deficit:
Common stock, issued and outstanding 5,565
Additional paid in capital 1,167,012
Accumulated deficit (15,102,198)
-----------------------
Total shareholders' deficit (13,929,621)
-----------------------
Total liabilities and shareholders' deficit $75,145,715
=======================
</TABLE>
<PAGE> 134
NORTHLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
For the six months ended June 30,
-------------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues: $ 19,466,084 $ 14,644,269
Expenses:
Cable television operations 8,895,358 6,382,562
Management operations 112,976 121,358
Other operations 877,856 719,084
Depreciation and amortization 5,494,951 4,185,353
------------ ------------
15,381,141 11,408,357
------------ ------------
Income from operations 4,084,943 3,235,911
------------ ------------
Other income (expense):
Interest expense (3,967,946) (3,118,094)
Interest income 31,244 33,223
Other income (expense) 2,021 (47,739)
Gain on sale of assets 7,320 34,469
Income taxes (12,799) (6,710)
------------ ------------
============ ============
Net income $ 144,783 $ 131,062
============ ============
</TABLE>
<PAGE> 135
NORTHLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT - (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
Common Stock
-------------------------------
Number of Additional Accumulated
Shares Amount Paid in Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 4,494,865 $ 5,619 $ 1,154,518 $(15,007,041) $(13,846,904)
Common stock issued pursuant
to employee stock options 5,000 6 12,494 12,500
Common stock retired (48,000) (60) (239,940) (240,000)
Net income 144,783 144,783
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1996 $ 4,451,865 $ 5,565 $ 1,167,012 $(15,102,198) $(13,929,621)
============ ============ ============ ============ ============
</TABLE>
<PAGE> 136
NORTHLAND TELECOMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
For the six months ended June 30,
--------------------------------------------------------
1996 1995
----------------------- --------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 144,783 $ 131,062
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 5,494,951 4,185,353
Gain on sale of assets (7,320) (34,469)
(Increase) decrease in operating assets:
Due from managed limited partnerships (491,215) (174,180)
Accounts receivable (337,353) (121,477)
Prepaid expenses 122,332 112,685
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses 1,086,643 (695,615)
Subscriber prepayments (344,746) (194,064)
----------------------- --------------------------
Net cash from operating activities 5,668,075 3,209,294
----------------------- --------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of cable television systems (19,722,445)
Purchase of property and equipment, net (1,343,757) (1,103,568)
(Investment) in distributions from limited partnerships (364) 203,968
----------------------- --------------------------
Net cash from (used in) investing activities (1,344,121) (20,622,045)
----------------------- --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (1,948,596) (1,091,214)
Proceeds from borrowing under long term debt - 18,585,394
Loan fees and other costs incurred 27,249 (22,943)
Stock issued pursuant to employee stock plans 12,500 40,000
Repurchase of stock (240,000) (84,000)
----------------------- --------------------------
Net cash from (used in) financing activities (2,148,847) 17,427,237
----------------------- --------------------------
INCREASE (DECREASE) IN CASH 2,175,107 14,486
CASH, beginning of period 1,686,295 4,206,970
----------------------- --------------------------
CASH, end of period $ 3,861,402 $ 4,221,456
======================= ==========================
</TABLE>
<PAGE> 137
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Northland Telecommunications Corporation
and Subsidiaries
Consolidated Financial Statements
As of December 31, 1995 and 1994
Together with Auditors' Report
14
<PAGE> 138
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders of
Northland Telecommunications Corporation:
We have audited the accompanying consolidated balance sheets of Northland
Telecommunications Corporation (a Washington corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in shareholders' deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Northland Telecommunications
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
April 4, 1996
<PAGE> 139
- --------------------------------------------------------------------------------
Consolidated Financial Statements
- --------------------------------------------------------------------------------
NORTHLAND TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Cash......................................................................... $ 1,686,295 $ 4,206,970
Accounts receivable.......................................................... 960,809 606,317
Other........................................................................ 446,005 351,697
Investment in cable television properties:
Property and equipment, at cost............................................ 58,021,617 41,517,626
Less -- accumulated depreciation........................................... (18,557,241) (14,103,961)
------------ ------------
39,464,376 27,413,665
Franchise agreements (net of accumulated amortization of $17,561,303 in
1995 and $13,927,343 in 1994)........................................... 25,146,092 17,836,605
Goodwill (net of accumulated amortization of $1,527,939 in 1995 and
$1,354,824 in 1994)..................................................... 5,396,494 5,569,609
Organization costs and other intangible assets (net of accumulated
amortization of $5,570,674 in 1995 and $5,067,789 in 1994).............. 3,098,314 2,695,441
------------ ------------
Total investment in cable television properties......................... 73,105,276 53,515,320
------------ ------------
Other property and equipment, net............................................ 692,344 501,486
------------ ------------
Total assets............................................................ $ 76,890,729 $ 59,181,790
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities:
Accounts payable and accrued expenses...................................... $ 2,655,608 $ 2,118,030
Subscriber prepayments and converter deposits.............................. 841,121 657,560
Dividends payable.......................................................... -- 1,508,979
Due to managed limited partnerships........................................ 455,232 134,669
Notes payable.............................................................. 86,124,753 65,558,971
Accumulated deficit in managed limited partnerships........................ 660,919 754,057
------------ ------------
Total liabilities....................................................... 90,737,633 70,732,266
------------ ------------
Commitments and Contingencies (Note 8).......................................
Shareholders' Deficit:
Common stock, voting, par value $.00125 per share; 20,000,000 shares
authorized; 4,494,865 and 4,572,665 shares issued and outstanding as of
December 31, 1995 and 1994, respectively................................ 5,619 5,716
Additional paid-in capital................................................. 1,154,518 1,107,042
Accumulated deficit........................................................ (15,007,041) (12,663,234)
------------ ------------
(13,846,904) (11,550,476)
------------ ------------
Total liabilities and shareholders' deficit............................. $ 76,890,729 $ 59,181,790
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
15
<PAGE> 140
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NORTHLAND TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Cable television operations................................................. $ 27,258,673 $15,344,842
Management operations....................................................... 2,182,145 2,408,309
Other operations............................................................ 1,031,876 747,735
------------ -----------
Total revenues........................................................... 30,472,694 18,500,886
------------ -----------
Expenses:
Cable television operations................................................. (12,314,397) (6,871,510)
Management operations....................................................... (318,771) (567,124)
Other operations............................................................ (1,561,560) (666,918)
------------ -----------
Total expenses........................................................... (14,194,728) (8,105,552)
------------ -----------
Income from operations before depreciation and amortization.............. 16,277,966 10,395,334
Depreciation and Amortization Expense......................................... (8,971,845) (5,285,666)
------------ -----------
Income from operations................................................... 7,306,121 5,109,668
------------ -----------
Other Income (Expense):
Interest expense............................................................ (7,315,381) (3,281,598)
Equity in net income of managed limited partnerships........................ 7,407 260,685
Loss on disposal of assets.................................................. (103,634) (125,581)
Other....................................................................... 36,535 21,269
------------ -----------
(Loss) income before income taxes........................................ (68,952) 1,984,443
Income Tax (Expense) Benefit.................................................. (37,980) 7,878
------------ -----------
Net (Loss) Income............................................................. $ (106,932) $ 1,992,321
=========== ==========
Net (Loss) Income Per Share................................................... $ (.02) $ .44
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 141
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NORTHLAND TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, AT DECEMBER 31, 1993................. 4,555,665 $5,695 $1,064,563 $(13,146,576) $(12,076,318)
Common stock issued pursuant to employee
stock plans.............................. 17,000 21 42,479 -- 42,500
Dividends declared.......................... -- -- -- (1,508,979) (1,508,979)
Net income.................................. -- -- -- 1,992,321 1,992,321
--------- ------ ---------- ------------ ------------
BALANCE, AT DECEMBER 31, 1994................. 4,572,665 5,716 1,107,042 (12,663,234) (11,550,476)
Common stock issued pursuant to employee
stock plans.............................. 19,000 24 47,476 -- 47,500
Common stock retired........................ (96,800) (121) -- (483,878) (483,999)
Dividends declared.......................... -- -- -- (1,752,997) (1,752,997)
Net loss.................................... -- -- -- (106,932) (106,932)
--------- ------ ---------- ------------ ------------
BALANCE, AT DECEMBER 31, 1995................. 4,494,865 $5,619 $1,154,518 $(15,007,041) $(13,846,904)
======== ====== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 142
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NORTHLAND TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................................... $ (106,932) $ 1,992,321
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization........................................... 9,173,952 5,352,136
Loss on disposal of assets.............................................. 103,634 125,581
Equity in net income of managed limited partnerships.................... (7,407) (260,685)
(Increase) decrease in operating assets:
Accounts receivable................................................... (354,492) (124,512)
Other................................................................. (84,582) (88,623)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses................................. 451,342 622,640
Subscriber prepayments and converter deposits......................... 157,049 264,955
Due to managed limited partnerships................................... (58,413) (408,906)
------------ ------------
Net cash provided by operating activities............................. 9,274,151 7,474,907
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems less holdback of $1,451,484 in 1995
and $719,326 in 1994.................................................... (25,151,648) (26,362,591)
Investment in cable television properties.................................. (2,893,321) (1,824,681)
Acquisition of radio station, less holdback of $16,150..................... (63,850) --
Cash distributions from managed limited partnerships....................... 224,012 74,359
Purchase of other property and equipment, net.............................. (222,915) (95,215)
Proceeds from disposal of assets........................................... 8,900 4,700
Organization costs and other............................................... (41,279) (15,333)
------------ ------------
Net cash used in investing activities................................. (28,140,101) (28,218,761)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable................................................ 22,705,298 65,500,000
Principal payments on notes payable........................................ (2,550,490) (40,179,915)
(Retirement) issuance of common stock, net................................. (436,499) 42,500
Dividends paid to shareholders............................................. (3,261,976) (1,200,000)
Loan fees.................................................................. (111,058) (1,811,295)
------------ ------------
Net cash provided by financing activities............................. 16,345,275 22,351,290
------------ ------------
(DECREASE) INCREASE IN CASH.................................................. (2,520,675) 1,607,436
CASH, beginning of year...................................................... 4,206,970 2,599,534
------------ ------------
CASH, end of year............................................................ $ 1,686,295 $ 4,206,970
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest..................................... $ 7,515,512 $ 3,046,155
============ ============
Cash paid (received) during the year for income taxes...................... $ 18,365 $ (7,878)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 143
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
FORMATION AND BUSINESS
Northland Telecommunications Corporation (NTC), a Washington corporation,
and its wholly owned subsidiaries (collectively, the Company) are engaged in the
business of locating existing cable television systems and negotiating for their
acquisition (directly or on behalf of managed limited partnerships). The Company
directly operates or manages the operations of these systems.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements of
Northland Telecommunications Corporation include the accounts of its four wholly
owned subsidiaries: Northland Communications Corporation and subsidiary (NCC),
Northland Cable Television, Inc. and subsidiary (NCTV), Northland Cable Services
Corporation and subsidiaries (NCSC) and Northland Media, Inc. and subsidiary
(NMI). Significant intercompany accounts and transactions have been eliminated.
NCC, a Washington corporation, is the managing general partner of six
limited partnerships which own and operate cable television systems located
throughout the western United States, Texas, Mississippi, North Carolina,
Alabama and Georgia. NCC is also the parent company for Northland Cable
Properties, Inc. (NCP Inc.), which was formed in 1995 to own and operate cable
television systems.
NCTV, a Washington corporation, was formed to own and operate cable
television systems. NCTV is also the parent company for Northland Cable News,
Inc. (NCN), which was formed to develop and distribute programming to certain of
the Company's affiliated entities.
NCSC, a Washington corporation, is the parent company of Cable Television
Billing, Inc. (CTB), Northland Investment Corporation (NIC) and Cable
Ad-Concepts, Inc. (CAC). CTB provides billing services to cable systems owned by
managed limited partnerships and wholly owned systems. NIC acts as the managing
underwriter of affiliated limited partnership offerings. CAC develops and
produces video commercial advertisements to be cablecast on Northland affiliated
cable systems.
NMI, a Washington corporation, is the parent company of Statesboro Media,
Inc. (SMI). SMI owns and operates an AM radio station serving the city of
Statesboro, Georgia and surrounding areas.
System Acquisitions -- Cable television system and radio station
acquisitions are accounted for as purchase transactions and their cost is
allocated as follows: first, to the estimated fair market value of net tangible
assets acquired; then, to the franchise and other determinable intangible costs;
and then any excess purchase price is allocated to goodwill.
