<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only [as permitted by Exchange
Act Rule 14(a)-6(e)(2)]
[ ] Definitive Proxy Statement
[ ] Definitive Additional Material
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee:
[ ] No fee required.
[ ] $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.
[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 PARTNERSHIP AND GENERAL PARTNERSHIP INTERESTS
(2) Aggregate number of securities to which transaction applies:
14,735 UNITS OF LIMITED PARTNERSHIP INTEREST (THE "UNITS") AND
ALL OF THE GENERAL PARTNERSHIP INTEREST
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
filing fee is calculated and how determined): approximately
$773.92 PER UNIT AND $3,801,262.25 FOR THE GENERAL PARTNERSHIP
INTERESTS BASED UPON THE PROJECTED PARTNERSHIP NET CASH VALUE
OF $15,205,049 (75% OF WHICH IS ATTRIBUTABLE TO THE UNITS AND
25% OF WHICH IS ATTRIBUTABLE TO THE GENERAL PARTNERSHIP
INTERESTS)
(4) Proposed maximum aggregate value of transaction: $15,205,049
(5) Total fee paid: $3,041
[ ] Fee paid previously with written 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 FIVE LIMITED PARTNERSHIP
1201 THIRD AVENUE, SUITE 3600
SEATTLE, WASHINGTON 98101
________, 1998
TO: THE LIMITED PARTNERS OF NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
The accompanying Notice of Special Meeting and Proxy Statement contain
an explanation relating to the proposed sale of the cable television systems and
other assets owned by Northland Cable Properties Five Limited Partnership (the
"Partnership"), and the dissolution, winding up and liquidation of the
Partnership. These assets of the Partnership include the cable television
franchises and cable television systems of four operating system groups,
including Cedar Creek, Lamesa and Corsicana, Texas, and Forest City, North
Carolina, as well as control of Corsicana Media, Inc., a wholly owned subsidiary
of the Partnership and operator of an AM radio station serving the community of
Corsicana, Texas and surrounding contiguous areas (collectively, the "Assets").
The Proxy Statement describes a proposal whereby the Partnership would
sell the undivided portion of the Assets that is attributable to the Limited
Partners' collective interest in the Partnership (the "LPs' Interest") at a
price which equals the independently appraised fair market value of the Assets
of $35,463,000. If approved, the sale transaction and resulting liquidation is
anticipated to yield a cumulative total of approximately $2,417 per $1,000
investment to Limited Partners during the life of the Partnership (or
approximately $1,208.50 per $500 unit of limited partnership interest). These
estimates include prior cash distributions to date of $755 per $1,000 investment
(or $377.50 per $500 unit of limited partnership interest). Because the
transaction involves the acquisition of the Assets by the Managing General
Partner of the Partnership or an affiliate of the Managing General Partner, 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
Assets 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 Assets 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 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 early July 1998, 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 $945 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 Assets 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 Assets to a third party, as of the date of Closing, for a gross cash
purchase price equal to $35,463,000 (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 Assets and by the net value of the
portion of the Assets 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 Assets.
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Distributions to Limited Partners will be made in three installments.
The initial distribution of $945 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 July 1998. The balance of distributions to be
made to the Limited Partners, anticipated to approximate a total of $666 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 July 1998, distributions to the
Limited Partners are expected to approximate $342 per $1,000 investment in July
1999, and $324 per $1,000 investment in July 2000. 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 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 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 has obtained
an independent appraisal of the value of the Assets, 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 Assets 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 $35,463,000, which is
equal to the appraised fair market value of the Assets, 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 Assets 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 _____, 1998. The Notice of
Special Meeting and Proxy Statement are included with this letter.
2
<PAGE> 4
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 __________________________________________
John S. Whetzell, President
3
<PAGE> 5
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
OF NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
TO BE HELD JUNE ___, 1998
A Special Meeting of the Limited Partners of Northland Cable Properties
Five Limited Partnership (the "Partnership") will be held at 1201 Third Avenue,
Suite 3600, Seattle, Washington, at 3:00 p.m., local time, on _____, 1998.
The purpose of the Special Meeting is to consider and vote upon the
proposed sale by the Partnership of the cable television systems and other
assets owned by the Partnership, and the dissolution, winding up and liquidation
of the Partnership. These assets of the Partnership include the cable television
franchises and cable television systems of four system operating groups,
including Cedar Creek, Lamesa and Corsicana, Texas, and Forest City, North
Carolina, as well as control of Corsicana Media, Inc., a wholly owned subsidiary
of the Partnership and operator of an AM radio station serving the community of
Corsicana, Texas and surrounding contiguous areas (collectively, the "Assets").
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 Assets 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 equals the independently appraised fair market
value of the Assets of $35,463,000, and (ii) distribute in-kind to Northland the
undivided portion of the Assets 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 Partner. If approved, the sale transaction and resulting liquidation is
anticipated to yield a cumulative total of approximately $2,417 per $1,000
investment to Limited Partners during the life of the Partnership (or
approximately $1,208.50 per $500 unit of limited partnership interest). These
estimates include prior cash distributions to date of $755 per $1,000 investment
(or $377.50 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
early July 1998, the Partnership will be dissolved. Also in July 1998, the
Partnership expects to make its initial distribution of sale proceeds to Limited
Partners, in the amount of $945 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 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 Assets, 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 Assets 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 $35,463,000, which is equal to
the appraised fair market value of the Assets, 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:
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<PAGE> 6
The grant to the Managing General Partner of authority to sell the cable
systems owned by the Partnership (the "Assets") 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 Five
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
Assets 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
Assets 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 _____, 1998, 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 _____, 1998 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 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 _________, 1998.
The General Partners recommend that you vote IN FAVOR of the proposed
transaction.
NORTHLAND CABLE PROPERTIES FIVE
LIMITED PARTNERSHIP
By: Northland Communications Corporation,
Managing General Partner of the Partnership
By ___________________________________________
John S. Whetzell, President
Seattle, Washington
________, 1998
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NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP PROXY STATEMENT
This Proxy Statement describes a proposal whereby Northland Cable
Properties Five Limited Partnership (the "Partnership") would liquidate its
cable television systems and other assets (the "Assets") at a valuation which is
equal to the appraised fair market value of such Assets. 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 Assets 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 Assets 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 _____, 1998, the record date, there were
14,735 units of limited partnership interest outstanding, held by 995 Limited
Partners of record. The Managing General Partner holds 8 of such units
(representing 0.05% of the total), and intends to vote in favor of the proposal
described herein. Neither the Administrative General Partner nor any of its
affiliates 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 (as defined below) of the
transaction occurs, Northland will acquire the Assets from the Partnership and
the Partnership will be dissolved. Although Northland presently intends to
consummate the proposed transaction, if approved, it is under no obligation to
do so. Closing of the transaction is also subject to certain conditions,
including Northland obtaining satisfactory debt financing, and no such financing
has yet been obtained. If the proposal is approved and Closing does not occur
within the requisite period, the Assets 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 _____,
1998, 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 _____, 1998 will be entitled
notice of and to vote at the Special Meeting. This Proxy Statement is first
being mailed to Limited Partners on ________, 1998.
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.
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 either by
delivering written notice of revocation to the Managing General Partner or by
executing and delivering another proxy dated as of a later date, or by voting in
person at the Special Meeting. Attendance at the Special Meeting, by itself,
will not revoke a proxy.
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 ________, 1998.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Introduction...............................................................................1
Special Factors............................................................................4
Summary Historical Financial Information...................................................6
Proposed Transaction.......................................................................7
Certain Consequences Of The Transaction...................................................21
Certain Consequences Of Limited Partners' Determination Not To Sell.......................23
Projected Cash Available From Liquidation.................................................23
Projected Cash Available If Closing Occurs................................................24
Management's Discussion And Analysis Of Financial Condition And Results
Of Operations.........................................................................26
Federal Income Tax Consequences...........................................................31
Conflicts Of Interest.....................................................................35
Overview of Partnership Business and Properties...........................................36
Certain Affiliates Of The Partnership.....................................................42
Plan Of Solicitation......................................................................46
Incorporation By Reference................................................................46
Financial Statements......................................................................47
</TABLE>
<TABLE>
<CAPTION>
Exhibits:
<S> <C>
Form of Proxy.................................................................A-1
Form of Amendment to Partnership Agreement....................................B-1
Daniels Appraisal.............................................................C-1
</TABLE>
<PAGE> 9
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 the cable television systems and
other assets owned by the Partnership, and the dissolution, winding up and
liquidation of the Partnership. These assets of the Partnership include the
cable television franchises and cable television systems of four system
operating groups, including Cedar Creek, Lamesa and Corsicana, Texas, and Forest
City, North Carolina, as well as control of Corsicana Media, Inc., a wholly
owned subsidiary of the Partnership and operator of an AM radio station serving
the community of Corsicana, Texas and surrounding contiguous areas.
If the proposal is approved, the Partnership will be authorized to enter
into an Agreement with Northland, the Managing General Partner of the
Partnership or its assigns, to (i) sell to Northland the undivided portion of
the Assets that is attributable to LP's Interest and the AGP's Interest at a
price which equals the independently appraised fair market value of the Assets
of $35,463,000, and (ii) distribute in-kind to Northland the undivided portion
of the Assets that is attributable to 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 Partner, respectively.
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
early July 1998, the Partnership will be dissolved.
In December 1997, the Assets were appraised by Daniels & Associates,
L.P., Denver, Colorado, an internationally-recognized expert in the appraisal of
cable television systems and other media-related businesses ("Daniels"). For
purposes of the proposed transaction, the General Partners have valued the
Assets at the appraised fair market value of $35,463,000. 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 $945 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 Assets 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 Assets to a third party, as of the date of Closing, for a gross cash
purchase price equal to $35,463,000 (the "Gross Valuation"). Such amount will be
determined in accordance with the terms of the Amended and Restated Certificate
and Agreement of Limited Partnership of the Partnership, as amended (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 Assets and by the net value of the portion of the Assets
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 Assets. If approved, the transaction is anticipated to
yield a total of approximately $2,417 per $1,000 investment to Limited Partners
during the life of the Partnership (or approximately $1,208.50 per $500 unit of
limited partnership interest). These estimates include prior cash distributions
to date of $755 per $1,000 investment (or $377.50 per $500 unit of limited
partnership interest).