Property and Equipment -- Depreciation of cable television properties and
other property and equipment is provided using the straight-line method over the
following estimated service lives:
<TABLE>
<S> <C>
Buildings......................................................... 20 years
Distribution plant................................................ 10 years
Leasehold improvements and other.................................. 5-20 years
Furniture and fixtures............................................ 10 years
Vehicles.......................................................... 5 years
</TABLE>
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
Intangible Assets -- Costs assigned to goodwill, franchise agreements and
organization costs and other intangible assets are amortized using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Goodwill......................................................... 40 years
Franchise agreements............................................. 7-20 years
Organization costs and other intangible assets................... 3-10 years
</TABLE>
Revenue Recognition -- Cable television service revenue is recognized in
the month service is provided to customers. Advance payments received on cable
services are recorded as subscriber prepayments. Revenue for management and
other services provided to the limited partnerships is recorded on the accrual
method in the month service is provided.
Estimates Used in Financial Statement Presentation -- The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amount of assets
19
<PAGE> 144
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
Reclassifications -- Certain reclassifications have been made to conform
the prior year's data with the current year presentation.
Net Income per Share of Common Stock -- Net income per share of common
stock is based on the weighted average number of shares of 4,550,931 and
4,556,503 during 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
2. INCOME TAXES:
For federal income tax purposes, the Company files a consolidated federal
income tax return. Deferred income taxes are determined on the asset and
liability method in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." The asset and liability method
requires the recognition of deferred 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.
The primary components of deferred income taxes, as of December 31, 1995
and 1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
-----------------------------------------------------------------------------
Deferred income tax assets:
Net operating loss carryforward................. $8,174,000 $7,182,000
Valuation allowance............................. (1,165,000) (1,352,000)
---------- ----------
7,009,000 5,830,000
---------- ----------
Deferred income tax liabilities:
Property and equipment.......................... 3,539,000 2,489,000
Accumulated deficit in managed limited
partnerships................................. 3,470,000 3,341,000
---------- ----------
7,009,000 5,830,000
---------- ----------
$ -- $ --
========== ==========
</TABLE>
The Company has not recognized any expense for federal income taxes in the
accompanying Consolidated Statements of Operations due to the availability of
net operating loss carryforwards. For 1995 and 1994, the Company reported a loss
for federal income tax purposes due to temporary differences in depreciation and
amortization expense and its share of income or loss generated by managed
limited partnerships.
The federal net operating loss carryforward of approximately $24,041,000
expires in the years 2003-2010. The Company has determined that the net deferred
tax asset does not satisfy the recognition criteria set forth in SFAS No. 109.
Accordingly, a valuation allowance has been established for that amount.
3. TRANSACTIONS WITH MANAGED LIMITED PARTNERSHIPS AND OTHER RELATED PARTIES:
MANAGEMENT FEES
NCC and NCTV receive fees for managing the limited partnerships of 5% to
6.75% of the partnerships' gross revenues, excluding revenues from the sale of
cable television systems or franchises. Under the terms of certain credit
agreements, the payment of management fees is allowed upon the partnerships'
compliance with certain covenants.
REIMBURSED OPERATING EXPENSES
NCC provides certain centralized services to managed limited partnerships
and other affiliated entities. As set forth in the partnership and intercompany
agreements, the managed limited partnerships and affiliated entities reimburse
NCC for the cost of those services, which include executive services,
engineering, marketing, management services, accounting, bookkeeping, legal,
copying, office rent and computer services.
The amounts billed to managed limited partnerships and affiliated entities
for these services are based on NCC's cost. The cost of certain services are
charged directly to these entities, based upon the actual time spent by NCC's
employees. The cost of other services is allocated to these entities based upon
their relative size, revenue and other factors. Amounts charged for these
services were approximately $2,044,000 and $2,207,000 in 1995 and 1994,
respectively.
20
<PAGE> 145
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- --------------------------------------------------------------------------------
NCTV also has operating management agreements with limited partnerships
managed by NCC. Under the terms of these agreements, NCTV serves as the managing
agent for certain of the limited partnerships' cable television systems and is
reimbursed for certain operating, administrative and programming expenses. NCTV
received approximately $66,000 and $25,000 under the terms of these agreements
during 1995 and 1994, respectively.
ACCUMULATED DEFICIT IN MANAGED LIMITED PARTNERSHIPS
NCC is a general partner in limited partnerships that own and operate cable
television systems. All items of income, loss, deduction and credit are
allocated 99% to the limited partners and 1% to the general partners until the
limited partners have received aggregate cash distributions in an amount equal
to their aggregate capital contributions (plus, in some cases, a preferred
return). Thereafter, general partners receive 25% (20% at two partnerships) and
the limited partners are allocated 75% (80% at two partnerships) of partnership
income, losses and distributions.
Prior to the general partners receiving cash distributions from operations
for any year, the limited partners must receive cash distributions in an amount
equal to at least 50% of the limited partners' allocable share of taxable net
income for such year. In the case of certain partnerships, the limitation is the
lesser of (i) 50% of the limited partners' allocable share of net income for
such year or (ii) the federal income tax payable on the limited partners'
allocable share of net income at the then highest marginal federal income tax
rate applicable to such net income.
Any distribution other than from cash flow, such as from the sale or
refinancing of a system or upon dissolution of the partnership, will be
determined according to the partnership agreements.
Upon a majority vote of the limited partners, the assets of the partnership
may be sold to NCC. The price to be paid will be based upon an independent
appraisal. NCC is not obligated to purchase the interests offered.
OTHER OPERATIONS
CTB charges fees to NCTV, NCP Inc. and managed limited partnerships for
providing billing services. During 1995 and 1994, CTB recognized revenues of
approximately $246,000 and $294,000, respectively, from the managed limited
partnerships. The amounts charged to NCTV and NCP Inc. by CTB have been
eliminated in consolidation.
NCN and CAC charge NCTV and certain managed limited partnerships for
providing program production and advertising services, respectively. During 1995
and 1994, NCN recognized revenues of approximately $602,000 and $342,000. CAC
recognized approximately $163,000 and $111,000 in revenues during 1995 and 1994.
The amounts charged to NCTV by NCN and CAC have been eliminated in
consolidation.
RECEIVABLES (PAYABLES) FROM MANAGED LIMITED PARTNERSHIPS
Receivables (payables) consist of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
-------------------------------------------------------------------------------
Northland Cable Properties Two....................... $ -- $(647,675)
Northland Cable Properties Three..................... -- (11,069)
Northland Cable Properties Four...................... 101,942 58,871
Northland Cable Properties Five...................... 188,513 96,579
Northland Cable Properties Six....................... 97,650 79,215
Northland Cable Properties Seven..................... 100,287 64,429
Northland Cable Properties Eight..................... 71,960 51,791
Clemson-Seneca Cable TV.............................. (474,622) 44,422
Pend Oreille Cable TV................................ (581,037) 135,460
Others............................................... 40,075 (6,692)
--------- ---------
$(455,232) $(134,669)
========= =========
</TABLE>
Under the terms of the limited partnerships' revolving credit and term loan
agreements with commercial banks, the partnerships have agreed to financial
covenants which require the maintenance of certain ratios of notes payable to
cash flow. NCC, as general partner, submits quarterly debt compliance reports to
the partnerships' creditors under these arrangements.
21
<PAGE> 146
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. BORROWING ARRANGEMENTS:
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Revolving credit and term loan, collateralized by a first lien position on all
present and future assets and stock of NCTV. Interest rates vary based on certain
financial covenants; currently 9.24% (weighted average). Graduated principal and
interest payments are due quarterly until maturity on September 30, 2003. ........ $82,569,998 $65,500,000
Term loan, collateralized by a first lien position on all present and future assets
of NCP Inc. Interest rates vary based on certain financial covenants; currently
8.71%. Graduated principal and interest payments are due quarterly until maturity
on December 31, 1999. ............................................................ 2,950,000 --
Term loan, secured by parcel of land purchased with proceeds. Interest accrues at
prime plus .75%; currently 9.00%. Principal and interest payments are due monthly
until maturity in 1998. .......................................................... 154,747 --
Seller note, currently accruing interest at 8.75%. Due to mature in 1996. .......... 232,710 --
Non-interest bearing seller notes, due to mature during 1996. ...................... 179,264 --
Other............................................................................... 38,034 58,971
----------- -----------
$86,124,753 $65,558,971
========== ==========
</TABLE>
Annual maturities of notes payable are as follows:
<TABLE>
<S> <C>
1996............................................................ $ 4,158,105
1997............................................................ 5,704,000
1998............................................................ 8,552,650
1999............................................................ 11,330,000
2000............................................................ 10,260,000
Thereafter...................................................... 46,119,998
-----------
$86,124,753
==========
</TABLE>
Under the revolving credit and term loan agreement, NCTV has agreed to
restrictive covenants which require the maintenance of certain ratios, including
a Pro Forma Debt Service Ratio of 1.2 to 1, an Interest Coverage Ratio of not
less than 1.7 to 1 and a Leverage Ratio of 5.75 to 1, among other restrictions.
NCTV submits quarterly debt compliance reports to its creditor under this
arrangement.
NCTV has entered into interest rate swap agreements to reduce the impact of
changes in interest rates. Interest rate swap transactions generally involve the
exchange of fixed and floating interest payment obligations without the exchange
of the underlying principal amounts. At December 31, 1995, NCTV had an interest
rate swap agreement in effect with its bank. These agreements effectively change
NCTV's interest rate exposure to a fixed rate of 6.27%, plus an applicable
margin which is based on certain financial covenants (the margin at December 31,
1995 was 2.75%). The notional amount of each swap, the fixed interest rates and
the maturity dates are as follows:
<TABLE>
<CAPTION>
MATURITY DATE FIXED RATE AMOUNT
<S> <C> <C>
---------------------------------------------------------------------------------
November 6, 1996..................................... 5.85 $ 3,500,000
December 8, 1996..................................... 5.485 1,800,000
June 12, 1997........................................ 5.63 13,500,000
June 30, 1997........................................ 5.97 12,900,000
August 26, 1997...................................... 6.65 28,592,500
September 30, 1997................................... 6.00 4,200,000
March 9, 1998........................................ 7.25 5,500,000
-----------
$69,992,500
==========
</TABLE>
At December 31, 1995, NCTV would have been required to pay approximately
$1,120,000 to settle these agreements based on fair value estimates received
from financial institutions.
22
<PAGE> 147
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- --------------------------------------------------------------------------------
Under its current term loan agreement, NCP Inc. has agreed to restrictive
covenants which require the maintenance of certain ratios, including a Cash Flow
to Debt Service Ratio of 1.20 to 1 and a Funded Debt to Cash Flow Ratio of 4.75
to 1, among other restrictions. NCC submits quarterly debt compliance reports to
NCP Inc.'s creditor under this agreement.
NCP, Inc. has entered into an interest rate swap agreement to reduce the
impact of changes in interest rates. At December 31, 1995, NCP, Inc. had
outstanding one interest rate swap agreement with its creditor, having a
notional principal amount of $2,950,000. This agreement effectively changes NCP
Inc.'s interest rate exposure to a fixed rate of 5.71%, plus an applicable
margin based on certain financial covenants (the margin at December 31, 1995 was
3.00%). The interest rate swap agreement matures June 30, 1997. At December 31,
NCP Inc. would have been required to pay approximately $21,500 to settle this
agreement, based on fair value estimates received from financial institutions.
The counterparties to the Company's interest rate swap agreements are the
Company's creditors. The Company is exposed to credit risk to the extent of
nonperformance by a counterparty; however, management believes the risk of
incurring losses due to credit risk is remote. The notional amount of the
instruments discussed above reflects the extent of involvement in the
instruments, but does not represent the Company's exposure to market risk.
Considerable judgment is required to develop the estimates of fair value; thus,
the estimates provided above are not necessarily indicative of the amounts that
could be realized in a current market exchange.
- --------------------------------------------------------------------------------
5. INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
-------------------------------------------------------------------------------
Land and buildings.............................. $ 1,965,828 $ 1,452,111
Distribution plant.............................. 53,032,895 37,996,321
Other equipment................................. 2,951,077 2,005,453
Leasehold improvements.......................... 38,451 38,451
Construction-in-progress........................ 33,366 25,290
------------ ------------
58,021,617 41,517,626
Less -- accumulated depreciation................ (18,557,241) (14,103,961)
------------ ------------
$ 39,464,376 $ 27,413,665
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
6. OTHER PROPERTY AND EQUIPMENT:
Other property and equipment consists of the following:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
-------------------------------------------------------------------------------
Furniture and fixtures............................. $ 1,111,171 $ 965,618
Vehicles........................................... 137,033 137,033
Other.............................................. 465,845 367,438
----------- ----------
1,714,049 1,470,089
Less -- accumulated depreciation................... (1,021,705) (968,603)
----------- ----------
$ 692,344 $ 501,486
========== =========
</TABLE>
- --------------------------------------------------------------------------------
7. EMPLOYEE BENEFIT ARRANGEMENTS:
NTC has a nonqualified stock option plan (the Plan) for certain key
executives of the Company. Under the terms of the Plan, options granted vest in
incremental amounts over specified time periods and are exercisable until
termination of the Plan on March 31, 1997. The exercise price of each option is
$2.50, which was considered to approximate fair market value at the date of
grant. The Plan is administered by the president of NTC. Since establishment of
the Plan, 70,000 options have been granted. At December 31, 1995 and 1994, no
options were exercisable. During 1995 and 1994, options for 19,000 and 17,000
shares, respectively, were exercised.
The Company also has a 401(k) retirement plan for the benefit of its
employees. Full-time employees who have completed one year of service and who
are at least 21 years of age are eligible to participate in the plan.
23
<PAGE> 148
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- --------------------------------------------------------------------------------
In December 1994, the Board of Directors of NTC approved a discretionary
regional manager stock bonus plan (the Bonus Plan). The Bonus Plan is
administered by the president of NTC. The earliest bonus award date was January
1, 1996.
In 1995, NTC established a discretionary senior executive stock bonus plan,
which is based on total revenues generated by NTC and affiliates. The earliest
bonus award date is April 1996.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This statement affects, among other things, the valuation and
disclosure of stock-based transactions with employees. As the Company plans to
use the pro forma disclosure alternative, the Company does not anticipate any
material impact on its financial position, results of operations or cash flows.
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES:
LEASE ARRANGEMENTS
The Company rents certain office space, equipment, tower sites and pole
attachments under operating leases. Rental expense (including month-to-month
leases) was approximately $896,000 and $603,000 in 1995 and 1994, respectively,
before reimbursements from managed limited partnerships. Minimum lease payments
to the end of the lease terms are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 492,362
1997............................................................. 481,057
1998............................................................. 28,892
1999............................................................. 27,632
2000............................................................. 12,096
Thereafter....................................................... 75,374
----------
$1,117,413
=========
</TABLE>
CONTINGENCIES AND GUARANTEES
As general partner, NCC is contingently liable for partnership losses in
excess of amounts invested by the limited partners. NCC is also contingently
liable for the debt obligations of its respective limited partnerships, which
together total approximately $87,071,000 as of December 31, 1995.
EFFECTS OF REGULATION
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the
Federal Communications Commission (FCC) adopted rules implementing rate
regulation and certain other provisions of the 1992 Act, which became effective
September 1, 1993. On February 22, 1994, the FCC adopted further rate regulation
rules requiring additional reductions, which became effective May 15, 1994, and
revised the benchmarks and formulas used to calculate such rates. Also in
February, the FCC's initial rules governing cost-of-service showings were
adopted, with an effective date of May 15, 1994. Cable operators may pursue
cost-of-service showings to justify charging rates for regulated services in
excess of those established by the FCC in its benchmark regulatory scheme.
On May 5, 1995, the FCC announced the adoption of a simplified set of rate
regulation rules applicable to small cable systems, defined as a system serving
15,000 or fewer subscribers, owned by small companies, defined as a company
serving 400,000 or fewer subscribers. Under the FCC's definition, the Company is
a small company and each of the Company's cable systems are small systems.
Maximum permitted rates under these revised rules are dependent on several
factors including the number of regulated channels offered, the net asset basis
of plant and equipment used to deliver regulated services, the number of
subscribers served and a reasonable rate of return. It is management's opinion
that, in all material respects, the rates in effect in the Company's cable
systems are within the maximum allowable rates permitted under the FCC's small
cable system rules.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act)
became law. The 1996 Act will eliminate all rate controls on cable programming
service tiers of small cable systems, defined by the 1996 Act as systems serving
fewer than 50,000 subscribers owned by operators serving fewer than 1% of all
subscribers in the United States (approximately 600,000 subscribers). All of the
Company's cable systems qualify as small cable systems. Many of the changes
called for by the 1996 Act will not take effect until the FCC issues new
regulations, a process that could take from several months to a few years.
Because of this, the full impact of the 1996 Act on the Company's operations
cannot be determined at this time.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
24
<PAGE> 149
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9. ACQUISITION OF SYSTEMS:
During 1995, NCTV purchased the assets of Clemson-Seneca Cable TV Limited
Partnership and the operating assets of cable television systems in Oconee
County, South Carolina, Madera County, California, and communities in and around
Mexia, Texas adding approximately 15,000 basic subscribers, or an increase of
22%.
The aggregate purchase price of the assets was approximately $21,600,000.
As of December 31, 1995, NCTV had paid approximately $20,582,000 of the
aggregate purchase price through borrowings under its revolving credit and term
loan and cash on hand. As of December 31, 1995, $870,447 remains payable under
the holdback provisions of the respective purchase agreements which reflect
reductions for certain post-closing adjustments. At December 31, 1995, $474,622
of this amount was reflected in due to managed limited partnerships on the
consolidated balance sheet.
During 1994, NCTV purchased the assets of three partnerships which were
managed by NCC, adding approximately 24,000 basic subscribers, or an increase of
59%. The aggregate purchase price of the partnerships was $27,040,000. As of
December 31, 1994, the Company had paid approximately $26,400,000 of the
aggregate purchase price through borrowings under its term loan, had outstanding
approximately $700,000 of amounts to be paid under the holdback provisions of
the purchase agreements. For purposes of the consolidated statement of cash
flows, amounts due under the holdbacks have been treated as noncash
transactions. During 1995, the amounts outstanding pursuant to the holdback
provisions of the purchase agreements were paid.
On May 31, 1995, NCP Inc. acquired the assets of the Pend Oreille Cable TV
Limited Partnership (the Partnership), a limited partnership managed by NCC, NCP
Inc.'s parent company. The aggregate purchase price of these assets was
$4,450,000, which was reduced by $435,000 representing NCC's proportionate share
of the sales proceeds distributable by the Partnership. The acquisition was
financed through borrowings under NCP Inc.'s term loan, working capital provided
by NCC and approximately $581,000 payable under the holdback provisions of the
purchase agreement on August 31, 1996, net of any post-closing adjustments. At
December 31, 1995, the holdback was included in due to managed limited
partnerships on the consolidated balance sheet.
On October 17, 1995, SMI acquired the assets of WPTB, an AM radio station
serving the city of Statesboro, Georgia and surrounding areas. The aggregate
purchase price was approximately $80,000. SMI paid $70,000 using cash on hand,
with the balance of $10,000 to be paid under the holdback provisions on April
15, 1996, net of any post-closing adjustments.
Pro forma consolidated operating results (unaudited) of the Company for
1995 and 1994, assuming the acquisition of the assets described above had been
made at the beginning of the respective periods, follow:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenue........................................... $34,117,000 $31,422,000
========== ===========
Net loss.......................................... $(1,578,000) $(2,200,000)
========== ===========
Per share......................................... $ (0.35) $ (0.48)
========== ===========
</TABLE>
25
<PAGE> 150
NORTHLAND CABLE TELEVISION, INC.
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996 (Unaudited)
(Prepared by Management)
ASSETS
<TABLE>
<S> <C>
Cash $ 1,616,611
Due from limited partnerships 20,259
Accounts receivable 915,289
Investment in cable television properties:
Property and equipment, net of accumulated
depreciation of $21,068,054 35,413,213
Intangible assets, net of accumulated
amortization of $23,081,437 respectively 33,062,681
-------------
Total investment in CATV properties 68,475,894
-------------
Advances to parent 1,003,457
Prepaid expenses and other 238,298
-------------
Total assets $72,269,808
=============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued expenses $3,310,429
Converter deposits 97,665
Subscriber prepayments 353,831
Notes payable 81,319,504
Due to affiliates 10,763,438
-------------
Total liabilities 95,844,867
-------------
Shareholder's equity (deficit):
Common stock, issued and outstanding 10,000
Additional paid in capital 2,212,334
Accumulated deficit (25,797,393)
-------------
Total shareholder's equity (deficit) (23,575,059)
-------------
Total liabilities and shareholder's equity $72,269,808
=============
</TABLE>
<PAGE> 151
NORTHLAND CABLE TELEVISION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
For the six months ended June 30,
-------------------------------------
1996 1995
------------- --------------
<S> <C> <C>
Revenues:
Management fees $ - $ 120,425
Service revenues 15,456,926 11,719,304
------------- --------------
15,456,926 11,839,729
Expenses:
Operating 1,204,710 877,016
General and administrative 3,515,086 2,655,189
Programming 3,715,547 2,779,209
Depreciation and amortization 5,200,467 4,095,348
------------- --------------
13,635,811 10,406,761
------------- --------------
Income from operations 1,821,115 1,432,967
Other income (expense):
Production operations, net 191,648 221,766
Interest expense (3,838,895) (3,095,543)
Interest income 23,910 31,060
Equity in income of managed limited partnership - 750
Other income (expense) - (48,556)
Gain on disposal of assets 7,300 34,469
------------- --------------
(3,616,038) (2,856,053)
------------- --------------
Income (loss) before income taxes (1,794,923) (1,423,085)
Income taxes (174) (4,380)
------------- --------------
Net income (loss) $(1,795,097) $(1,427,465)
============= ==============
</TABLE>
<PAGE> 152
NORTHLAND CABLE TELEVISION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
For the six months ended June 30,
-------------------------------------
1996 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,795,097) $(1,427,465)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation and amortization 5,200,467 4,095,348
Equity in income of managed limited partnership - (750)
Gain on sale of assets (7,300) (34,469)
(Increase) decrease in operating assets:
Due from limited partnerships 62,681 (74,277)
Accounts receivable (8,509) (93,023)
Prepaid expenses and other 76,448 97,636
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses 914,697 605,076
Converter deposits (10,604) 25,455
Subscriber prepayments (326,682) (250,895)
------------- --------------
Net cash from operating activities 4,106,102 2,942,636
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of cable television systems (15,221,925)
Investment in cable television systems (1,232,054) (1,032,319)
Cash distributions from managed limited partnership - 756
------------- --------------
Net cash used in investing activities (1,232,054) (16,273,488)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under long term debt - 13,152,625
Principal payments on borrowings (1,825,407) -
Advances to parent and from affiliates (441,691) 71,827
Loan fees and other costs incurred 27,366 (20,880)
------------- --------------
Net cash from (used in) financing activities (2,239,732) 13,203,572
------------- --------------
INCREASE (DECREASE) IN CASH 634,316 (127,280)
CASH, beginning of period 982,295 2,547,496
------------- --------------
CASH, end of period $1,616,611 $2,420,216
============= ==============
</TABLE>
<PAGE> 153
NORTHLAND CABLE TELEVISION, INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDER'S EQUITY (DEFICIT) - (Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
Number of Accumulated
Shares Amount Paid in Capital Deficit Total
--------- -------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $10,000 $10,000 $2,212,334 ($24,002,296) ($21,779,962)
Net income (loss) (1,795,097) (1,795,097)
------- ------- ---------- ------------ ------------
Balance, June 30, 1996 $10,000 $10,000 $2,212,334 ($25,797,393) ($23,575,059)
======= ======= ========== ============ ============
</TABLE>
<PAGE> 154
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland
Telecommunications Corporation)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
<PAGE> 155
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Northland Cable Television, Inc.:
We have audited the accompanying consolidated balance sheets of Northland Cable
Television, Inc. (a Washington corporation and a wholly owned subsidiary of
Northland Telecommunications Corporation) and subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of operations, changes
in shareholder's deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 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, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Seattle, Washington,
March 26, 1996
<PAGE> 156
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
CASH $ 982,295 $ 2,547,496
DUE FROM MANAGED LIMITED PARTNERSHIPS 82,940 24,984
ACCOUNTS RECEIVABLE 906,780 604,117
UNSECURED ADVANCES TO PARENT 1,003,457 1,003,457
INVESTMENT IN MANAGED LIMITED PARTNERSHIP 7,778 -
PREPAID EXPENSES 306,968 244,371
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 55,241,912 41,592,543
Less-- accumulated depreciation (18,444,806) (14,146,114)
------------ ------------
36,797,106 27,446,429
Franchise agreements (net of accumulated
amortization of $18,334,932 in 1995 and
$14,356,563 in 1994) 27,374,524 21,558,829
Goodwill (net of accumulated amortization of
$1,527,939 in 1995 and $1,354,823 in 1994) 5,396,494 5,569,609
Organization costs and other intangible
assets (net of accumulated amortization of
$5,543,432 in 1995 and $5,067,791 in 1994) 2,896,248 2,695,442
------------ ------------
72,464,372 57,270,309
------------ ------------
Total assets $ 75,754,590 $ 61,694,734
============ ============
</TABLE>
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 2,395,732 $ 2,056,233
Converter deposits 108,269 75,440
Subscriber prepayments 680,513 582,119
Due to managed limited partnership 474,622 -
Notes payable 83,144,911 65,531,020
Unsecured advances from affiliates 10,730,505 11,437,304
Accumulated deficit in managed limited
partnership - 34,463
------------ ------------
Total liabilities 97,534,552 79,716,579
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDER'S DEFICIT:
Common stock (par value $1.00 per share,
authorized 50,000 shares; 10,000 shares
issued and outstanding) 10,000 10,000
Additional paid-in capital 2,212,334 2,212,334
Accumulated deficit (24,002,296) (20,244,179)
------------ ------------
Total shareholder's deficit (21,779,962) (18,021,845)