Following Closing, distributions to Limited Partners will be made in
three installments. See "Projected Cash Available If Closing Occurs." The
initial distribution of $945 per $1,000 investment will be made within 30
1
<PAGE> 10
days after the date of Closing. The Managing General Partner and the
Administrative General Partner (collectively, the "General Partners") believe
that the initial distribution will occur in late July 1998. The balance of
distributions to be made to the Limited Partners, anticipated to approximate a
total of $666 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
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 July 1998, distributions
to the Limited Partners are expected to approximate $342 per $1,000 investment
in July 1999, and $324 per $1,000 investment in July 2000. 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 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 General Partners have determined that Limited Partners of record as
of the close of business on _____, 1998 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 Partnership Agreement, the
affirmative vote of Limited Partners holding a majority of the outstanding units
is required to approve the proposed transaction. An abstention, therefore, will
have the same effect as a vote to disapprove the proposal. There currently is no
established public market in which the units are being traded.
A proxy that is properly completed, executed 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 Assets 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 acquire the Assets. For example, assuming that the requisite approval of
Limited Partners is obtained, the Partnership will be authorized to enter into
an agreement with Northland for the acquisition of the Assets. 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 Assets. The Managing General
Partner has faced a substantial conflict of interest in determining the terms of
acquisition of the Assets by Northland. In addition, the General Partners 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 Assets.
2
<PAGE> 11
Conflicts of interest include the possibility that the fair market value
and net cash flow of the Assets 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 Assets, instead
of consummating the proposed transaction. Similarly, if the Assets 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, the cable appraiser retained by the General Partners in
connection with the proposal herein, is not affiliated with the General Partners
or the Partnership, Northland and its 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 Northland and its
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 8 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."
SOLICITATION OF PROXIES
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.
3
<PAGE> 12
SPECIAL FACTORS
A number of special factors apply to the proposed transaction. Such
factors are described more fully elsewhere in this Proxy Statement and the
exhibits and should be read in conjunction with the rest of this Proxy
Statement. Limited Partners are urged to read all of this Proxy Statement and
the exhibits 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 Assets, but
believe that the present transaction structure represents a more favorable
option for Limited Partners. 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 Assets, or even to obtain a higher price for the
Assets, the General Partners believe that this is unnecessary given the
obtaining of an independent appraisal of the Assets, 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 additional investments 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 Assets 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 Assets
will then be owned and operated by Northland or its assigns. 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 Assets, 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
Assets 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 Assets, instead of consummating the proposed transaction.
Similarly, if the Assets 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, based on the fact that
many investors have held their units for more than 12 years without liquidity,
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 Assets 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.
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 Assets from
Daniels, an internationally recognized cable brokerage, appraisal and investment
banking firm (the "Daniels Appraisal"), and the structuring of the proposed
transaction so that the approval of Limited Partners is required to be obtained.
(The 8 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 to derive the Gross
Valuation of $35,463,000, 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 financial forecasts prepared by Daniels in
arriving at the valuation contained in the Daniels Appraisal. A copy of the
Daniels Appraisal is included in this Proxy Statement as Exhibit C.
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 Assets 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
Assets, and the General Partners' decision not to solicit bids from independent
third parties. See "Proposed Transaction -- Fairness of the Proposed
Transaction."
4
<PAGE> 13
No other material factors were considered. For example, in the absence
of an established public 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 the Daniels
Appraisal, 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 valuations would have exceeded the appraised value. The
appraised value as of December 1, 1997 substantially exceeds the net book value
of the Partnership as of December 1, 1997. There were no recent purchases of
units by the Partnership or any affiliate of the Partnership for the General
Partners to consider. The General Partners have made no recent effort to solicit
bids from independent third parties for a sale of the Assets, and no firm offers
have 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. The General
Partners decided not to solicit third-party bids to purchase the Assets 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 Assets, 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 Assets to be
approximately $500,000. See "Proposed Transaction -- Fairness of the Proposed
Transaction."
In connection with the proposed transaction, the Partnership obtained an
independent appraisal of the Assets 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 Daniels Appraisal is
contained elsewhere in this Proxy Statement. See "Proposed Transaction --
Summary of Appraisal."
In valuing the Assets, with respect to the Partnership's cable
television systems, Daniels applied two valuation methodologies: (i) discounted
operating cash flow analysis based on the projected operating results of the
Assets over a ten-year period, with application of a factor for the residual
value of the Assets at the end of that ten-year period; and (ii) comparable
private market transaction multiples analysis, to correlate and validate the
findings of the discounted cash flow analysis. The second methodology involved a
review of other cable system sales that have occurred over the recent past and 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
Assets. Other valuation methodology was applied with respect to the
Partnership's radio station operating assets. See "Proposed Transaction --
Summary of Appraisal."
5
<PAGE> 14
SUMMARY HISTORICAL FINANCIAL INFORMATION
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------------------------- SEPT. 30,
1992 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue ..................... $ 4,192,847 $ 4,724,194 $ 5,598,494 $ 7,897,009 $ 9,244,966 $ 7,073,105
Expenses .................... 3,437,040 3,847,615 4,884,942 7,371,230 8,074,521 5,971,708
----------- ----------- ----------- ----------- ----------- -----------
Operating Income ............ 755,807 876,579 713,552 525,779 1,170,445 1,101,397
Other Income (Expenses) ..... 825,487 (561,873) (751,338) (1,515,159) 1,898,178 (1,213,780)
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss) ........... $ (69,680) $ 314,706 $ (37,786) $ (989,380) $ (727,733) $ (112,383)
=========== =========== =========== =========== =========== ===========
Allocation of Net Income
(Loss):
General Partners .......... $ (597) $ 3,147 $ (378) $ (9,893) $ (7,277) $ (1,124)
Limited Partners .......... (69,083) 311,559 (37,408) (979,487) (720,456) (111,259)
Net Income (Loss) Per Limited
Partnership Unit .......... (5) 21 (3) (66) (49) (8)
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------- SEPT. 30,
1992 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total Assets ................ $ 6,930,346 6,270,667 $15,099,388 $17,951,250 $16,683,277 $15,933,412
Total Liabilities ........... 10,399,329 9,591,252 18,641,032 22,631,152 22,165,350 21,529,869
Partners' Deficit:
General Partners .......... (137,124) (135,475) (137,346) (148,727) (156,748) (157,872)
Limited Partners .......... (3,331,859) (3,185,110) (3,404,298) (4,531,175) (5,325,325) (5,438,585)
</TABLE>
6
<PAGE> 15
PROPOSED TRANSACTION
BACKGROUND OF PROPOSED TRANSACTION
The Partnership was formed on August 19, 1985 and began operations in
1985 with the acquisition of a cable television system serving several
communities and contiguous areas surrounding Cedar Creek, Texas (the "Cedar
Creek System"). In 1986, the Partnership purchased cable television systems
located in Lamesa, Texas and surrounding areas (the "Lamesa System") and in
western North Carolina (the "Forest City System"). In September 1994 the
Partnership purchased a cable television system in Corsicana, Texas (the
"Corsicana System"). In December 1995, the Partnership acquired television
systems serving communities in the Ellenboro, Bostic, Gilkey and Harris, North
Carolina areas, which have been operationally integrated with the Forest City
System. In August 1994, the Partnership formed Corsicana Media, Inc. ("Corsicana
Media"), a Washington corporation and wholly owned subsidiary, for the purpose
of acquiring and operating an AM radio station serving the community of
Corsicana, Texas and surrounding areas. On January 16, 1995, Corsicana Media
acquired the radio station operating assets of KAN-D Land, Inc.
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
September 30, 1997, the outstanding principal balance owing on the Partnership's
bank financing was $20,017,266. In addition, the Partnership owed the Managing
General Partner an aggregate of approximately $95,383 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 twelve years without liquidity,
that a significant number of Limited Partners may desire to liquidate their
investment, the General Partners began in the fall of 1997 to formulate a
proposal to sell the Assets. (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 SPECIAL 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 sale of the Assets 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 Assets and specific amendments to the Partnership Agreement authorizing the
acquisition of the Assets by Northland; (b) the effect of such disposition and
authorization on the amount of proceeds and assets distributed to the
Partnership; 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 Assets 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 portion of the Assets 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 1986. There is no established public 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
7
<PAGE> 16
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 Assets in the fall of 1997. 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 a third party buyer may be difficult. In
particular, the Managing General Partner studied the market factors discussed
below.
In late 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. While the
Telecommunications Act of 1996 (the "1996 Act Telecommunications 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 Cable Act make it more expensive for cable companies to
operate.
Competition to the cable television industry is 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 Assets to a single 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 Assets. 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 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 Assets first arose in
the fall of 1997, 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 Assets. 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 Assets would be more attractive to Northland, as a purchaser
familiar with the operation of the Assets and one able to realize economies of
scale, than the Assets 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.
A meeting regarding the proposed transaction was held among officers and
representatives of the General Partners at the offices of the Administrative
General Partner on September 25, 1997. Messrs. Whetzell and Clark and John S.
Simmers, of the Administrative General Partner, were present at this meeting,
and discussed and formulated 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 the aforementioned meeting of the General Partners held on
September 25, 1997, 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 through the
acquisition of, and its familiarity with, the Assets.
8
<PAGE> 17
Although the negative market factors described above were perceived as
an obstacle to the sale of the Assets to an independent third party on
acceptable terms, the ownership by Northland of other cable television systems
in the vicinity of the Assets makes the acquisition of the Assets a more
valuable proposition to Northland. Third parties would not experience such
economies of scale. The proximity of the Partnership's cable television 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 transaction costs
that Northland would not be required to bear. For example, Northland's engineers
are currently familiar with the technical aspects of the systems comprising the
Assets, 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 Assets while gaining the degree of
familiarity with the Assets that Northland has attained.
Due to the reasons for Northland's interest in acquiring the Assets, and
the fact that Northland's motivating factors are unique to Northland, the
General Partners remain convinced that selling the Assets to an independent
third party on acceptable terms would be difficult.
As a result, in October 1997, the Partnership retained Daniels, an
internationally-recognized cable brokerage, appraisal and investment banking
firm to appraise the fair market value of the Assets. 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 Assets were to be sold to an independent third party on the open
market. Daniels was also instructed to appraise separately the value of the
Corsicana Media radio station assets, as a means to determine the value to the
Partnership of its 100% ownership of the stock of Corsicana Media. Daniels was
advised that Northland would be a potential buyer of the Assets. Daniels
delivered a written report in December 1997 that the fair market gross asset
value of the Assets as of December 1, 1997 was $35,463,000.
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 Assets, Daniels relied on a discounted operating cash
flow analysis (see pages 11-12 of the Daniels Appraisal) based on the projected
operating results of the Assets over a ten-year period and applied a factor for
the residual value of the Assets at the end of that ten-year period. The
discounted cash flow analysis is also correlated and validated 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 Assets, and (ii) the value-per-subscriber of such other
system sales with the value-per-subscriber valuation of the Assets (see pages
13-14 of the Daniels Appraisal). According to Daniels, both the discounted cash
flow analysis and the comparable private market transaction multiples analysis
are generally accepted valuation methodologies.
In the course of performing the valuation, Daniels engaged in
discussions with employees of the Managing General Partner's corporate office,
made due diligence visits to substantially all of the operating systems
comprising the Assets, reviewed and evaluated materials and information provided
by the Managing General Partner and Assets' management, researched demographic
information relating to the various communities served by the Partnership,
analyzed forecasted financial and operating information, and drew upon its own
general knowledge
9
<PAGE> 18
about the cable television and AM radio industries. On the basis of this
information and these efforts, Daniels prepared summaries of relevant operating,
technical, financial and demographic characteristics of the Partnership's
operating systems.
Thereafter, in order to assess the fair market value of the
Partnership's assets, Daniels prepared detailed operating and financial
forecasts for each of the four system operating groups and Corsicana Media,
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 and Corsicana
Media. 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, as noted above, Daniels used the
comparable private market transaction 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 systems.
These multiples were compared to similar multiples for the Assets obtained using
the value arrived at for the Assets 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 Assets 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 Assets will be
renewed indefinitely as needed without material change except to reflect any
upgrade or rebuild of the Assets. In addition, Daniels assumed, in evaluating
future capital expenditures and cash flows, that the various systems comprising
the Assets will be upgraded within three to five years (see pages 6-10 of the
Daniels Appraisal).
DISCOUNTED CASH FLOW VALUATION
The discounted cash flow valuation methodology measures the present
value of the Assets' forecasted free cash flow from operations, which is defined
as earnings before interest, taxes, depreciation and amortization ("EBITDA"),
less capital expenditures including all rebuild or upgrade costs. Daniels
determined forecasted cash flows by creating ten-year operating forecasts for
each of the operating systems comprising the Assets, each of which took into
account detailed projections of revenue and expense components. Daniels then
calculated the projected residual value of the Assets assuming a sale of each
system at the end of year ten. This terminal enterprise value was based on a
multiple of EBITDA which Daniels determined to be reasonable in light of
comparable private market transaction multiples of EBITDA.
Daniels' revenue forecasts were based on its forecasts of the number of
homes passed and the subscriber penetration levels and rates for each System,
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, and rebuild or upgrade
requirements. Daniels believes that the opportunity of the systems comprising
the Assets 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 included in this Proxy
Statement as Exhibit C.
Once Daniels had arrived at a forecast of cash flows and terminal
enterprise values, it discounted these values back to the present at a discount
rate representing the weighted average cost of capital for various entities
within the cable television and AM radio industries that are capable of
consummating a sale similar in size to the acquisition of the Assets. 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 and AM
radio investments and blending this cost with the equity return objectives for
large publicly traded companies. Daniels arrived at a weighted cost of capital
of 15% (see pages 11-12 of the Daniels Appraisal).
10
<PAGE> 19
Applying the discount rate to its cash flow forecasts, Daniels arrived
at a valuation of $35,463,000 for the Partnership's assets. This combined value
is comprised of (i) the aggregate fair market value of the Partnership's cable
television system of $34,998,744, which is equal to 8.2 times the estimated cash
flow for the year ending December 31, 1997, or $1,541 per equivalent basic
subscriber; and (ii) the aggregate fair market value of Corsicana Media of
$463,097, which is equal to 6.4 times the normalized operating cash flow, or 1.3
times the normalized revenue for the year ending December 31, 1997.
COMPARABLE TRANSACTIONS VALUATION
In addition to the discounted cash flow methodology, Daniels used the
comparable private market transaction multiples methodology. Daniels describes
this as another generally accepted valuation methodology for correlating and
validating the findings of the discounted cash flow analysis with private market
realities. Under this methodology, Daniels compared selected market multiples
reported in the sales of cable television systems and AM radio stations of
similar size, situated in similar markets, and of similar technical condition to
the Assets. All information provided to the Managing General Partner relating to
the basis for Daniels' selection of comparable transactions is contained in the
Daniels Appraisal. See pages 13-14 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 cable television system
operation assets as of December 1, 1997 of $35,000,000, representing 8.2 times
the estimated operating cash flow for the year ended December 31, 1997, or a
value per equivalent basic subscriber of $1,541. This cash flow multiple is
equal to the weighted average multiple for comparable transactions and equal to
the multiple derived from the discounted cash flow analysis described above. The
value per subscriber is slightly above the weighted average value per subscriber
derived from the comparable transactions analysis and equal to the value per
subscriber derived from the discounted cash flow analysis described above.
Based on its analysis using the same valuation methodologies, Daniels
arrived at an estimated fair market value for Corsicana Media as of December 31,
1997 of $463,000 representing 6.4 times the normalized operating cash flow, or
1.3 times the normalized revenue for the year ending December 31, 1997. The
normalized operating cash flow multiple is below the range of comparable private
market transactions and equal to the multiple derived from the discounted cash
flow analysis described above. The normal revenue multiple is below the
mid-point of the range of comparable private market transactions and equal to
the multiple derived from the discounted cash flow analysis described above.
Daniels points out that detailed valuation and financial data pertaining
to private market sales of AM radio stations comparable to Corsicana Media are
not publicly available. As a result, Daniels has relied on data obtained during
the course of its advisory activities within the broadcast industry, which data
are proprietary and confidential. Based on such data, Daniels concludes that an
AM radio station demonstrating comparable size, market and technical
characteristics to Corsicana Media would be valued at between 7 and 8 times
operating cash flow, or 1 to 2 times revenue. See page 14 of the Daniels
Appraisal.
The combination of the fair market values derived for the Partnership's
cable television operating systems and Corsicana Media results in an estimated
fair market value of the Partnership, as of the valuation date of December 1,
1997, of $35,463,000, or 8.2 times estimated operating cash flow for the year
ending December 31, 1997. This appraised value appears fair and reasonable to
the General Partners.
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. Provisions of
regulatory events that have impacted the Partnership's cable television system
operations, which are the principal business of the Partnership, are summarized
below.
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INTRODUCTION
The operation of cable television systems is extensively regulated by
the FCC, some state governments and most local governments. The
Telecommunications Act of 1996 alters the regulatory structure governing the
nation's telecommunications providers. The Telecommunications Act of 1996 is
intended to remove barriers to competition in both the cable television market
and the local telephone market. It also reduces the scope of cable rate
regulation.
The 1996 Telecommunications Act requires the FCC to undertake a host of
implementing rulemakings, the final outcome of which cannot yet be determined.
Moreover, Congress and the FCC have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect the
Partnership's operations. This section briefly summarizes key laws and
regulations affecting the operation of the Partnership's systems and does not
purport to describe all present, proposed, or possible laws and regulations
affecting the Company or its systems.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry. Under that regime, all cable systems are subject to
rate regulation, unless they face "effective competition" in their local
franchise area. Federal law now defines "effective competition" on a
community-specific basis as requiring either low penetration (less than 30%) by
the incumbent cable operator, appreciable penetration (more than 15%) by
competing multichannel video providers ("MVPs"), or the presence of a competing
MVP affiliated with a local telephone company.
Although the FCC rules control, local government units (commonly
referred to as "local franchising authorities" or "LFAs") are primarily
responsible for administering the regulation of the lowest level of cable, the
basic service tier ("BST"), which typically contains local broadcast stations
and public, educational, and government access channels. Before an LFA begins
BST rate regulation, it must certify to the FCC that it will follow applicable
federal rules, and many LFAs have voluntarily declined to exercise this
authority. LFAs also have primary responsibility for regulating cable equipment
rates. Under federal law, charges for various types of cable equipment must be
unbundled from each other and from monthly charges for programming services. The
1996 Telecommunications Act allows operators to aggregate costs for broad
categories of equipment across geographic and functional lines.
The FCC itself directly administers rate regulation of an operator's
cable programming service tiers ("CPST"), which typically contain
satellite-delivered programming. Under the 1996 Telecommunications Act, the FCC
can regulate CPST rates only if an LFA first receives at least two rate
complaints from local subscribers and then files a formal complaint with the
FCC. When new CPST rate complaints are filed, the FCC now considers only whether
the incremental increase is justified and will not reduce the previously
established CPST rate.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carnage. The FCC has modified its rate
adjustment regulations to allow for annual rate increases and to minimize
previous problems associated with regulatory lag. Operators also have the
opportunity of bypassing this "benchmark" regulatory scheme in favor of
traditional "cost-of-service," regulation in cases where the latter methodology
appears favorable. Premium cable services offered on a per-channel or
per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. Federal law requires that the
BST be offered to all cable subscribers, but limits the ability of
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operators to require purchase of any CPST before purchasing premium services
offered on a per-channel or per-program basis.
In an effort to ease the regulatory burden on small cable systems, the
FCC has created special rate rules applicable for systems with fewer than 15,000
subscribers owned by an operator with fewer than 400,000 subscribers. The
special rate rules allow for a simplified cost-of-service showing. All of the
Partnership's systems are eligible for these simplified cost-of-service rules,
and have calculated rates generally in accordance with those rules.