------------ ------------
Total liabilities and shareholder's
deficit $ 75,754,590 $ 61,694,734
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE> 157
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock
---------------------
Number Additional
of Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, at December 31, 1993 10,000 $10,000 $2,212,334 $(19,859,664) $(17,637,330)
Net loss - - - (384,515) (384,515)
------ ------- ---------- ------------ ------------
BALANCE, at December 31, 1994 10,000 10,000 2,212,334 (20,244,179) (18,021,845)
Net loss - - - (3,758,117) (3,758,117)
------ ------- ---------- ------------ ------------
BALANCE, at December 31, 1995 10,000 $10,000 $2,212,334 $(24,002,296) $(21,779,962)
====== ======= ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 158
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland
Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,758,117) $ (384,515)
Adjustments to reconcile net loss to net cash provided by operating activities-
Depreciation and amortization 9,224,474 5,373,480
Loss on refinancing of notes payable - 129,103
Loss on disposal of assets 80,045 23,876
Equity in net (income) loss of managed limited partnership (750) 104
(Increase) decrease in operating assets:
Due from managed limited partnerships (57,956) 12,641
Accounts receivable (302,663) (108,056)
Prepaid expenses (62,597) (94,231)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 297,183 605,899
Converter deposits 32,829 (4,312)
Subscriber prepayments 98,394 269,268
------------ ------------
Net cash provided by operating activities 5,550,842 5,823,257
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems, less holdback of $870,447
in 1995 and $899,158 in 1994 (21,717,081) (26,362,691)
Investment in cable television properties (2,731,117) (1,824,681)
Proceeds from disposal of assets 8,900 1,700
Cash distributions from managed limited partnership 682 3,027
Franchise fees, organization costs and other intangibles (41,279) (11,785)
------------ ------------
Net cash used in investing activities (24,479,895) (28,194,430)
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable $19,655,298 $ 65,500,000
Principal payments on notes payable (2,437,231) (38,696,796)
Advances from affiliates 201,358 (1,116,682)
Loan fees (55,573) (1,811,295)
----------- ------------
Net cash provided by financing activities 17,363,852 23,875,227
----------- ------------
(DECREASE) INCREASE IN CASH (1,565,201) 1,504,054
CASH, beginning of year 2,547,496 1,043,442
----------- ------------
CASH, end of year $ 982,295 $ 2,547,496
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 7,360,315 $ 2,986,799
=========== ============
Cash paid (received) during the year for state income taxes $ 5,610 $ (19,443)
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 159
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
CABLE TELEVISION OPERATIONS:
Service revenues $26,395,398 $15,344,842
----------- -----------
Expenses, including reimbursements
to affiliates-
Programming 4,742,357 2,757,547
Operating 2,070,223 1,160,114
General and administrative 6,030,257 3,113,983
Advertising 702,908 265,166
----------- -----------
13,545,745 7,296,810
----------- -----------
Income from cable television
operations 12,849,653 8,048,032
----------- -----------
PROGRAMMING OPERATIONS:
License fees 602,263 342,462
Operating expenses (1,026,501) (296,778)
----------- -----------
(Loss) income from programming
operations (424,238) 45,684
----------- -----------
MANAGEMENT OPERATIONS:
Management fees 120,618 226,043
General and administrative expenses (27,683) (45,872)
----------- -----------
Income from management operations
92,935 180,171
----------- -----------
Income from operations before
depreciation and amortization 12,518,350 8,273,887
DEPRECIATION AND AMORTIZATION EXPENSE (9,022,367) (5,307,010)
----------- -----------
Income from operations 3,495,983 2,966,877
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
OTHER INCOME (EXPENSE):
Interest income $ 65,158 $ 33,038
Interest expense (7,214,737) (3,225,721)
Equity in net income (loss) of managed limited
partnership 750 (104)
Loss on disposal of assets (80,045) (23,876)
Loss on refinancing of notes payable and other - (154,172)
----------- ------------
(7,228,874) (3,370,835)
----------- -----------
Loss before income taxes (3,732,891) (403,958)
STATE INCOME TAX EXPENSE (BENEFIT) 25,226 (19,443)
----------- -----------
NET LOSS $(3,758,117) $ (384,515)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 160
NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY
(A wholly owned subsidiary of Northland
Telecommunications Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Formation and Business
Northland Cable Television, Inc. (NCTV), a Washington corporation, was formed
to own and operate cable television systems and at December 31, 1995, had 54
non-exclusive franchises to operate cable television systems. These franchises
will expire at various dates through 2020. During 1995, the Company acquired
the assets of the Clemson-Seneca Cable TV Limited Partnership (Clemson-Seneca).
Prior to the acquisition, NCTV served as the general partner of Clemson-Seneca.
Northland Cable News, Inc. (NCN), a Washington corporation which was formed to
develop and distribute programming to certain of the Company's affiliated
entities, is a wholly owned subsidiary of NCTV. NCTV and NCN are collectively
referred to as the Company.
The Company and its affiliates, Northland Communications Corporation and
subsidiary (NCC); Northland Cable Services Corporation and subsidiaries (NCSC);
and Northland Media, Inc. and subsidiary (NMI) are wholly owned subsidiaries of
Northland Telecommunications Corporation and subsidiaries (NTC). NCC is the
managing general partner of six limited partnerships, which own and operate
cable television systems. Additionally, NCC owns and operates cable systems
through Northland Cable Properties, Inc. (NCP, Inc.), its wholly owned
subsidiary. NCSC is the parent company for Cable Television Billing, Inc.
(CTB), Northland Investment Corporation (NIC) and Cable Ad-Concepts, Inc.
(CAC). CTB provides billing services to cable systems owned by managed limited
partnerships of NCC and wholly owned systems of the Company and NCC. NIC acts
as the managing underwriter of affiliated limited partnership offerings. CAC
develops and produces video commercial advertisements to be cablecast on
Northland affiliated cable systems. NMI was formed as a holding company to own
certain non-cable related assets.
Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
the Company and its wholly owned subsidiary, NCN. Significant intercompany
accounts and transactions have been eliminated.
The Company merged Cal-Nor Cableview, Inc., a former subsidiary, into the
Company during 1994.
<PAGE> 161
Acquisition of Cable Television Systems
Cable television system acquisitions are accounted for as purchase transactions
and their cost is allocated as follows: first, to the estimated fair market
value of net tangible assets acquired; then, to the franchise and other
determinable intangible costs; and then, any excess is allocated to goodwill.
Depreciation -- Depreciation of property and equipment is provided using the
straight-line method over the following estimated service lives:
<TABLE>
<S> <C>
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold improvements 5-20 years
</TABLE>
Intangible Assets -- Costs assigned to goodwill, franchise agreements and
organization costs and other intangible assets are amortized using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Goodwill 40 years
Franchise agreements 10-20 years
Organization costs and other
intangible assets 3-10 years
</TABLE>
Revenue Recognition -- Cable television service revenue is recognized in the
month service is provided to customers. Advance payments on cable services to
be rendered are recorded as subscriber prepayments. Revenue from management
services provided to Clemson-Seneca was recorded on the accrual method in the
month service was provided. License fee revenue is recognized in the period
service is provided.
Estimates Used in Financial Statement Presentation -- The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amount 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.
Reclassifications -- Certain reclassifications have been made to conform prior
year's data with the current year presentation.
2. INCOME TAXES:
The operations of the Company and its affiliates are included for federal
income tax purposes in a consolidated federal income tax return filed by NTC.
Deferred income taxes are determined on the asset and liability method in
accordance with Statement of Financial Accounting Standards (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.
<PAGE> 162
The primary components of deferred income taxes, as of December 31, 1995 and
1994, are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 8,762,000 $ 6,509,000
Valuation allowance (5,230,000) (3,980,000)
----------- -----------
3,532,000 2,529,000
----------- -----------
Deferred tax liabilities:
Property and equipment 3,532,000 2,074,000
Accumulated deficit in managed
limited partnership - 455,000
----------- -----------
3,532,000 2,529,000
----------- -----------
$ - $ -
----------- -----------
</TABLE>
The federal income tax net operating loss carryforward of approximately
$25,800,000 expires in the years 2003-2010. The Company determined that the
net deferred tax asset did not satisfy the recognition criteria set forth in
SFAS No. 109. Accordingly, a valuation allowance was recorded against that
amount.
3. TRANSACTIONS WITH MANAGED LIMITED PARTNERSHIP AND OTHER RELATED
PARTIES:
Management Fees
Prior to the acquisition of the assets of Clemson-Seneca, the Company received
a fee for its services equal to 6.75% of Clemson-Seneca's gross revenues,
excluding revenues from the sale of cable television systems or franchises.
In August 1994, NCTV began paying management fees to NTC equal to 5% of NCTV's
gross revenues, excluding revenues from the sale of cable television systems or
franchises. The Company paid $1,320,492 and $331,603 to NTC in 1995 and 1994,
respectively.
Program License Fees
In July 1994, NCN, a wholly owned subsidiary of the Company, began receiving
monthly program license fees from affiliated entities for programming produced
by NCN. Total license fees earned from affiliates during 1995 and 1994 were
$602,263 and $342,462, respectively.
<PAGE> 163
Unsecured Advances to Parent and Advances from Affiliates
The Company's advances from affiliates are intended to be repaid through future
cash flow generated by the Company. Under the terms of an intercompany
borrowing arrangement, the Company has agreed to repay all outstanding advances
due to affiliates by December 31, 1997. Under the terms of an intercompany
borrowing arrangement, NTC has agreed to repay all outstanding advances due to
the Company by December 31, 1997.
Reimbursements
NCC provides certain centralized services to the Company and other affiliated
entities. The Company reimburses NCC for the cost of those services, which
include executive services, engineering, marketing, management services,
accounting, bookkeeping, legal, copying, office rent and computer services.
The amounts billed to the Company are based on NCC's cost. The costs of
certain services are charged directly to the Company, based upon the actual
time spent by NCC's employees. The cost of other services is allocated to the
Company based upon certain factors, including its relative size, revenue and
other factors. Amounts charged for these services were $1,425,316 and $622,486
for 1995 and 1994, respectively.
In 1995 and 1994, the Company paid billing service fees to CTB of $175,632 and
$105,779, respectively. In 1995 and 1994, CAC billed the Company $161,627 and
$33,790, respectively, for advertising services.
The Company has operating management agreements with limited partnerships
managed by NCC. Under the terms of these agreements, the Company serves as the
managing agent for certain of the limited partnerships' cable television
systems and is reimbursed for certain operating, administrative and programming
expenses. The Company received $65,921 and $25,087 under the terms of these
agreements during 1995 and 1994, respectively.
Accumulated Deficit in Managed Limited Partnership
NCTV was a general partner in Clemson-Seneca, which owned and operated a cable
television system. During 1995, NCTV purchased the assets of Clemson-Seneca.
All items of income, loss, deduction and credit generated by this limited
partnership were allocated 99% to the limited partners and 1% to NCTV as
managing general partner until the limited partners had received aggregate cash
distributions in an amount equal to aggregate capital contributions.
Thereafter, the general partners received 25% and the limited partners were
allocated 75% of partnership income, losses and distributions. Distributions
from the sale of the system have been determined according to its partnership
agreement.
<PAGE> 164
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
------------ ------------
<S> <C> <C>
Land and buildings $ 1,935,828 $ 1,452,111
Distribution plant 50,293,667 37,996,321
Other equipment 2,940,600 2,080,370
Leasehold improvements 38,451 38,451
Construction-in-progress 33,366 25,290
------------ ------------
55,241,912 41,592,543
Less-- accumulated depreciation (18,444,806) (14,146,114)
------------ ------------
$ 36,797,106 $ 27,446,429
------------ ------------
</TABLE>
Replacements, renewals and improvements are capitalized. Maintenance and
repairs are charged to expense as incurred.
5. BORROWING ARRANGEMENTS:
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revolving credit and term loan, collateralized by a first lien position on all present and
future assets and stock of the Company. Interest rates vary based on certain financial
covenants; currently 9.24% (weighted average). Graduated principal and interest
payments are due quarterly until maturity on September 30, 2003. $82,569,998 $65,500,000
Term loan, secured by parcel of land purchased with proceeds. Interest accrues at prime
plus .75%; currently 9.00%. Principal and interest payments are due monthly until
maturity in 1998. 154,747 -
Seller note, currently accruing interest at 8.75%, due to mature in 1996. 232,710 -
Non-interest bearing seller notes, due to mature during 1996. 163,114 -
Other 24,342 31,020
----------- -----------
$83,144,911 $65,531,020
----------- -----------
</TABLE>
<PAGE> 165
Annual maturities of notes payable for the years ending after December 31,
1995, are as follows:
<TABLE>
<S> <C>
1996 $ 3,928,263
1997 5,424,000
1998 8,232,650
1999 9,180,000
2000 10,260,000
Thereafter 46,119,998
-----------
$83,144,911
-----------
</TABLE>
Under the revolving credit and term loan agreement, the Company has agreed to
restrictive covenants which require the maintenance of certain ratios,
including a Pro Forma Debt Service Ratio of 1.2 to 1, an Interest Coverage
Ratio of not less than 1.7 to 1 and a Leverage Ratio of 5.75 to 1, among other
restrictions. The Company submits quarterly debt compliance reports to its
creditor under this arrangement.