The 1996 Telecommunications Act provides additional relief for small
cable operators. For franchising units with less than 50,000 subscribers and
owned by an operator with less than one percent of the nation's cable
subscribers (i.e., approximately 600,000 subscribers) that is not affiliated
with any entities with aggregate annual gross revenue exceeding $250 million,
CPST rate regulation is automatically eliminated. The Partnership and all of
its systems qualify for this CPST deregulation.
The 1996 Cable Act sunsets FCC regulation of CPST rates for all systems
(regardless of size) on March 31, 1999. It also relaxes existing uniform rate
requirements by specifying that uniform rate requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing still may
be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Cable Act provides that no state or local laws or regulations
may prohibit or have the effect of prohibiting any entity from providing any
interstate or intrastate telecommunications service. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The extent to which state and local governments may
impose requirements in such situations recently has been, and will continue to
be, the subject of litigation. The outcome of that litigation, and its effect on
the Partnership, cannot be predicted. The favorable pole attachment rates
afforded cable operators under federal law can be gradually increased by utility
companies owning the poles (beginning on February 8, 2001) if the operator
provides telecommunications service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Cable Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. Certain aspects of the
FCC's initial interconnection order were rejected by the Eighth Circuit Court of
Appeals on July 18, 1997, on the ground that the states, not the FCC, have
statutory authority to set the prices that incumbent local exchange carriers may
charge for interconnection. It is expected that the FCC will seek review by the
United States Supreme Court of the ruling.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Cable Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers ("LECs"), including the Bell
Operating Companies, can now compete with cable operators both inside and
outside their telephone service areas. Because of their resources, LECs could be
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formidable competitors to traditional cable operators, and certain LECs have
begun offering cable service.
Under the 1996 Cable Act, a LEC providing video programming to
subscribers generally will be regulated as a traditional cable operator (subject
to local franchising and federal regulatory requirements), unless the LEC elects
to provide its programming via an "open video system" ("OVS"). To qualify for
OVS status, the LEC must reserve two-thirds of the system's activated channels
for unaffiliated entities.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures between
cable operators and LECs in the same market. The 1996 Telecommunications Act
provides a few limited exceptions to this buyout prohibition, including a
carefully circumscribed "rural exemption." The 1996 Telecommunications Act also
provides the FCC with the limited authority to grant waivers of the buyout
prohibition (subject to LFA approval).
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION
The 1996 Cable Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Because of their resources, electric utilities could be formidable competitors
to traditional cable systems, and a few electric utilities have announced plans
to offer video programming. Recent technological advances have increased the
likelihood that electric utilities may become competitive with the Partnership.
ADDITIONAL OWNERSHIP RESTRICTIONS
The 1996 Cable Act eliminates statutory restrictions on broadcast/cable
cross-ownership (including broadcast network/cable restrictions), but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Cable Act also
eliminates the three year holding period required under the 1992 Cable Act's
"anti-trafficking" provision. The 1996 Cable Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
("SMATV") and MMDS facilities, but lifts those restrictions where the cable
operator is subject to effective competition. FCC regulations permit cable
operators to own and operate SMATV systems within their franchise area, provided
that such operation is consistent with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national program services. A companion rule establishing
a nationwide ownership cap on any cable operator equal to 30% of all domestic
cable subscribers has been stayed pending further judicial review.
There are no federal restrictions on non-U.S. entities having an
ownership interest in cable television systems or the FCC licenses commonly
employed by such systems.
MUST CARRY/RETRANSMISSION CONSENT
The 1992 Cable Act conveyed to a commercial broadcaster the right
generally to elect every three years either to require: (i) that the local cable
operator carry its signals ("must carry"); or (ii) that such operator obtain the
broadcaster's retransmission consent before doing so. The Company has been able
to reach agreements with all of the broadcasters who elected retransmission
consent and has not been required by broadcasters to remove any broadcast
stations from the cable television channel line-ups. To date, compliance with
the "retransmission consent" and "must
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carry" provisions of the 1992 Cable Act has not had a material effect on the
Partnership, although this result may change in the future depending on such
factors as market conditions, the introduction of digital broadcasts, channel
capacity and similar matters when such arrangements are renegotiated.
CHANNEL SET-ASIDES
LFAs can include franchise provisions, requiring cable operators to set
aside certain channels for public, educational and governmental access
programming. Federal law also requires cable systems to designate a portion of
their channel capacity (up to 15% in some cases) for commercial leased access by
unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but use of commercial leased access channels has
been relatively limited. The FCC recently modified its leased access rules,
making leased access somewhat more favorable to potential users. The changes,
however, were not as dramatic as leased access users had hoped, and should not
significantly infringe on the Partnership's control over the channel line-up of
its various cable television operating systems. The revised maximum rate formula
has been challenged by one leased access applicant in an appeal to the D.C.
Circuit Court.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition
to incumbent cable operators, the 1992 Cable Act imposed restrictions on
dealings between cable operators and cable programmers. The 1992 Cable Act
precludes video programmers affiliated with cable companies from favoring cable
operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors. This provision limits the
ability of vertically integrated cable programmers to offer exclusive
programming arrangements to cable companies.
OTHER FCC REGULATIONS
In addition to the FCC regulations noted above, there are other FCC
regulations covering such areas as equal employment opportunity, subscriber
privacy, programming practices (including, among other things, syndicated
program exclusivity, network program non-duplication, local sports blackouts,
indecent programming, lottery programming, political programming, sponsorship
identification, and children's programming advertisements), registration of
cable systems and facilities licensing, maintenance of various records and
public inspection files, frequency usage, lockbox availability, antenna
structure notification, tower marking and lighting, consumer protection and
customer service standards, technical standards, and consumer electronics
equipment compatibility. The FCC recently adopted rules relating to the
ownership of cable wiring located inside multiple dwelling unit complexes. The
FCC has concluded that such wiring can, in certain cases, be unilaterally
acquired by the complex owner, making it easier for complex owners to terminate
service from the incumbent cable operator in favor of a new entrant. The FCC
recently imposed new Emergency Alert System requirements on cable operators
which will be phased in over several years. The FCC recently adopted "closed
captioning" rules that the Partnership does not expect to have an adverse effect
on its operations. The FCC has the authority to enforce its regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the revocation
of FCC licenses needed to operate certain transmission facilities used in
connection with cable operations.
PENDING PROCEEDING
The FCC has initiated a rulemaking proceeding involving whether cable
customers must be allowed to purchase cable converters from third party vendors.
If the FCC concludes that such distribution is required, and does not make
appropriate allowances for signal piracy concerns, it may become more difficult
for cable operators to combat theft of service.
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COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenue to a
federal copyright royalty pool (which varies depending on the size of the system
and the number of distant broadcast television signals carried), cable operators
can obtain blanket permission to retransmit copyrighted material on broadcast
signals. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect the Partnership's ability to obtain desired broadcast programming. In
addition, the cable industry pays music licensing fees to BMI and is negotiating
a similar arrangement with ASCAP. Copyright clearances for non-broadcast
programming services are arranged through private negotiations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in exchange for the use of public rights-of-way. Federal law now prohibits
franchise authorities from granting exclusive franchises or from unreasonably
refusing to award additional franchises. Cable franchises generally are granted
for fixed terms and in many cases include monetary penalties for non-compliance
and may be terminable if the franchisee fails to comply with material
provisions.
The terms and conditions of franchises vary materially from jurisdiction
to jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. Although LFAs have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, LFAs cannot require the payment of franchise
fees exceeding 5% of the system's gross revenue, cannot dictate the particular
technology used by the system, and cannot specify video programming, other than
identifying broad categories of programming, that must be carried on the
systems.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees as a condition of renewal. Similarly, if a franchise
authority's consent is required for the purchase or sale of a cable system or
franchise, such authority may attempt to impose more burdensome or onerous
franchise requirements in connection with a request for consent. Historically,
franchises have been renewed for cable operators that have provided satisfactory
services and have complied with the terms of their franchises. However, there
can be no assurance that renewal will be granted or that renewals will be made
on similar terms and conditions.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of state governmental agencies.
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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 ASSETS 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 Assets 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 Assets 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, respectively. 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 July 1998, 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 $945 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. See "Projected Cash
Available If Closing Occurs."
The aggregate amount to be distributed to the Limited Partners, as a
group, in connection with the acquisition of the Assets 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 Assets to a third party, as of the date of Closing, for a gross cash
purchase price equal to $35,463,000. 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 attributable to the
Limited Partners' collective interest in the Assets and by the net value of the
portion of the Assets 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 Assets.
Distributions to Limited Partners will be made in three installments.
The initial distribution of $945 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 July 1998. The balance of distributions to be
made to the Limited Partners, anticipated to approximate a total of $666 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 currently has no debt that
would be senior to the Note, but it could incur such debt in the future.
Assuming that Closing occurs in July 1998, distributions to the Limited Partners
are expected to approximate $342 per $1,000 investment in July 1999 and $324 per
$1,000 investment in July 2000. 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.
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DETERMINATION BY NORTHLAND NOT TO CLOSE
Even 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 early July 1998.
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
Assets. In such event, the Assets will not be sold without again obtaining the
approval of Limited Partners in accordance with the Partnership Agreement.
TERMS OF THE TRANSACTION
The General Partners have proposed that the Partnership dispose the
Assets based on the Gross Valuation of $35,463,000. The value of Partnership
assets other than the Assets 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.
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
Assets attributable to the MGP's Interest, including that portion of stock of
Corsicana Media held by the Partnership and attributable to the MGP'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 Assets is reduced
by the value of the MGP's Interest in the Assets. 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
$35,463,000. 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 Assets 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 Assets, and will be reduced by the amount of any Partnership liabilities.
The Partnership Agreement 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 $755 per $1,000 investment, the first $1,823,271 of
distributions will be allocated $1,805,038 to the Limited Partners (in cash) and
$18,233 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 $1,823,271
plus (ii) the value of Partnership assets other than the Assets, 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 Assets, 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
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the Assets or otherwise, will be shared by the Limited Partners and General
Partners ratably in accordance with the Partnership Agreement (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 Assets, the General Partners have relied on the Daniels Appraisal and their
own conclusions as to the value of the Assets. 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.
Although the Gross Valuation represents an estimate of the amount that
an independent third party would pay for the Assets, based on the appraised
value of the Daniels Appraisal, the actual price that any such party may be
willing to pay could be in excess of 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 Assets were sold to such a third party.
However, a sale of the Assets 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 equal to the
independently 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 Assets, and the
General Partners' decision not to solicit bids from independent third parties.
In the absence of an established public market in which units of limited
partnership interest 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 Assets 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 equals the appraised
value of the Assets, and then ascribed weight to the structuring of the
transaction so that approval of a majority in interest of the Limited Partners
is required. (The 8 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 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
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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."
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 purchase price of 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.
20
<PAGE> 29
CERTAIN CONSEQUENCES OF THE TRANSACTION
DISSOLUTION PROCEDURES
If the Limited Partners approve of the disposition of the Assets 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. Additional distributions will be
made as and when Northland makes payments on the Note.
Following the final distribution, which is expected to occur in July
2000, 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. 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 Assets
and the liquidation of the Partnership. The dollar amounts reflect allocations
as required pursuant to the Partnership Agreement. As of _____, 1998, there were
14,735 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.
21
<PAGE> 30
TAX RESULTS FROM DISPOSITION OF THE ASSETS AND RESULTING LIQUIDATION
(PER $1,000 INVESTMENT)
<TABLE>
<S> <C>
Overall Ordinary Income Per $1,000 Investment (1) (2).................... $620
Overall Long-Term Capital Gain Per $1,000 Investment (2) (3)............. $997
</TABLE>
- ----------------
(1) Assumes that depreciation recapture per $1,000 investment will be equal to
$1,360. 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 $739 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 Assets of $561 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 North Carolina, wherein one of the systems comprising the
Assets is located, imposes an income tax on the net income earned by nonresident
partners from property located in North Carolina or from a business operation
conducted in the state of North Carolina. This includes property owned or a
business conducted through a partnership, and accordingly will apply to the
Limited Partners of the Partnership.
The Partnership is responsible for reporting each nonresident partner's
share of the income derived from North Carolina, and is required to compute and
pay the tax due for each nonresident partner. The tax will be based on the
income generated by Partnership operations, including the income to be generated
by the proposed transaction, as apportioned to North Carolina under state law.
The North Carolina tax rates increase on a graduated scale, beginning at 6% up
to a maximum tax rate of 7.75%. The Partnership anticipates making the required
tax calculations on behalf of each Limited Partner when the North Carolina
Partnership Income Tax Return is prepared. The tax paid on behalf of each
Limited Partner will be reported on their Schedule K-1 for 1998, and will be
treated as cash distributed to the Limited Partner.
A nonresident partner, other than a corporation, is not required to file
a North Carolina income tax return when the only income from North Carolina
sources is the nonresident's share of income from a partnership doing business
in North Carolina, and the Partnership pays the tax due for the nonresident
partner. Accordingly, nonresident Limited Partners who are not corporations will
not be required to file a North Carolina income tax return unless they have
North Carolina income from sources other than partnerships which have paid the
requisite tax on their behalf. However, a Limited Partner may file a North
Carolina income tax return if he or she so chooses. If a Limited Partner chooses
to file in North Carolina, the tax paid by the Partnership on their behalf may
be claimed as a credit towards their North Carolina tax liability.
THIS IS ONLY A BRIEF SUMMARY OF THE POTENTIAL STATE TAX CONSIDERATIONS
OF THE PROPOSED TRANSACTION. LIMITED PARTNERS SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE APPLICATION OF NORTH CAROLINA INCOME TAX LAWS AND OTHER
STATE AND LOCAL LAWS TO THEIR SPECIFIC SITUATION.
22
<PAGE> 31
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
Assets. The General Partners are unable to determine whether the future fair
market value of the Assets, 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."
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 Assets 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 Assets 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 Assets 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 Assets based
on the Gross Valuation of $35,463,000, without payment of any brokerage
commission, and fully liquidates. The projected net cash available assumes that
the transaction occurs on September 30, 1997, and thus reflects payments of
principal and interest on Partnership indebtedness and certain accrued receipts
and costs as of September 30, 1997. 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 Assets, including proxy solicitation
expenses, and estimated general and administrative and operating expenses.
Partnership assets other than the Assets (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 September 30, 1997, the General Partners do not
anticipate that any events will occur between September 30, 1997 and the Closing
date that will materially affect the figures.
23
<PAGE> 32
PROJECTED CASH AVAILABLE IF CLOSING OCCURS
<TABLE>
<CAPTION>
PARTNERSHIP PROJECTED CASH VALUE:
<S> <C>
Gross Valuation for Assets (1) ................. $ 35,463,000
Plus (Less):
Cash on Hand, Receivables & Other Assets (2) 1,184,418
Appraisal Expenses (3) ..................... (25,000)
Transaction and Proxy Costs (4) ............ (100,000)
Partnership Administrative Costs (5) ....... (100,000)
Debt Repayment to Others (6) ............... (21,529,869)
Miscellaneous Costs (7) .................... (100,000)
Net Repayments of Debt Through Closing (8) . 412,500
------------
</TABLE>
<TABLE>
<S> <C>
Projected Net Cash Value (9) ..................................................... 15,205,049
LIMITED PARTNERS' PROJECTED CASH AVAILABLE (10) .................................. 11,841,372
-----------
Per $1,000 Capital Contribution - INITIAL DISTRIBUTION FROM CLOSING .............. $ 945
Per $1,000 Capital Contribution - DISTRIBUTION FROM FIRST NOTE PAYMENT, INCLUDING
INTEREST ......................................................................... 342
Per $1,000 Capital Contribution - DISTRIBUTION FROM FINAL NOTE PAYMENT, INCLUDING
INTEREST ......................................................................... 324
Per $1,000 Capital Contribution - PREVIOUSLY RECEIVED CASH DISTRIBUTION .......... 755
North Carolina Non-Resident Tax Paid on Behalf of the Limited Partners - TREATED
AS A CASH DISTRIBUTION (THIS APPLIES ONLY TO NORTH CAROLINA NON-RESIDENT
LIMITED PARTNERS) (11) ....................................................... 51
-----------
TOTAL OVERALL POTENTIAL RETURN OVER THE LIFE OF THE
PARTNERSHIP PER $1,000 LIMITED PARTNER CAPITAL CONTRIBUTION .................. $ 2,417
</TABLE>
(1) The sale of the Assets 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 $604,944 (ii) accounts
receivable of $430,554, and (iii) prepaid expenses of $148,920, all of
which were determined as of September 30, 1997.
(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 $65,000, printing costs
of approximately $25,000, mailing expenses of approximately $7,000, 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 July 2000. 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.
24
<PAGE> 33
(6) Consists of (i) notes payable of $20,017,266 to the Partnership's lender,
(ii) advances, deferred expenses and fee reimbursements of $95,383 payable
to the Managing General Partner net of amounts due from affiliates, and
(iii) accounts payable, accrued expenses and other liabilities of
$1,417,220, all of which were determined as of September 30, 1997.
(7) Estimated amount to be set aside to cover miscellaneous costs.
(8) Represents scheduled amortization of notes payable of $262,500, $375,000
and $375,000 due December 31, 1997, March 31 and June 30, 1998,
respectively, net of $600,000 borrowed subsequent to September 30, 1997.
(9) "Projected Net Cash Value" includes the Partners' distributive share of
cash and the value of Northland's in-kind distribution of assets.
(10) 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, including stock in Corsicana Media, 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 $1,000
PER UNIT INVESTMENT AGGREGATE
------- ---------- ----------
<S> <C> <C> <C>
Original Capital Contribution $500.00 $ 1,000 $7,367,500
Prior Cash Distributions .... $377.50 $ 755 5,562,462
------- ---------- ----------
Excess ...................... $122.50 $ 245 $1,805,038
======= ========== ==========
</TABLE>
Distribution 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
($122.50 per limited partnership unit).......... $ -- $ 1,805,038 $ 1,805,038
Section 16(d)(4): Distributions to the General
Partners equal to 1.01% of the amount
distributable pursuant to Section 16(d)(3)...... 18,233 -- 18,233
Section 16(d)(5): Balance distributed 75% to the
Limited Partners and 25% to the
General Partner ............................... 3,345,444 10,036,334 13,381,778
---------- ----------- -----------
Distribution of Projected Net Cash Value..... $3,363,677 $11,841,372 $15,205,049
========== =========== ===========
</TABLE>
(11) See "Certain Consequences of the Transaction -- State Tax Considerations."
25
<PAGE> 34
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 Assets. 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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Total revenues reached $7,073,105 for the nine months ended September
30, 1997, representing an increase of approximately 3% over the same period in
1996. Of these revenues $4,814,186 (68%) is derived from subscriptions to basic
service, $662,841 (9%) is derived from subscriptions to premium services,
$697,233 (10%) from tier service subscriptions and $898,845 (13%) from other
sources such as installation charges and advertising. The overall revenue
increase is attributable to a full period inclusion of basic rate increases
effective August 1, 1996 which approximated 5% on a weighted average basis.
Additionally, tier revenues increased 26% due to the launch of a tier service in
the Corsicana System.
As of September 30, 1997 the Assets served approximately 22,700 basic
subscribers, 8,190 premium subscribers and 10,460 tier subscribers.
Operating expenses totaled $629,259 for the nine months ended September
30, 1997, representing an increase of approximately 6% over the same period in
1996. The increase was attributable to wage and benefit cost increases. Salary
and benefit costs are the major components of operating expenses accounting for
approximately 75% of the total. Wages are reviewed annually, and generally
increased based on cost of living adjustments and other factors. Therefore,
management expects the trend of increases in operating expenses to continue.