The Company has entered into interest rate swap agreements to reduce the impact
of changes in interest rates. Interest rate swap transactions generally
involve the exchange of fixed and floating interest payment obligations without
the exchange of the underlying principal amounts. At December 31, 1995, the
Company had outstanding various interest rate swap agreements with its bank.
These agreements effectively change the Company's interest rate exposure to a
fixed rate of 6.27%, plus an applicable margin which is based on certain
financial covenants (the margin at December 31, 1995 was 2.75%). The notional
amount of each swap, the fixed interest rate and the maturity date are as
follows:
<TABLE>
<CAPTION>
Maturity Date Fixed Rate Amount
------------- ---------- -----------
<S> <C> <C>
November 6, 1996 5.85 $ 3,500,000
December 8, 1996 5.485 1,800,000
June 12, 1997 5.63 13,500,000
June 30, 1997 5.97 12,900,000
August 26, 1997 6.65 28,592,500
September 30, 1997 6.00 4,200,000
March 9, 1998 7.25 5,500,000
-----------
$69,992,500
-----------
</TABLE>
At December 31, 1995, NCTV would have been required to pay approximately
$1,120,000 to settle these agreements based on fair value estimates received
from financial institutions.
The counterparty to the Company's interest rate swap agreements is the
Company's creditor. The Company is exposed to credit risk to the extent of
nonperformance by a counterparty; however, management believes the risk of
incurring losses due to credit risk is remote. The notional amount of the
instruments discussed above reflects the extent of involvement in the
instruments, but does not represent the Company's exposure to market risk.
Considerable judgment is required to develop the estimates of fair value; thus,
the estimates provided above are not necessarily indicative of the amounts that
could be realized in a current market exchange.
<PAGE> 166
6. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Company leases certain tower sites, office facilities and pole attachments
under leases accounted for as operating leases. Rental expense (including
month-to-month leases) was $434,101 and $214,401 in 1995 and 1994,
respectively. Minimum lease payments to the end of the lease terms are as
follows:
<TABLE>
<S> <C>
1996 $ 36,465
1997 30,646
1998 27,351
1999 26,091
2000 11,055
Thereafter 72,252
--------
$203,860
--------
</TABLE>
Effects of Regulation
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the Federal
Communications Commission (FCC) adopted rules implementing rate regulation and
certain other provisions of the 1992 Act, which became effective September 1,
1993. On February 22, 1994, the FCC adopted further rate regulation rules
requiring additional reductions, which became effective May 15, 1994, and
revised the benchmarks and formulas used to calculate such rates. Also in
February, the FCC's initial rules governing cost-of-service showings were
adopted, with an effective date of May 15, 1994. Cable operators may pursue
cost-of-service showings to justify charging rates for regulated services in
excess of those established by the FCC in its benchmark regulatory scheme.
On May 5, 1995, the FCC announced the adoption of a simplified set of rate
regulation rules applicable to small cable systems, defined as a system serving
15,000 or fewer subscribers, owned by small companies, defined as a company
serving 400,000 or fewer subscribers. Under the FCC's definition, the Company
is a small company and each of the Company's cable systems are small systems.
Maximum permitted rates under these revised rules are dependent on several
factors including the number of regulated channels offered, the net asset basis
of plant and equipment used to deliver regulated services, the number of
subscribers served and a reasonable rate of return. It is management's opinion
that, in all material respects, the rates in effect in the Company's cable
systems are within the maximum allowable rates permitted under the FCC's small
cable system rules.
<PAGE> 167
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became
law. The 1996 Act will eliminate all rate controls on cable programming
service tiers of small cable systems, defined by the 1996 Act as systems
serving fewer than 50,000 subscribers owned by operators serving fewer than 1%
of all subscribers in the United States (approximately 600,000 subscribers).
All of the Company's cable systems qualify as small cable systems. Many of the
changes called for by the 1996 Act will not take effect until the FCC issues
new regulations, a process that could take from several months to a few years
depending on the complexity of the required changes and the statutory time
limits. Because of this, the full impact of the 1996 Act on the Company's
operations cannot be determined at this time.
7. ACQUISITION OF SYSTEMS:
During 1995, the Company purchased the assets of Clemson-Seneca and the
operating assets of cable television systems in Oconee County, South Carolina;
Madera County, California; and communities in and around Mexia, Texas adding
approximately 15,000 basic subscribers, or an increase of 22%.
The aggregate purchase price of the assets was approximately $21,600,000. As
of December 31, 1995, the Company had paid approximately $20,582,000 of the
aggregate purchase price through borrowings under its revolving credit and term
loan and cash on hand. As of December 31, 1995, $870,447 remained payable
under the holdback provisions of the respective purchase agreements, which
reflect reductions for certain post- closing adjustments. At December 31,
1995, $474,622 of this amount was included in due to managed limited
partnership on the consolidated balance sheet.
During 1994, the Company purchased the assets of three partnerships which were
managed by NCC, an affiliate of the Company adding approximately 24,000 basic
subscribers, or an increase of 59%. The aggregate purchase price of the
partnerships was $30,100,000. As of December 31, 1994, the Company had paid
approximately $26,400,000 of the aggregate purchase price through borrowings
under its term loan, had outstanding approximately $900,000 of amounts to be
paid under the holdback provisions of the purchase agreements and had an
outstanding payable to an affiliate of approximately $2,800,000. For purposes
of the consolidated statement of cash flows, amounts due under the holdback and
amounts due to the Company's affiliate have been treated as noncash
transactions. During 1995, the amounts outstanding pursuant to the holdback
provisions of the purchase agreements were paid.
Pro forma operating results (unaudited) of the Company for 1995 and 1994,
assuming the acquisitions of the partnerships and systems described above had
been made at the beginning of the respective periods, follow:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $30,214,753 $27,464,910
=========== ===========
Net loss $(4,939,577) $(5,185,845)
=========== ===========
</TABLE>
<PAGE> 168
EXHIBIT A
PROXY
For delivery at the Special Meeting of Limited Partners to be held on December
18, 1996, and at adjournments thereof.
SOLICITED ON BEHALF OF THE GENERAL PARTNERS.
The undersigned hereby: acknowledges receipt of the Notice of Special Meeting of
Limited Partners of Northland Cable Properties Four Limited Partnership (the
"Partnership") and accompanying Proxy Statement, each dated November 1, 1996
("Proxy Materials"); appoints John S. Whetzell and Richard I. Clark, or either
of them, as proxies, each with full power to appoint his substitute; represents
that the undersigned holds of record as of October 15, 1996, the number of units
of limited partnership interest set forth below; authorizes the proxies to
represent and to vote, as designated below, all of such interest at the Special
Meeting of Limited Partners to be held on December 18, 1996 or any adjournments
thereof; and directs the proxies to:
APPROVE / / DISAPPROVE / / ABSTAIN FROM VOTING ON / /
The following:
The grant to the Managing General Partner of authority to sell the
cable systems owned by the Partnership (the "Systems") to Northland
Communications Corporation or its assigns ("Northland"), to dissolve
and wind up the affairs of the Partnership, to distribute the proceeds
of the liquidation and any remaining assets in accordance with the
Partnership Agreement and the Proxy Materials, and to take any action
deemed necessary or appropriate by it to accomplish the foregoing;
together with an amendment to the Amended and Restated Certificate and
Agreement of Limited Partnership of Northland Cable Properties Four
Limited Partnership, as such amendment is set forth in Exhibit B to the
Proxy Materials, to authorize the Partnership to enter into an
agreement with Northland for the sale to Northland of the undivided
portion of the Systems which is attributable to the Limited Partners'
and Administrative General Partner's collective interest in the
Partnership, and the distribution to Northland, in-kind, of the
undivided portion of the Systems which is attributable to the Managing
General Partner's interest in the Partnership, all on the terms and
conditions described in the Proxy Materials; and all such other and
future actions reasonably necessary to accomplish the foregoing.
This proxy will be voted as directed by the undersigned. The above-referenced
proposal is an integrated transaction. Therefore, Limited Partners may not vote
for or against individual elements of the proposed transaction, but must vote
either for or against the proposed transaction as a whole. IF THIS PROXY IS
EXECUTED AND RETURNED AND NO DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED TO
APPROVE THE ABOVE-REFERENCED PROPOSAL.
When Limited Partner interests are held by joint tenants, both should sign. When
signing as attorney, executor, administrator, trustee, or guardian, give full
title as such. A corporation should sign in full corporate name by its president
or other authorized officer, and a partnership should sign in full partnership
name by its authorized representative.
DATED: __________________________, 1996 SIGN EXACTLY AS NAME APPEARS BELOW
X_____________________________________
Number of Limited Partnership (Signature)
Units Held:
X_____________________________________
(Signature, if held jointly)
PLEASE PROMPTLY COMPLETE, SIGN, DATE AND RETURN THIS PROXY FORM
IN THE ENCLOSED ENVELOPE.
<PAGE> 169
EXHIBIT B
AMENDMENT
TO
AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
OF
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
The Amended and Restated Certificate and Agreement of Limited Partnership
of Northland Cable Properties Four Limited Partnership (the "Partnership"),
dated April 19, 1985, as amended (the "Partnership Agreement"), is further
amended by adding a new Article 22, which reads in its entirety as follows:
22. Sale and Distribution to Northland.
a. Authority for Agreement. The Partnership is hereby
authorized to enter into an agreement (the "Northland Agreement") with
Northland Communications Corporation or its assigns ("Northland") to (i)
sell to Northland the undivided portion of the franchises and operating
assets of all of the cable television systems owned by the Partnership,
which serve the communities of Flint/Tyler, New Caney, Whitewright,
Hillsboro, Kaufman, Waterwood and Prairie View, Texas and Chowchilla,
California, as well as surrounding contiguous areas (the "Systems"),
that is attributable to the Limited Partners' and the Administrative
General Partner's collective interest in the Partnership, and (ii)
distribute in-kind to Northland the undivided portion of the Systems
that is attributable to the Managing General Partner's interest in the
Partnership. The terms and conditions of the Northland Agreement are
generally described in the Proxy Statement of the Partnership dated
November 1, 1996 (the "Proxy Statement"). This Article relates only to
the acquisition of the Systems by Northland and shall not, in any
respect, restrict or otherwise affect the authority of the General
Partners to sell or otherwise dispose of the Systems to unaffiliated
third parties in accordance with Article 11.
(1) Appraisal Process. The Partnership commissioned
Daniels & Associates, L.P., an independent, nationally-known cable
appraiser, to appraise the value of the Systems. The final appraisal,
which is dated as of June 30, 1996, was made in conformity with standard
appraisal techniques and applied relevant market and economic factors.
The General Partners made available to the appraiser all of the books
and records of the Partnership, and such other information as the
appraiser reasonably requested in order to ascertain the value of the
Systems. The Partnership will pay the fees and expenses of the
appraiser. The value of the Systems, as determined by the appraiser, is
$30,318,000. Such appraised value has been increased by the General
Partners to $32,000,000, which constitutes the "Northland Price," as
that term is used below in this Article 22.
(2) Exercise of Purchase Option. At any time within
180 days of the date of the Special Meeting of Limited Partners to which
the Proxy Statement relates, or of any adjournment thereof, Northland,
in its sole and absolute discretion, shall have the right to consummate
the Northland Agreement. The date of such consummation shall be the
"Closing Date." On the Closing Date, (a) the Partnership
B-1
<PAGE> 170
shall (i) sell to Northland the undivided portion of the Systems that
is attributable to the Limited Partners' and the Administrative General
Partner's collective interest in the Partnership, and (ii) distribute
to Northland in-kind the undivided portion of the Systems that is
attributable to the Managing General Partner's interest in the
Partnership; and (b) Northland shall pay the Partnership, through a
combination of cash and a promissory note (the "Note"), an amount (the
"Purchase Price") which is equal to the amount of cash that would be
distributed collectively to the Limited Partners and the Administrative
General Partner if, on the Closing Date, (i) the Systems were sold at
the Northland Price for cash to an independent third party, and gain
from the transaction were allocated in accordance with paragraph 16(c)
of the Partnership Agreement, (ii) all known Partnership liabilities
were paid, and (iii) the remaining sale proceeds were distributed to
the Partners in accordance with paragraph 16(d) of the Partnership
Agreement.
The cash payment made by Northland to the Partnership on the
Closing Date shall be in an amount which, after retiring known
Partnership liabilities, will enable the Partnership to distribute to
the Limited Partners $750 for every $1,000 invested. The Note
delivered by Northland to the Partnership on the Closing Date shall be
in principal amount equal to the remaining balance of the Purchase
Price, and shall bear interest at a rate of six percent (6%) per annum.