General and administrative expenses totaled $1,760,874 for the nine
months ended September 30, 1997, representing an increase of 2% over the same
period in 1996. The increase was attributable to a 24% rise in wage and benefit
costs resulting from annual wage adjustments and the addition of personnel in
the Corsicana and Forest City systems.
Programming expenses totaled $1,930,194 for the nine months ended
September 30, 1997, representing a 7% increase over the same period in 1996.
Programming expenses mainly consist of payments made to suppliers of various
cable programming services and are generally based on the number of subscribers
served. The 1997 increase is primarily attributable to a rise in the number of
tier subscribers resulting from the launch of a tier service in the Corsicana
System.
Depreciation and amortization expenses totaled $1,651,381 for the nine
months ended September 30, 1997, representing a decline of $73,896 from the same
period in 1996. This decrease is a result of certain Partnership assets being
fully depreciated.
Interest expense totaled $1,265,244 for the nine months ended September
30, 1997 representing a decrease of $37,321 from the same period in 1996. The
Partnership's average bank debt outstanding decreased to $20,542,800 for the
1997 period from $21,369,100 for the 1996 period as a result of quarterly
principal payments.
26
<PAGE> 35
1996 AND 1995
Total revenue for the year ended December 31, 1996 reached $9,244,966,
representing an increase of approximately 17% over 1995 revenue. This increase
stems from a full year of operations for those cable television systems which
were acquired in December of 1995 (formerly owned by affiliates of Phoenix
Cable and collectively identified herein as the "Phoenix Systems") and are now a
part of the Partnership's Forest City System, originally purchased in 1986. Of
the 1996 revenue, $6,237,969 (68%) is derived from subscriptions to basic
service, $932,331 (10%) from subscriptions to premium services, $769,223 (8%)
from tier service subscriptions, and $933,460 (14%) from other sources such as
installation charges and advertising.
The following table displays historical average rate information for
various services offered by the Partnership's systems (amounts per subscriber
per month):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Basic Rate .............. $22.10 $20.85 $20.15 $19.90 $19.20
Tier Rate ............... 7.05 5.35 3.80 3.25 2.20
HBO Rate ................ 11.70 11.30 10.75 10.75 9.65
Cinemax Rate ............ 6.80 7.00 7.15 7.35 7.50
Showtime Rate ........... 10.85 10.95 10.50 10.50 8.50
Movie Channel Rate ...... 8.70 9.00 8.50 8.50 8.50
Disney Rate ............. 8.15 7.75 7.50 7.50 7.50
Additional Outlet Rate .. -- -- -- -- 3.56
Service Contract Rate ... 2.75 2.90 3.10 3.15 --
</TABLE>
Operating expenses totaled $823,200 for 1996, representing an increase
of approximately 9% over 1995. This is primarily due to the addition of
employees from the purchase in 1995 of the Phoenix Systems as well as increases
in salary and benefit costs for all employees. Salary and benefit costs are the
major components of operating expenses. Employee wages are reviewed annually,
and in most cases increased based on cost of living adjustments and other
factors. Therefore, Management expects the trend of increases in operating
expenses to continue.
General and administrative expenses totaled $2,437,295 for 1996,
representing an increase of approximately 20% over 1995. This is mainly due to
the acquisition of the Phoenix Systems, increased salary and benefit costs, and
increases in revenue based expenses, such as franchise fees 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 $2,426,483 for 1996, representing an
increase of 19% over 1995. Approximately 50% of the increase is attributable to
subscriber based expenses associated with the acquisition of the Phoenix
Systems. Approximately 10% of the increase relates to advertising expenses. The
remaining increase is the result of higher costs charged by various program
suppliers, and additional salary and benefit costs related to local programming
support. 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 served, future subscriber increases will cause the trend of
programming expense increases to continue. In addition, rate increases from
program suppliers, as well as fees due to the launch of additional channels,
will contribute to the trend of increased programming costs.
Depreciation and amortization expense decreased from $2,544,097 in 1995
to $2,387,543 in 1996 (approximately 7%). This is mainly due to various assets
becoming fully depreciated in early 1996, partially offset by expense associated
with the acquisition of the Phoenix Systems.
Interest expense increased from $1,505,965 in 1995 to $1,740,313 in 1996
(approximately 16%). The Partnership's average debt balance increased from
approximately $19,477,652 in 1995 to $21,275,304 in 1996, mainly due to
increased borrowing to finance the acquisition of the Phoenix Systems in
December 1995. In addition,
27
<PAGE> 36
the Partnership's effective interest rate increased from approximately 7.73% in
1995 to approximately 8.00% in 1996.
In 1996, the Partnership generated a net loss of $727,733. The operating
losses incurred by the Partnership historically are a result of significant
non-cash charges to income for depreciation and amortization. Prior to the
deduction for these non-cash items, the Partnership has generated positive
operating income in each of the past three years ending December 31. Management
anticipates that this trend will continue, and that the Partnership will
continue to generate net operating losses after depreciation and amortization
until a majority of the Partnership's assets are fully depreciated.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's cable television systems are located in and around
four operating groups, including Corsicana, Lamesa and Cedar Creek, Texas and
Forest City, North Carolina. The principal physical properties of the Assets
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 $1,784,524
for the nine months ended September 30, 1997 and $2,150,354 and $1,341,667 for
the years ended December 31, 1996 and 1995, respectively. 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.
The General Partners are not obligated to defer payments due to them or to make
loans to the Partnership.
The Partnership currently has a revolving credit and term loan facility
with First Union National Bank of North Carolina. The indebtedness is
secured by a first lien position on all present and future assets of the
Partnership. As of September 30, 1997, this loan facility had an outstanding
balance of $20,017,266. Graduated principal plus interest payments are due
quarterly until maturity on March 31, 2001. 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 debt
to annualized operating cash flow of 5.25 to 1 and a minimum ratio of annualized
operating cash flow to fixed charges of 1.00 to 1. 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 September 30, 1997, the
Partnership was not in compliance with the required ratio of debt to annualized
operating cash flow. Additionally, the Partnership does not expect to comply
with its required ratio of debt to annualized operating cash flow for the
quarter ended December 31, 1997. The Partnership has received a waiver from its
lender for these covenant violations. The waivers granted by the lender apply
specifically to these events of default and shall remain in effect with respect
to these specific items throughout the remaining term of the loan agreement.
28
<PAGE> 37
The issuance of the waivers were conditioned upon the Managing General
Partner deferring management fees for the first quarter of 1998, which would
approximate $150,000, and limiting the Partnership's borrowings under its
revolving credit facility to $600,000 subsequent to September 30, 1997. These
conditions would provide the Partnership with $750,000 of working capital in
addition to that provided by operations which management estimates will be
adequate to cover all operating expenses, debt service and capital expenditures
for 1998.
Should the Partnership continue operations beyond 1998, the Managing
Partner believes certain modifications to the existing loan agreement would be
necessary. These modifications would include a revision to the required ratio
of debt to annualized operating cash flow as well as an extension of maturity
and rescheduling of principal amortization. Based on discussion with the
Partnership's lender, the Managing Partner believes these modifications could be
achieved, if necessary, with no material adverse effect on the Partnership.
29
<PAGE> 38
The Partnership manages its exposure to changes in interest rates by
entering into certain fixed rate agreements with its lender. As of the date of
this filing, interest rates on amounts outstanding under the credit facility are
as follows: $14,832,212 fixed at a LIBOR rate of 8.53% expiring March 31, 1998;
$5,131,554 fixed at a LIBOR rate of 8.56% expiring March 9, 1998; and $200,000
bearing interest at a floating rate, currently 10.25%. These rates include a
margin paid to the lender, currently 2.625% for fixed rates and 1.375% for
floating rates, which may increase or decrease depending on the Partnership's
ratio of debt to annualized operating cash flow.
CAPITAL EXPENDITURES
During 1996, the Partnership incurred approximately $1,016,000 on
capital expenditures. These expenditures include fiber interconnection and
system repair from ice storm damage in the Forest City System, a tier launch in
the Corsicana System and vehicle replacements in various systems.
During the nine months ended September 30, 1997, the Partnership
incurred approximately $803,000 in capital expenditures including a vehicle
upgrade and new office construction in the Corsicana System; a vehicle
replacement in the Cedar Creek System; and the first phase of a plant upgrade to
the Ellenboro portion of the Forest City System.
Planned expenditures for the balance of 1997 include construction of a
fiber optic backbone and new vehicle purchase in the Cedar Creek System; a
vehicle replacement in the Lamesa System; a continuing system upgrade to 400 MHz
in the Ellenboro portion of the Forest City System; computer equipment upgrade
in the Corsicana System and small line extensions in various systems.
30
<PAGE> 39
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, the
Revenue Reconciliation Act of 1993, the Small Business Jobs Protection, Health
Insurance Portability and Accountability, and Personal Responsibility and Work
Opportunity Reconciliation Acts of 1996 (the "1996 Acts"), and the Taxpayer
Relief Act of 1997 (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. In addition, since the proposed transaction is not expected to
close until July 1998, Congress could pass further legislation effective in 1998
that could significantly change the tax consequences of the proposed transaction
from that discussed below. 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 ASSETS AND LIQUIDATION OF PARTNERSHIP
Upon the disposition of the Assets, 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 Assets. See "Tax
Consequences of a Decision Not to Sell" below for a discussion of passive
activity loss limitations and suspended losses.
The Partnership believes that the Assets should be treated as a "Section
1231 asset" and, therefore, a Partner's share of gain or loss on the sale of the
Assets 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
("non-recaptured net Section 1231 losses"). 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
Assets 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 recognize gain or loss upon the liquidation of the Partnership following
the disposition of the Assets 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 Partnership 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 Assets" 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 Assets. The Internal Revenue Service (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
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<PAGE> 40
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 Assets 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 recognized UBTI with respect to cash distributions in
excess of basis.
INITIAL NCP-FIVE IRA INVESTMENT -- $5,000
<TABLE>
<S> <C>
Cash distributions received over the life of the partnership excluding
interest payments in 1999 and 2000 ($2,372 per $1,000 investment).................. $11,860
UBTI tax liability - 1998.......................................................... (1,588)
-------
NET CASH AFTER TAXES TO IRA INVESTOR............................................... $10,272
=======
</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 year of sale (1998). In addition, should the IRA be able to utilize a
capital loss in 1998, the remaining basis in the partnership in the year of
termination (1998) would result in a $230 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 investment 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
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<PAGE> 41
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 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. Capital gain income, including
net Section 1231 gains treated as capital gains, may receive favorable tax
treatment as discussed below.
The Taxpayer Relief Act of 1997 significantly changed the tax treatment
of capital gain income for noncorporate taxpayers. Capital gains from sales of
certain property held more than one year are now taxed at maximum tax rates that
vary from 10% to 28%, depending on the type of property sold, the taxpayer's
marginal tax rate, and the holding period of the property. In summary, capital
gain assets held for more than 18 months ("long-term gains") are taxed at a
maximum tax rate of 20% for taxpayers otherwise in the 28% or higher tax
bracket. The maximum tax rate is 10% for such gains that would otherwise be
taxed at the taxpayer's 15% tax bracket. Capital gain assets held for more than
one year but not more than 18 months ("mid-term gains") are taxed at a maximum
tax rate of 28%. Capital gain assets held for one year or less continue to be
taxed at the taxpayer's ordinary income tax rate, as was the case under prior
law. Finally, long-term capital gains from the sale of depreciable real estate
are taxed at a maximum tax rate of 25% to the extent the gain is not
attributable to prior depreciation deductions recaptured as ordinary income
under the depreciation recapture rules.
The large majority of the Partnership's assets will have been held by
the Partnership for more than 18 months at the time of the proposed transaction.
Therefore the capital gain income (including the Section 1231 gains) recognized
by the Limited Partners should constitute long-term gains eligible for the 20%
or 10% tax rates, as applicable. As discussed above, to the extent a Limited
Partner has non-recaptured net Section 1231 losses, his or her Section 1231 gain
will be treated as ordinary income and will not receive the favorable capital
gain tax rates. Also as discussed above, gain attributable to prior depreciation
and amortization deductions will be taxed as ordinary income under the
depreciation recapture rules. Finally, a small portion of the Partnership gain
may be attributable to depreciable real estate that would be eligible for the
25% tax rate.
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. The
favorable capital gain tax rates discussed above also apply for alternative
minimum tax purposes. The Tax Acts also 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
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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 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 net investment income. Net investment
income generally includes interest, dividends, annuities, royalties and
short-term capital gains, less expenses attributable to the production of such
income. Long-term capital gains from investment property are not generally
included in net investment income, however a taxpayer may elect to forego the
favorable tax rates available for long-term gains and include them in net
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.
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> 43
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 right to acquire the Assets 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 Assets. 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 Assets itself.
Notwithstanding the factors described above under "Proposed Transaction
- -- Market Factors," the fair market value and net cash flow of the Assets 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 Assets, instead of consummating the proposed transaction.
Similarly, if the Assets 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
Assets is fair and reasonable, and that the disposition of the Assets 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 Assets from third parties.
Although Daniels, the appraiser of the Assets, is not affiliated with
the General Partners or the Partnership, Northland and its 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
Northland and its 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 Assets.
The Managing General Partner holds 8 units of limited partnership
interest (representing 0.05% 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> 44
OVERVIEW OF PARTNERSHIP BUSINESS AND PROPERTIES
BUSINESS
The Partnership is a Washington limited partnership consisting of two
General Partners and approximately 995 Limited Partners as of January 1, 1998.
Northland Communications Corporation, a Washington corporation, is the Managing
General Partner of the Partnership. FN Equities Joint Venture, a California
general partnership, is the Administrative General Partner of the Partnership.
Northland was formed in March 1981 and is principally involved in the
ownership and management of cable television systems. Northland currently
manages the operations and is the general partner for cable television systems
owned by 5 limited partnerships. Northland is also the parent company of
Northland Cable Properties, Inc. which was formed in the February 1995 and is
principally involved in direct ownership of cable television systems. Northland
is a subsidiary of Northland Telecommunications Corporation ("NTC"). Other
subsidiaries, direct and indirect, of NTC include:
NORTHLAND CABLE TELEVISION, INC. - formed in October 1985 and
principally involved in the direct ownership of cable television systems. Sole
shareholder of Northland Cable News, Inc.
NORTHLAND CABLE NEWS, INC. - formed in May 1994 and principally involved
in the production and development of local news, sports and informational
programming.
NORTHLAND CABLE SERVICES CORPORATION - formed in August 1993 and
principally involved in the development and production of computer software used
in billing and financial record keeping for Northland-affiliated cable systems.
Sole shareholder of Cable Ad-Concepts, Inc.
CABLE AD-CONCEPTS, INC. - formed in November 1993 and principally
involved in the sale, development and production of video commercial
advertisements that are cablecast on Northland-affiliated cable systems.
NORTHLAND MEDIA, INC. - formed in April 1995 as the holding company for
Statesboro Media, Inc.:
STATESBORO MEDIA, INC. - formed in April 1995 and principally involved
in acquiring and operating an AM radio station serving the community of
Statesboro, Georgia and surrounding areas.
The Partnership was formed on August 19, 1985 and began operations in
1985 with the acquisition of a cable television system serving several
communities and contiguous areas surrounding Cedar Creek, Texas. In 1986, the
Partnership purchased cable television systems located in Lamesa, Texas and
surrounding areas, and in western North Carolina. In September 1994 the
Partnership purchased a cable television system in Corsicana, Texas. In December
1995, the Partnership acquired television systems serving communities in the
Ellenboro, Bostic, Gilkey and Harris, North Carolina areas (which systems were
previously described as the "Phoenix Systems,") but for operational purposes are
now part of the Forest City System. As of September 30, 1997, the total number
of basic subscribers served by the systems comprising the Assets was
approximately 22,700, and the Partnership's penetration rate (basic subscribers
as a percentage of homes passed) was approximately 60% as compared to an
industry average of approximately 68%, as reported by Paul Kagan Associates,
Inc.
In August 1994, the Partnership formed Corsicana Media, Inc., a
Washington corporation and wholly owned subsidiary, for the purpose of acquiring
and operating an AM radio station serving the community of Corsicana, Texas and
surrounding areas. On January 16, 1995, Corsicana Media acquired the radio
station operating assets of KAN-D Land, Inc.
The Partnership has 25 non-exclusive franchises to operate the systems
comprising the Assets. These franchises, which will expire at various dates
through 2014, have been granted by county, city and other local governmental
authorities in the areas in which such 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 the communities. The
franchises may be terminated for failure to comply with their respective
conditions.
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The Partnership serves the communities and surrounding areas of the
Cedar Creek System, the Lamesa System, the Forest City System (including the
former Phoenix Systems) and the Corsicana System. The following is a
description of the areas so served:
CEDAR CREEK SYSTEM: The eight communities served by the Cedar Creek
System are scattered around Cedar Creek Lake, a man-made reservoir created in
1967 to provide water to Fort Worth, Texas. The 33,750-acre lake is a recreation
attraction and provides residents and weekenders with opportunities for fishing,
camping, boating and other water sports. Although tourism is the primary growth
industry, many residents commute to Dallas on a daily basis. Certain information
regarding the Cedar Creek System as of September 30, 1997 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 4,100
Tier Subscribers 1,084
Premium Subscribers 1,149
Estimated Homes Passed 8,445
</TABLE>
LAMESA SYSTEM: Lamesa is the county seat of Dawson County, Texas. Its
economy is largely based on agriculture and livestock. Total cultivated acreage
in Dawson County is estimated at over 500,000 acres, with cotton being the
principal crop. Certain information regarding the Lamesa System as of September
30, 1997 is as follows:
<TABLE>
<S> <C>
Basic Subscribers 3,306
Tier Subscribers 1,416
Premium Subscribers 866
Estimated Homes Passed 4,085
</TABLE>
FOREST CITY SYSTEM: The communities served by the Forest City System are
all located in Rutherford County, North Carolina, in the industrial Piedmont
section of North Carolina and the Blue Ridge Mountains. Rutherford County is in
an area generally referred to as the "Thermal Belt" region. This region is known
for its year-round moderate climate. Initially, this climate created ideal
conditions for a prosperous agricultural economy, which remains a strong
contributor to the local economy. More recently, the area has been enjoying
growth in industrial development. Certain information regarding the Forest City
System, which includes all information regarding the Phoenix Systems, as of
September 30, 1997, is as follows:
<TABLE>
<S> <C>
Basic Subscribers 9,159
Tier Subscribers 6,911
Premium Subscribers 3,271
Estimated Homes Passed 15,240
</TABLE>
CORSICANA SYSTEM: The Corsicana System serves the community of and
contiguous areas surrounding Corsicana, Texas located in north central Texas on
I-45 between Dallas (53 miles) and Houston (187 miles). Founded in 1848, the
city flourished with the expansion of railroads, discovery of oil in 1894 and
subsequent oil booms. Corsicana was the site of the first oil refinery in Texas,
built by Magnolia Oil in 1897. From those beginnings came Mobil Oil whose parent
company was Magnolia. Texaco Oil also traces its beginnings to Corsicana. Today,
Corsicana is the host city for Texas' newest and largest recreational area,
Richland Chambers Lake. The city also encompasses the 117-acre main campus of
Navarro College, which contains a population of approximately 3,000 students.
Certain information regarding the Corsicana System as of September 30, 1997 is
as follows:
<TABLE>
<S> <C>
Basic Subscribers 6,145
Tier Subscribers 1,053
Premium Subscribers 2,901
Estimated Homes Passed 10,250
</TABLE>
The Partnership had 36 employees as of September 30, 1997. Management of
these systems is handled through offices located in the towns of Gun Barrel City
(Cedar Creek), Lamesa and Corsicana, Texas and Forest City, North Carolina.
Pursuant to the Partnership Agreement, the Partnership reimburses the Managing
General
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<PAGE> 46
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 Partnership's franchising authorities. 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 programming services, the content of which varies from system to
system. "Premium subscribers" are households that subscribe to one or more "pay
channels" in addition to the basic service. These pay channels include such
services as Showtime, Home Box Office, Cinemax, Disney or The Movie Channel.