The Note will be payable in two annual installments commencing on the
first anniversary of the Closing Date, with one-half of the principal,
plus all accrued but unpaid interest, due on each payment date. The Note
will be subordinated to Northland's existing and future senior debt.
On the Closing Date, the Partnership will deliver to Northland
such deeds, bills of sale, endorsements, assignments and other good and
sufficient instruments of sale, transfer and conveyance, in form and
substance satisfactory to Northland, as shall be necessary or
appropriate to vest in Northland legal title to and ownership of the
Systems, free and clear of any liens, encumbrances and adverse interests
of other parties, except for those liens, encumbrances and adverse
interests expressly assumed by Northland.
b. Allocation of Gain and Cash Distributions. Gain from the
sale by the Partnership to Northland of the undivided portion of the
Systems that is attributable to the Limited Partners' and the
Administrative General Partner's collective interest in the Partnership
shall be allocated solely to the Limited Partners and to the
Administrative General Partner in accordance with paragraph 16(c) of the
Partnership Agreement, except that all allocations pursuant to paragraph
16(c)(3) shall be made 93.75% to the Limited Partners and 6.25% to the
Administrative General Partner. Distributions on and following the
Closing Date shall be made in accordance with paragraph 16(d) of the
Partnership Agreement, except that any liquidating distributions to the
Managing General Partner shall be in kind and shall include the in-kind
distribution to Northland of the undivided portion of the Systems that
is attributable to the Managing General Partner's interest in the
Partnership, and any liquidating distributions to the Limited Partners
and the Administrative General Partner shall be monetary and shall
include the net proceeds from the sale to Northland and payments made on
account of the Note. All other allocations of income, gain or loss and
distributions of cash shall be made to all the Partners in accordance
with the Partnership Agreement.
The General Partners are authorized to take all other and further
action deemed by them necessary or appropriate to effect the foregoing,
including but not limited to the
B-2
<PAGE> 171
creation of a liquidating trust for purposes of collecting Note
payments and carrying on other appropriate business following
dissolution of the Partnership. Notwithstanding paragraph 16(e) of the
Partnership Agreement, the General Partners shall furnish to Limited
Partners an audited statement, at Partnership expense, which shall set
forth the assets and liabilities of the Partnership as of the date of
final liquidation, but shall not be obligated to furnish reports
pursuant to paragraphs 18(b), (c) or (d) of the Partnership Agreement
for the year in which such liquidation occurs.
Except as expressly amended by this Amendment, the Partnership Agreement
shall remain in full force and effect.
DATED: December___, 1996.
NORTHLAND COMMUNICATIONS CORPORATION
(for itself as Managing General Partner of the
Partnership, and as attorney-in-fact for the
Administrative General Partner and a majority
in interest of the Limited Partners of the
Partnership)
By___________________________________________
John S. Whetzell, President
B-3
<PAGE> 172
EXHIBIT C
CONFIDENTIAL
APPRAISAL OF THE ASSETS OF
NORTHLAND CABLE PROPERTIES FOUR
LIMITED PARTNERSHIP
as of June 30, 1996
PREPARED BY
DANIELS & ASSOCIATES
<PAGE> 173
CONFIDENTIAL
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Appraisal Analysis Summary
Introduction
Northland Cable Properties Four Limited Partnership (the "Partnership") is a
Washington limited partnership consisting of two general partners and 1,028
limited partners. Northland Communications Corporation ("Northland"), a
Washington corporation, is the managing general partner of the Partnership. The
Partnership was formed on January 2, 1985 and began operations in April 1985
with the acquisition of several cable television systems in Texas and
California.
Daniels & Associates, L.P. ("Daniels") was retained by Northland to appraise
the fair market value of the assets of the Partnership as of June 30, 1996 (the
"Valuation Date"). The Partnership owns and operates cable television systems
serving numerous communities in Texas and California (referred to in the
aggregate as the "Systems") that, as of May 31, 1996, passed approximately
43,500 homes and served 23,152 basic subscribers in the following eight system
operating groups.
As of May 31, 1996
<TABLE>
<CAPTION>
Annualized
System Miles of Plant Approximate Basic Cash Flow for
Operating /Number of Homes/ Homes Subscriber Pay Units/ the Five M/E
Groups Headends Mile Passed Penetration Penetration 5/31/96
--------- -------------- ------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Flint/Tyler, TX 424/8 28 12,040 7,973/66.2% 2,361/29.6% N/A
New Caney, TX 547/6 25 13,550 6,806/50.2% 2,614/38.4% N/A
Whitewright, TX 100/2 43 4,275 1,756/41.1% 468/26.7% N/A
Hillsboro, TX 57/1 55 3,120 1,600/51.3% 413/25.8% N/A
Kaufman, TX 65/1 32 2,060 1,396/67.8% 671/48.1% N/A
Prairie View, TX 99/2 25 2,485 1,055/42.5% 406/38.5% N/A
Waterwood, TX 35/1 34 1,180 425/36.0% 160/37.6% N/A
Sub-Total Texas 1,327/21 29 38,710 21,011/54.3% 7,093/33.8% N/A
Chowchilla, CA 61/5 79 4,790 2,141/44.7% 910/42.5% N/A
Total All Systems 1,388/26 31 43,500 23,152/53.2% 8,003/34.6% $3,742,909
</TABLE>
The appraisal was performed in conjunction with the anticipated dissolution
and liquidation of the Partnership. This report summarizes Daniels' conclusions
and provides
1
<PAGE> 174
an outline of the scope of the engagement, the process used, an overview of
the Systems by group, the valuation methodology, the assumptions relied upon
and an explanation of the values derived.
Process
Daniels prepared an independent appraisal analysis to determine the fair
market value of the assets of the Partnership. The Systems were appraised
on a going-concern basis, in conformance with standard appraisal
techniques, utilizing a ten-year discounted net cash flow analysis and
applying relevant market and economic factors. The appraisal assumes that
the Systems have been and will continue to be operated as efficiently as
comparable cable systems, and that the franchises and leases of assets used
in the operation of the Systems will be renewed indefinitely without material
changes, other than upgrade and/or rebuild requirements (see "The Systems"
section).
The appraisal process included discussions with the Partnership's
management, due diligence visits to substantially all of the Systems by
Daniels' personnel, research of demographic information concerning the
various communities served and analyses of historical and forecasted
financial and operating information, as well as Daniels' general knowledge
about the industry. From such due diligence, summaries of the relevant
operating, technical, financial and demographic characteristics of the
Systems by operating group were prepared. These characteristics of the
Systems were instrumental in determining value.
In order to assess the fair market value of the Partnership's assets,
detailed operating and financial forecasts by system operating group were
prepared, incorporating the critical elements of operating revenues and
expenses as well as capital expenditure requirements. These financial
forecasts then formed the basis for determining a discounted cash flow value
for each system operating group, a standard valuation methodology used within
the industry. The combined values of the Systems, by system operating
group, provides a value of the cable operating assets of the Partnership on
a discounted cash flow basis. In addition, using the market multiple
methodology, an aggregate value for the Partnership's assets was derived
by analyzing value per subscriber and operating cash flow multiples
obtained in private market sales of comparable cable television systems, and
then by applying those comparable market multiples to the Systems. The
products of these two valuation methodologies were then analyzed to determine
a final appraised value for the Partnership's assets.
2
<PAGE> 175
The Systems
The Systems are clustered and managed as eight operating groups - including
seven in Texas and one in California. The largest operating group is
Flint/Tyler, Texas with approximately 8,000 basic subscribers and the smallest
is Waterwood, Texas with 425 basic subscribers. As of the Valuation Date, the
Systems had subscriber penetration rates ranging from 36.0% to 67.8%, and a
total basic penetration level of 53.2%, compared to the national average of
approximately 63.0%.
In the eight system operating groups, there are a total of 26 headends and 1,388
plant miles, of which approximately 93% is aerial and 7% is underground.
Approximately 8% of the plant miles are 270 MHz or less; 84% are 300 MHz to 370
MHz; and 8% of the plant is 400 MHz. Approximately 10% of the homes passed are
passed by plant with a bandwidth of 270 MHz or less, 73% are passed by 300 MHz
to 370 MHz plant, and 17% of the homes are passed by cable with a bandwidth of
400 MHz.
Technical Summary
<TABLE>
<CAPTION>
Miles of Plant and Approximate Homes Passed at Various Bandwidths
System Operating Miles @ 220/270 Miles @ 300 - 370 Miles @ 400 MHz/ Total Miles/
Group MHz/Homes Passed MHz/Homes Passed Homes Passed Homes Passed
------------------ ---------------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
Flint/Tyler, TX 9/165 415/11,875 424/12,040
New Caney, TX 547/13,550 547/13,550
Whitewright, TX 100/4,275 100/4,275
Hillsboro, TX 57/3,120 57/3,120
Kaufman, TX 65/2,060 65/2,060
Prairie View, TX 99/2,485 99/2,485
Waterwood, TX 35/1,180 35/1,180
Sub-Total Texas 109/4,440 1,161/31,150 57/3,120 1,327/38,710
Chowchilla, CA 6/495 55/4,295 61/4,790
Total All-Systems 109/4,440 1,167/31,645 12/7,415 1,388/43,500
</TABLE>
The lack of excess channel capacity and the reality of competition from DBS and
MMDS suggest that a rebuild or upgrade of all of the Systems with a current
capacity of less than 450 MHz would be prudent over the next several years. The
Partnership plans to upgrade all of the Systems to a bandwidth of 400 MHz to 450
MHz over the next three to four years, however, there are no current franchise
requirements to rebuild or upgrade any of the Systems. None of the Systems are
currently addressable. Daniels believes to
3
<PAGE> 176
remain competitive, these Systems will probably need to be further upgraded
or rebuilt in five to six years, and Daniels built this assumption into its
financial forecasts.
The quality of broadcast signals that can be received off-air varies among the
various system groups from very good to poor, and the communities that
receive good off-air signals typically have a lower subscriber
penetration rate. There are no hardwire overbuilds in any of the Systems;
however, there is an MMDS operator with service available to subscribers
served by the Whitewright, Texas operating group and by the Chowchilla,
California operating group. The MMDS operator has had a significant negative
effect on the Whitewright, Texas subscriber base, but the Chowchilla,
California subscriber base has remained fairly constant.
On May 5, 1995, the Federal Communications Commission ("FCC") announced the
adoption of a simplified set of rate regulation rules that will apply to
"small" cable systems, defined as a system serving 15,000 or fewer
subscribers, that are owned by "small" companies, defined as a company
serving 400,000 or fewer subscribers. Under the FCC's definition, the
Partnership is a "small" company and each of the Partnership's Systems are
"small" systems. Maximum permitted rates under these revised rules is
dependent on several factors including the number of regulated channels
offered, net asset basis of plant and equipment used to deliver regulated
services, the number of subscribers served, and a reasonable rate of return.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became
law. The 1996 Act will eliminate all rate controls on cable programming
service tiers ("CPSTs") of small cable systems, defined by the 1996 Act as
systems serving fewer than 50,000 subscribers owned by operators serving fewer
than 1% of all subscribers in the United States (approximately 600,000
subscribers). All of the Partnership's Systems qualify as small cable
systems. Many of the changes called for by the 1996 Act will not take
effect until the FCC issues new regulations, a process that could take from
several months to a few years, depending on the complexity of the required
changes and the statutory time limits.
As of the Valuation Date, the Partnership has received notification that
local franchising authorities with jurisdiction over approximately 8% of the
Partnership's subscribers have elected to certify to regulate basic rates.
Based on Northland's analysis, the rates charged by the Systems are within
the maximum rates allowed under FCC rate regulations.
4
<PAGE> 177
The annualized revenue and cash flow for the five-month period ended May 31,
1996 for the Systems was $8.6 million and $3.7 million, respectively. This
equates to an average monthly revenue per basic subscriber of $31.14 and average
annual cash flow per basic subscriber of $161.72.
Flint/Tyler, Texas
The Flint/Tyler, Texas group is the largest of the eight system operating groups
with subscribers located in suburban areas to the southeast, south, and
southwest of Tyler, Texas. As of May 31, 1996, this group passed approximately
12,040 homes and served 7,973 basic subscribers, for a penetration rate of
66.2%. This penetration rate is the second highest of all of the system
operating groups. The Flint/Tyler group added approximately 635 homes passed
and 626 basic subscribers over the last 29 months, for compound annual growth
rates of 2.3% and 3.4%, respectively. There are eight franchises covering this
group, with franchise expiration dates ranging from November 1997 to February
2008.
The Flint/Tyler operating group includes eight headends and 424 miles of plant,
91% of which is aerial. With the exception of approximately nine miles of
plant from one of the headends, all of the plant is capable of passing 300 MHz
or 330 MHz. The channel capacity varies by headend from 22 to 42, with only two
to six excess channels available. The Partnership is currently planning to
consolidate two of the eight headends into one headend and upgrading the plant
from this one headend to 450 MHz. This project is anticipated to be completed
by September 1996. Over the next three to four years, the Partnership is
planning to upgrade all of the remaining Flint/Tyler plant to at least 400 MHz
in order to increase channel capacity.
An Economy Basic service of primarily broadcast and local origination channels,
and a Specialty Tier of four satellite channels, are offered to the subscribers
served from three of the headends. A Standard Basic level of service of 13 to
27 channels is offered to all subscribers. The Economy Basic rate varies from
$11.95 to $12.95, the Specialty Tier is $5.35, and the Standard Basic rate
varies from $22.95 to $25.15. The last rate increase was effective October 1,
1995, and the next planned rate increase is August 1, 1996.
New Caney,Texas
New Caney is the second largest system operating group - passing approximately
13,550 homes in several communities approximately forty miles north of Houston
and serving 6,806 basic subscribers as of May 31, 1996. The overall penetration
rate in this group is
5
<PAGE> 178
only 50.2%, well below both the average for the Flint/Tyler group and the
current industry average. The New Caney system operating group includes six
headends and seven franchised areas, all of which, with the exception of the New
Caney headend, were acquired by the Partnership in September and October of
1995. The New Caney headend accounts for approximately 60% of the subscriber
base, and over the last 29 months has added approximately 58.0 homes passed and
351 basic subscribers, for compound annual growth rates of 3.3% and 3.8%,
respectively. The seven franchises covering this group expire between May 2002
and March 2011.
This system operating group includes six headends with 547 miles of plant, of
which approximately 94% is aerial and 6% is underground. Approximately 72% of
the plant miles are capable of passing 300 MHz, and 28% can pass 330 MHz. The
channel capacity is 36 channels from the 300 MHz plant and 41 from the 330 MHz
plant. The New Caney headend, which accounts for approximately 60% of the
subscribers in this group, has no excess channel capacity. The other five
headends have four to sixteen channels of excess channel capacity. The
Partnership is planning to combine the two largest headends into one headend and
to upgrade the plant from this headend to 330 MHz by October 1997. The
Partnership plans to upgrade the remaining plant to 450 MHz over the next two to
three years.
The subscribers served from four of the headends are offered only one level of
service - a Standard Basic package consisting of 15 to 29 channels for a rate of
$19.20 to $26.50. The remaining headends offer an Economy Basic service of 12
channels for $10.60, a Standard Basic with 15 or 20 channels for an additional
$12.70 to $17.40, and one of the headends offers a Specialty Tier of 6 channels
for $7.50. All of the headends also offer two to four pay services. The last
rate increase was effective October 1995 for approximately 60% of the
subscribers and March 1996 for the remaining 40%. The subscribers whose rates
were increased October 1, 1995 will have their next rate increase August 1,
1996. For the rest of the subscribers, no further rate increases are planned
for 1996.
Whitewright, Texas
The Whitewright system operating group, located north of Dallas and just south
of the Oklahoma border, was acquired by the Partnership in April 1985, as its
first acquisition. As of May 31, 1996, this system group passed approximately
4,275 homes and served 1,756 basic subscribers, for a penetration rate of 41.1%.
Homes-passed growth has been minimal over the last 29 months, and the subscriber
base has declined by approximately 500 subscribers since December 31, 1995, due
primarily to the presence
6
<PAGE> 179
of a local MMDS wireless cable operator known as Heartland Wireless. This
system group is operated under seven franchise agreements, with expiration dates
ranging from October 2001 to January 2012.
Included in this system group are two headends, the larger of which serves
approximately 97% of the subscriber base and has no excess channel capacity.
There are a total of 100 miles of 270 MHz plant in this system group, 92% of
which is aerial. Because of the absence of excess channel capacity and the
competitive operating environment, the Partnership is planning to upgrade the
plant to 330 MHz by the end of September 1996.
The larger headend offers an Economy Basic package of 14 channels for $12.00, a
Standard Basic package of an additional 16 channels for $12.70, and 3 pay
services. The last rate increase was effective April 1, 1996 for all
subscribers except the approximately 60 subscribers served from the Trenton
headend, whose rates will increase August 1, 1996.
Hillsboro, Kaufman, Waterwood and Prairie View, Texas
The four smallest of the Texas system operating groups were all acquired in
September and October of 1995, and account for approximately 19% of the
subscribers served by the Partnership. As of May 31, 1996, these four system
groups passed 8,845 homes and served 4,476 basic subscribers, for a penetration
rate of 50.6%. There are nine franchises covering these system groups, with
expiration dates ranging from September 1998 to April 2012.
There are five headends serving these four system groups, with the two largest
headends serving approximately 1,600 and 1,400 subscribers each. The Hillsboro
headend (1,600 subs) is currently being upgraded to 400 MHz, Kaufman (1,396
subs) is 370 MHz and will be upgraded to 450 MHz by December 1996, and the plant
from the remaining three headends is 300 MHz, and will probably be upgraded to
450 MHz over the next two to three years. There are a total of 248 miles of
aerial and only 8 miles of underground plant in these four system groups. The
Partnership is planning to eliminate one of the Prairie View headends and
replace those subscribers from line extension opportunities off the Brookshire
headend, an adjacent headend in the group.
Only the Hillsboro system offers an Economy Basic service of 17 channels for
$11.50. The other three system groups all offer a Standard Basic package only,
which includes 20 to 34 channels for $19.20 to $28.00. The Prairie View system
increased its rates effective
7
<PAGE> 180
March 1, 1996, however, rate increases in the other systems will not be
implemented until August 1, 1996.
Chowchilla, California
The Chowchilla system group serves several communities in California to the
northwest and the southwest of Fresno. As of May 31, 1996, this system group
passed 4,790 homes and served 2,141 basic subscribers, for a penetration rate of
44.7%. While the homes-passed growth has been minimal over the last 29 months,
the subscriber level and the subscriber penetration rate have declined (net of
the effect of an acquisition of approximately 200 subscribers), due primarily to
the availability of good quality off-air signals and the presence of an MMDS
wireless cable operator (People's Choice) in Fresno.
There are currently five headends and 61 miles of plant (79% aerial) serving the
Chowchilla system group, with the largest headend accounting for approximately
1,400 subscribers (65%). Approximately 55 miles of the plant is capable of
passing 400 MHz, while the remaining 6 miles is only 330 MHz. The Partnership
plans to combine two of the headends, and upgrade the plant from the combined
headend from 330 MHz to 400 MHz by the end of October 1996. One of the
headends, serving 106 subscribers, was shut down June 1, 1996 because of the
unprofitability of operating such a small system in a competitive environment.
The Partnership management believes that they will, however, increase
subscribers served from the other headends to more than offset this loss by
adding channels utilizing the available headend equipment and marketing the new
programming services. The Partnership management has no further near term plans
to upgrade the plant.
This system group offers a Standard Basic service of 23 to 32 channels for
$17.38 to $22.95. No Economy Basic level of service is available. The last
rate increase in this system group was effective October 1, 1995 and the next
planned rate increase is August 1, 1996.
Methodology
In order to appraise the fair market value of the assets of the Partnership,
Daniels used two valuation methodologies: (i) a discounted cash flow ("DCF")
valuation analysis; and (ii) an analysis of market multiples realized from
comparable private market cable transactions. The respective aggregate fair
market values of the Partnership's assets
8
<PAGE> 181
from each valuation methodology used were then compared, and a final value was
derived.
Discounted Cash Flow
This methodology measures the present value of the Systems' forecasted net
cash flows, defined as pre-tax operating income less capital expenditures
including all rebuild/upgrade costs. The Systems' forecasted net cash flow
is determined through the creation of a long-range operating forecast which
provides for detailed forecasts of critical revenue and expense components.
A residual value was forecasted based on growth of the Systems' net cash
flow into perpetuity, and discounted back to the present at the same
discount rate as the forecasted net cash flow. Daniels prepared a detailed
10-year revenue, cash flow and capital expenditure forecast for each of the
Systems to apply this discounted cash flow method.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels and rates and non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period, and were adjusted for particular growth
characteristics of each of the Systems. The capital expenditure forecasts
were based upon costs associated with the construction of new miles of plant,
plant maintenance and rebuild/upgrade requirements, and replacement and
upgrading of converters. Daniels believes the opportunities for the Systems
to provide ancillary telecommunications and data services are limited in
these markets and the technology and costs are also uncertain, therefore,
Daniels did not include telephony or data services revenue, expenses or
capital costs in its forecasts.
To determine the appropriate discount rate for this valuation, Daniels
attempted to approximate the weighted average cost of capital for an array
of entities within the cable television industry that are capable of
consummating an acquisition similar in size to the acquisition of these
Systems. The weighted average cost of capital is an entity's required
return on an investment necessary to satisfy the expectations of all of the
entity's investors, both debt and equity. An entity, therefore, will be
willing to pay a price for an investment as high as the value that will
allow it to meet its weighted average cost of capital or hurdle rate
requirement.
Borrowing costs are different for every entity, depending primarily upon
the overall credit quality of the borrower and/or the quality of the
collateral. In the cable industry, many lending institutions often use the
prime rate as a benchmark for determining loan interest rates. Some
borrowers pay interest rates above the prime rate while others are able to
9
<PAGE> 182
borrow at more favorable rates below the prime rate. Daniels, therefore,
assumes that the prime rate is a fair estimate of the average cost of debt of
an array of entities willing and financially able to consummate an acquisition
similar in size to the Systems. The cost of equity was determined by sampling
the estimated private market cost of equity for cable television investments
as of the Valuation Date and blending that with equity return objectives
of large publicly traded companies. Such equity returns are those which
would be required by experienced private equity investors and publicly traded
companies in cable television investments with similar characteristics as
those of the Partnership's Systems. The weighted average cost of capital
Daniels derived for the discounted cash flow analyses was 14.55%. Listed below
are the estimates of the costs of debt and equity in the capitalization
structure as of the Valuation Date used to determine the discount rate.
<TABLE>
<CAPTION>
Assumed Capital Structure % of Total Capital Cost of Capital
------------------------- ------------------ ---------------
<S> <C> <C>
Debt 60.0% 8.25%
Equity 40.0% 24.0%
Total Weighted Average Cost of Capital 100% 14.55%
</TABLE>
The combined DCF value of the Systems arrived at from this analysis was
$30.2 million, which is equal to 8.1 times the annualized operating cash
flow for the five-month period ended May 31, 1996, and $1,305 per basic
Subscriber.
<TABLE>
<CAPTION>
Discounted Cash Flow Multiple of 5 M/E 5/31/96
Valuation Annualized Cash Flow Value I Basic Subscriber
-------------------- ------------------------- ------------------------
<S> <C> <C>
$30,223,720 8.1X $1,305
</TABLE>
Comparable Transactions
In addition to the DCF valuation methodology, Daniels also used the
comparable transactions methodology, which is another generally accepted
valuation methodology used to correlate and validate the findings of the DCF
method with the realities of the private market. Under this method, the
market multiples reported in sales of cable systems of similar size, markets
and technical condition are compared to the subject Systems. In the case of
cable television system values, the most commonly used market multiples are
(i) a multiple of trailing three or six months annualized operating cash flow
and (ii) the price per Subscriber. Because detailed financial, operating and
technical information is not generally available regarding private cable
system transactions, it is difficult to relate specific transaction values
and multiples directly to the subject Systems. However, through an analysis
of both the range and average of the market multiples
10
<PAGE> 183
derived from a group of comparable system transactions, about which
information is available, this methodology provides a general measure of the
market multiples realized from comparable transactions, which are then applied
to the subject Systems in order to assess fair market value.
Comparable Sale Transactions
<TABLE>
<CAPTION>
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- ------- ----- ------ ----------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Various IL, KS, NE, MO Galaxy Telecom Douglas Communication 43,100 $46,000,000 $1,067 8.2 8/95
Various OK, TX Classic Cable Mission Cable 42,550 $57,471,000 $1,351 7.5 10/95
Various VA, GA, TN FrontierVision C4 Media 40,600 $47,500,000 $1,170 8.5 1/96
Various CO, MN, MO, NM Fanch Comm. Mark Twain Cablevision 27,300 $35,300,000 $1,293 8.0 5195
Various SC, GA, FL Galaxy Telecom Friendship Cable 18,000 $21,028,000 $1,168 7.0 9/95
Various KS, IA, IL, MO, NE Anderson Pacific Douglas Communication 16,000 $17,000,000 $1,062 8.1 12/95
AZ, MS Fanch Comm. GH Cable 12,400 $15,789,000 $1,273 8.0 8/95
------- ------------ ------ --- -----
Total/Average of System Comparables 199,950 $240,088,000 $1,201 7.9
</TABLE>
Source: Paul Kagan Associates, Inc. Cable TV Investor through May 31,1996 and
Daniels & Associates' Data Base as of May 31, 1996
The comparable transactions analysis yields a cash flow multiple range of 7.0
to 8.5 times cash flow and a weighted average for all of the transactions of
7.9 times cash flow. The range for the value per subscriber is between $1,062
and $1,351 with an overall weighted average of $1,201 per subscriber.
Material Relationships
Daniels has no ownership position in Northland or the Partnership; however,
Daniels has at various times sold cable systems to Northland while
representing other cable operators, and has sold cable systems on behalf of
Northland. Currently, Daniels is engaged by another cable operator who is
negotiating a letter-of-intent to sell three small cable systems to
Northland. Daniels does not believe that these prior and present
relationships in any way affect its ability to fairly and impartially render
the opinion of value expressed herein.
Valuation
Based on the analyses using the above-described methodologies, the
estimated fair market value of the cable television operating assets of the
Partnership, as of June 30, 1996, is 8.1 times the annualized operating cash
flow for the five-month period ended May 31, 1996. This translates to a gross
value of $30,318,000, and a value per basic subscriber of $1,310.
11
<PAGE> 184
The cash flow multiple is above the weighted average multiple from the
comparable transactions analysis and equal to the multiple derived from the
DCF methodology. The value per basic subscriber is significantly above the
weighted average value per subscriber derived from the comparable transactions
analysis and modestly above the value per subscriber derived from the Daniels
DCF valuation analysis, due to rounding.
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by the Partnership, as well as
published demographic information for the service areas. While Daniels
believes such sources to be reliable and accurate, it has not independently
verified any such information. The valuation is based on information
available to Daniels as of the Valuation Date. Daniels undertakes no
responsibility for updating this opinion to reflect changes in the value
of the assets subsequent to the Valuation Date of June 30, 1996, such as
market, economic, technological, operational, governmental and other changes.
12
<PAGE> 185
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Subscriber Summary
<TABLE>
<CAPTION>
System Headend Approximate Homes Passed
- ------ ------- ----------------------------------------
12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Chowchilla, ca Chowchilla 2,480 2,485 2,490 2,490
Riverdale 735 735 735 740
Easton * N/A N/A N/A N/A
Caruthers ** 360 360 360 360
Planada 700 700 705 705
Le Grand *** N/A N/A N/A 495
------ ------ ------ ------
Total - CA 4,275 4,280 4,290 4,790
Whitewright, TX Whitewright 3,905 3,915 3,925 3,930
Trenton 260 345 345 345
------ ------ ------ ------
Sub-Total 4,165 4,260 4,270 4,275
Flint/Tyler, TX Flint 3,180 3,430 3,450 3,460
Chapel Hill 2,190 2,220 2,250 2,265
Jackson's Landing 865 905 905 910
Red Ackers 1,175 1,185 1,195 1,200
Berryville 990 990 995 995
Chandler 780 850 865 875
Big Eddy 2,085 2,125 2,165 2,170
Dixie 140 165 165 165
------ ------ ------ ------
Sub-Total 11,405 11,870 11,990 12,040
New Caney, Tx New Caney 7,050 7,440 7,600 7,630
Huffman **** N/A N/A 3,380 3,395
Tarkenton **** N/A N/A 500 500
Ace **** N/A N/A 400 400
Cut & Shoot **** N/A N/A 1,290 1,295
New Waverly **** N/A N/A 330 330
------ ------ ------ ------
Sub-Total 7,050 7,440 13,500 13,550
Hillsboro, TX Hillsboro **** N/A N/A 3,105 3,120
Kaufman, TX Kaufman/Oak Grove **** N/A N/A 2,050 2,060
Waterwood, TX Waterwood **** N/A N/A 1,175 1,180
Prairie View, TX Prairie View/Waller **** N/A N/A 1,175 1,785
Brookshire **** N/A N/A 700 700
Simonton ****/***** N/A N/A N/A N/A
------ ------ ------ ------
Sub-Total N/A N/A 2,475 2,485
Total - Texas 22,620 23,570 38,565 38,710
Total - TX/CA 26,895 27,850 42,855 43,500
</TABLE>
* This headend was shut down December 1994.
** The Caruthers headend was shut down June 1, 1996.
*** Acquired December 1995
**** Acquired September/October 1995
***** The Simonton headend will be shut down by the end of the third
quarter 1996.
<PAGE> 186
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Subscriber Summary
<TABLE>
<CAPTION>
System Headend Basic Subscribers/Penetration
- ------ ------- -----------------------------------------------------------------
12/31/93 12/31/94 12/31/95 12/31/96
------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Chowchilla, ca Chowchilla 1,411/56.9% 1,408/56.7% 1,397/56.1% 1,387/55.1%
Riverdale 214/29.1% 210/28.6% 244/33.2% 224/30.3%
Easton * 139 55 N/A N/A
Caruthers ** 115/32.2% 104/28.9% 113/31.4% 106/29.4%
Planada 250/35.7% 236/33.7% 246/34.9% 214/30.4%
Le Grand *** N/A N/A N/A 210/42.4%
----------- ----------- ----------- -----------
Total - CA 2,129/51.3% 2,013/47.0% 2,000/46.6% 2,141/44.7%
Whitewright, TX Whitewright 2,084/53.4% 2,111/53.9% 2,196/55.9% 1,700/43.3%
Trenton 56/21.5% 71/20.6% 70/20.3% 56/16.2%
----------- ----------- ----------- -----------
Sub-Total 2,140/51.4% 2,182/51.2% 2,266/53.1% 1,756/41.1%
Flint/Tyler, TX Flint 2,164/68.1% 2,352/68.6% 2,449/71.0% 2,480/71.7%
Chapel Hill 1,333/60.9% 1,365/61.5% 1,411/62.7% 1,424/62.9%
Jackson's Landing 646/74.7% 681/75.2% 670/74.0% 676/74.3%
Red Ackers 644/54.8% 673/56.8% 661/55.3% 648/54.0%
Berryville 609/61.5% 608/61.4% 584/58.7% 574/57.7%
Chandler 516/66.2% 558/65.6% 569/65.8% 607/69.4%
Big Eddy 1,330/63.8% 1,382/65.0% 1,437/66.4% 1,438/66.3%
Dixie 105/75.0% 119/72.1% 121/73.3% 126/76.4%
----------- ----------- ----------- -----------
Sub-Total 7,347/64.4% 7,738/65.2% 7,902/65.9% 7,973/66.2%
New Caney, Tx New Caney 3,705/52.6% 3,939/52.9% 4,046/53.2% 4,056/53.2%
Huffman **** N/A N/A 1,617/47.8% 1,573/46.3%
Tarkenton **** N/A N/A 256/51.2% 225/45.0%
Ace **** N/A N/A 223/55.8% 221/55.3%
Cut &Shoot **** N/A N/A 513/39.8% 547/42.2%
New Waverly **** N/A N/A 192/58.2% 184/55.8%
----------- ----------- ----------- -----------
Sub-Total 3,705/52.6% 3,939/52.9% 6,847/50.7% 6,806/50.2%
Hillsboro, TX Hillsboro **** N/A N/A 1,554/50.0% 1,600/51.3%
Kaufman, TX Kaufman/Oak Grove **** N/A N/A 1,452/70.8% 1,396/67.8%
Waterwood, TX Waterwood **** N/A N/A 440/37.4% 425/36.0%
Prairie View, TX Prairie View/Waller **** N/A N/A 346/19.5% 631/35.4%
Brookshire **** N/A N/A 200/28.6% 298/42.6%
Simonton ****/***** N/A N/A 131 126
----------- ----------- ----------- -----------
Sub-Total N/A N/A 677/27.4% 1,055/42.5%
----------- ----------- ----------- -----------
Total - Texas 13,192/58.3% 13,859/58.8% 21,138/54.8% 21,011/54.3%
----------- ----------- ----------- -----------
Total - TX/CA 15,321/57.0% 15,872/57.0% 23/138/53.7% 23/152/53.2%
=========== =========== =========== ===========
</TABLE>
* This headend was shut down December 1994.
** The Caruthers headend was shut down June 1, 1996.
*** Acquired December 1995
**** Acquired September/October 1995
***** The Simonton headend will be shut down by the end of the third
quarter 1996.
<PAGE> 187
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Subscriber Summary
<TABLE>
<CAPTION>
System Headend Pay Units/Penetration
- ------ ------- -----------------------------------------------------------------
12/31/93 12/31/94 12/31/95 5/31/96
------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Chowchilla, ca Chowchilla 603/42.7% 594/42.2% 567/40.6% 548/39.5%
Riverdale 160/74.8% 157/74.8% 166/68.0% 145/64.7%
Easton * 104/74.8% 32/58.2% N/A N/A
Caruthers ** 73/63.5% 63/60.6% 60/53.1% 49/46.2%
Planada 127/50.8% 105/44.5% 99/40.2% 84/39.3%
Le Grand *** N/A N/A N/A 84/40.0%
----------- ----------- ----------- -----------
Total - CA 1,067/48.7% 951/47.2% 892/44.6% 910/42.5%
Whitewright, TX Whitewright 648/31.1% 674/31.9% 613/27.9% 456/26.8%
Trenton 4/7.1% 17/23.9% 21/30.0% 12/21.4%
----------- ----------- ----------- -----------
Sub-Total 652/30.5% 691/31.7% 634/28.0% 468/26.7%
Flint/Tyler, TX Flint 747/34.5% 812/34.5% 750/30.6% 764/30.8%
Chapel Hill 411/30.8% 429/31.4% 422/29.9% 453/31.8%
Jackson's Landing 151/23.4% 189/27.8% 178/26.6% 195/28.8%
Red Ackers 135/21.0% 179/26.6% 160/24.2% 167/25.8%
Berryville 132/21.7% 171/28.1% 161/27.6% 168/29.3%
Chandler 125/24.2% 151/27.1% 167/29.3% 176/29.0%
Big Eddy 419/31.5% 424/30.7% 415/28.9% 413/28.7%
Dixie 14/13.3% 23/19.3% 26/21.5% 25/19.8%
----------- ----------- ----------- -----------
Sub-Total 2,134/29.0% 2,378/30.7% 2,279/28.8% 2,361/29.6%
New Caney, Tx New Caney 2,024/54.6% 2,048/52.0% 1,830/45.2% 1,817/44.8%
Huffman **** N/A N/A 525/32.5% 513/32.6%
Tarkenton **** N/A N/A 71/27.7% 51/22.7%
Ace **** N/A N/A 30/13.5% 32/14.5%
Cut &Shoot **** N/A N/A 137/26.7% 133/24.3%
New Waverly **** N/A N/A 68/35.4% 68/37.0%
----------- ----------- ----------- -----------
Sub-Total 2,024/54.6% 2,048/52.0% 2,661/38.9% 2,614/38.4%
Hillsboro, TX Hillsboro **** N/A N/A 647/41.6% 413/25.8%
Kaufman, TX Kaufman/Oak Grove **** N/A N/A 747/51.4% 671/48.1%
Waterwood, TX Waterwood **** N/A N/A 152/34.5% 160/37.6%
Prairie View, TX Prairie View/Waller **** N/A N/A 188/54.3% 169/26.8%
Brookshire **** N/A N/A 117/58.5% 175/58.7%
Simonton ****/***** N/A N/A 63/48.1% 62/49.2%
----------- ----------- ----------- -----------
Sub-Total N/A N/A 368/54.4% 406/38.5%
----------- ----------- ----------- -----------
Total - Texas 4,810/36.5% 5,117/36.9% 7,488/35.4% 7,093/33.8%
----------- ----------- ----------- -----------
Total - TX/CA 5,877/38.4% 6,068/38.2% 8,380/36.2% 8,003/34.6%
=========== =========== =========== ===========
</TABLE>
* This headend was shut down December 1994.
** The Caruthers headend was shut down June 1, 1996.
*** Acquired December 1995
**** Acquired September/October 1995
***** The Simonton headend will be shut down by the end of the third
quarter 1996.
<PAGE> 188
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Financial Summary
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Annualized Five
12/31/93 12/31/94(1) 12/31/95(3) Months Ended 5/31/96
---------- ----------- ----------- --------------------
<S> <C> <C> <C> <C>
Revenue $5,406,112 $5,657,619 $6,617,205 $8,647,735
Expense(2) 2,832,828 3,097,862 3,576,339 4,904,826
Cash Flow $2,573,284 $2,559,757 $3,040,866 $3,742,909
Cash Flow Margin 47.6% 45.2% 46.0% 43.3%
Average Monthly Revenue/Sub N/A $30.23 $30.50 $31.14
Average Annual Cash Flow/Sub N/A $164.12 $168.19 $161.72
</TABLE>
Notes:
(1) Decline in revenue and cash flow is primarily due to
federally mandated rate rollbacks effective 9/1/93.
(2) Expenses are shown before partnership management fees, which
are 6.0% of gross revenue.
(3) Includes the revenue and cash flow from acquiring
approximately 6,900 subscribers in September and October
1995.