CORSICANA MEDIA (AM RADIO STATION): In addition to the cable television
Assets described above, the Partnership owns all of the stock of Corsicana
Media, Inc., a Washington corporation, which the Partnership formed for the
purpose of acquiring and operating an AM radio station serving the community of
Corsicana, Texas and surrounding areas. On January 16, 1995, Corsicana Media
acquired the radio station operating assets of KAN-D Land, Inc. for a total
price of $500,000. This purchase price was determined by the seller from whom
the Partnership purchased the Corsicana System with the purchase of the
Corsicana System being conditioned upon the purchase of Corsicana Media. KAN-D
Land, Inc.'s operating assets consist of a low-power (i.e., 1,000 watt), unrated
(i.e., broadcasts in a non-existent radio market) AM radio station. Since August
1994, the Partnership has invested approximately $45,000 on capital projects
related to Corsicana Media, including the replacement of the station's tower,
ground plane and radio transmitter.
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 over recent years 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.
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast programming,
satellite master antenna television services, DBS services, wireless cable
services, newspapers, movie theaters, live sporting events, online computer
services and home video products, including videotape cassette recorders. The
extent to which a cable communications system is competitive depends, in part,
upon the cable system's ability to provide, at a reasonable price to customers,
a greater variety of programming and other communications services than those
which are available off-air or through other alternative delivery sources and
upon superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises
granted on a non-exclusive basis. The 1992 Cable Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to operate cable television systems without a
franchise. It is possible that a franchising authority might grant a second
franchise to another company containing terms and conditions more favorable than
those afforded the Partnership.
Well-financed businesses from outside the cable industry (such as the
public utilities and other companies that own the poles to which cable is
attached) may become competitors for franchises or providers of competing
services. Congress has repealed the prohibition against national television
networks owning cable systems, and telephone companies may now enter the cable
industry, as described below. Such new entrants may become competitors for
franchises or providers of competitive services. In general, a cable system's
financial performance will be adversely affected when a competing cable service
exists (referred to in the cable industry as an "overbuild").
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<PAGE> 47
In recent years, the FCC and the Congress have adopted policies
providing a more favorable operating environment for new and existing
technologies that provide, or have the potential to provide, substantial
competition to cable television systems. These technologies include, among
others, DBS, whereby signals are transmitted by satellite to small receiving
dishes located on subscribers' homes. Programming is currently available to DBS
subscribers through conventional, medium- and high-powered satellites. Existing
DBS systems offer in excess of 120 channels of programming and pay-per-view
services and are expected to increase channel capacity to 150 or more channels,
enabling them to provide program service comparable to and in some instances,
superior to those of cable television systems. At least four well-financed
companies currently offer DBS services and have undertaken extensive marketing
efforts to promote their products. The FCC has implemented regulations under the
1992 Cable Act to enhance the ability of DBS systems to make available to home
satellite dish owners certain satellite delivered cable programming at
competitive costs. Programming offered by DBS systems has certain advantages
over cable systems with respect to number of channels offered, programming
capacity and digital quality, as well as disadvantages that include high upfront
and monthly costs and a lack of local programming, service and equipment
distribution. DBS systems will provide increasing competition to cable systems
as the cost of DBS reception equipment continues to decline. At least one DBS
provider is undertaking the technical and legislative steps necessary to enhance
its service by adding local broadcast signals which could further increase
competitive pressures from DBS systems.
Cable television systems also compete with wireless program distribution
services such as MMDS which uses low power microwave to transmit video
programming over the air to customers. Additionally, the FCC recently adopted
new regulations allocating frequencies in the 28 GHz band for a new multichannel
wireless video service similar to MMDS, known as Local Multipoint Distribution
Service ("LMDS"). LMDS is also suited for providing wireless data services,
including the possibility of Internet access. Wireless distribution services
generally provide many of the programming services provided by cable systems,
although current technology limits the number of channels which may be offered.
Moreover, because MMDS service generally requires unobstructed "line of sight"
transmission paths, the ability of MMDS systems to compete may be hampered in
some areas by physical terrain and foliage.
The 1996 Telecommunications Act eliminated the previous prohibition on
the provision of video programming by local exchange telephone companies
("LECs") in their telephone service areas. Various LECs currently are providing
and seeking to provide video programming services within their telephone service
areas through a variety of distribution methods, primarily through the
deployment of broadband wire facilities, wireless transmission and installation
of traditional cable systems alongside existing telephone equipment. Cable
television systems could be placed at a competitive disadvantage if the delivery
of video programming services by LECs becomes widespread, since LECs may not be
required, under certain circumstances, to obtain local franchises to deliver
such video services or to comply with the variety of obligations imposed upon
cable television systems under such franchises. Issues of cross subsidization by
LECs of video and telephony services also pose strategic disadvantages for cable
operators seeking to compete with LECs that provide video services. The Company
believes, however, that the small to medium markets in which it provides or
expects to provide cable services are unlikely to support competition in the
provision of video and telecommunications broadband services given the lower
population densities and higher costs per subscriber of installing plant. The
1996 Telecommunications Act's provisions promoting facilities-based broadband
competition are primarily targeted at larger systems and markets. The 1996
Telecommunications Act includes certain limited exceptions to the general
prohibition on buy outs and joint ventures between incumbent cable operators and
LECs for smaller non-urban cable systems and carriers meeting certain criteria.
See "Proposed Transaction - Regulation Overview."
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information useful
both to consumers and businesses. The FCC also permits commercial and
noncommercial FM stations to use their subcarrier frequencies to provide non-
39
<PAGE> 48
broadcast services including data transmissions. The FCC has established an
over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. The expansion of fiber optic systems by LECs and other common
carriers, and electric utilities is providing facilities for the transmission
and distribution to homes and businesses of video services, including
interactive computer-based services like the Internet, data and other nonvideo
services.
The business of delivering and producing televised news, information and
entertainment are characterized by new market entrants, increasingly rapid
technological change and evolving industry standards. There can be no assurance
that the Partnership will be able to fund the capital expenditures necessary to
keep pace with technological developments or that the Partnership will
successfully predict the technical demand of its subscribers. The Partnership's
inability to provide enhanced services in a timely manner or to predict the
demands of the marketplace could have a material adverse effect on the
Partnership, its financial condition, prospects and debt service ability.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environments are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry or on the operations of the
Partnership.
40
<PAGE> 49
PROPERTIES
The Partnership's cable television system offices are located in and
around Gun Barrel City (Cedar Creek), Lamesa and Corsicana, Texas and Forest
City, North Carolina. The principal physical properties of the systems
comprising the Assets 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 38,020 homes as of
September 30, 1997. 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".)
In August 1994, the Partnership formed Corsicana Media, a Washington
corporation and a wholly owned subsidiary, for the purpose of acquiring and
operating an AM radio station serving the community of Corsicana, Texas and
surrounding areas. On January 16, 1995, Corsicana Media acquired the radio
station operating assets of KAN-D Land, Inc. for a total price of $500,000.
In September 1994, the Partnership completed its purchase of certain
operating assets and franchises of cable television systems owned by Corsicana
Cable Television ("CCT"). These systems currently serve the community of
Corsicana, Texas and surrounding areas. The total purchase price was $8,800,000.
At the time of closing, the Partnership paid $8,370,000 to CCT. The remaining
purchase price was in the form of an unsecured, subordinated,
noninterest-bearing hold-back note payable due June 30, 1995. During 1995, the
Partnership paid approximately $319,000 to CCT to satisfy the unsecured,
subordinated, noninterest-bearing hold-back note payable. The amount paid was
net of certain purchase price adjustments.
On December 20, 1995, the Partnership acquired substantially all
operating assets and franchise rights of the cable television systems in or
around the communities of Ellenboro, Bostic, Gilkey and Harris, in the state of
North Carolina (now part of the Forest City System and formerly described as the
Phoenix Systems) for a total purchase price of $4,233,000. The cable television
systems represent approximately 2,400 basic subscribers and were owned by
Phoenix Cable Income Fund and PCI One Incorporated.
LEGAL PROCEEDINGS
The Partnership is not subject to any material legal proceedings.
41
<PAGE> 50
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").
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. NCC is a wholly-owned subsidiary of Northland
Telecommunications Corporation, a Washington corporation ("NTC"). 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"), FN Network Partners, Ltd., a California limited partnership
("FNPL"), and John Simmers, the sole owner of FNE. 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 address of the principal
executive offices of each of the Administrative General Partner, FNE, FNPL and
John Simmers is 2780 Sky Park Drive, Suite 300, Torrance, California 90505.
The following table sets forth the executive officers and directors of
NCC:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
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
</TABLE>
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 Chairman of the
Board of Northland Telecommunications Corporation and each of its subsidiaries.
He has been involved with the cable television industry for over 23 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
42
<PAGE> 51
American Bar Association and has been practicing law for more than 35 years. Mr.
Iverson is the past president and a Trustee of the Pacific Northwest Ballet
Association. Mr. Iverson has a Juris Doctor degree from the University of
Washington.
RICHARD I. CLARK. Mr. Clark has served as Vice President 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 and Director of all subsidiaries of Northland
Telecommunications Corporation. Mr. Clark was elected Treasurer in April 1987,
prior to which he served as Secretary from March 1982. 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 19 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.
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 subscribers in Texas, Alabama
and Mississippi. 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.
43
<PAGE> 52
JAMES A. PENNEY. Mr. Penney is Vice President and General Counsel for
Northland Telecommunications Corporation and each of its subsidiaries and has
served in this role since September 1985. He was elected Secretary in April
1987. 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 and each of its subsidiaries since
October 1986. 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 and each of its
subsidiaries since April 1987. Mr. Dyste is responsible for planning and
advising all Northland Cable systems with regard to technical performance as
well as system upgrades and rebuilds. He is a past president 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 subscribers in Georgia,
Mississippi, North Carolina and South Carolina. 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 over 29 years and
is a current member of the Society of Cable Television Engineers. He is a
graduate of Swainsboro Technical Institute and has attended numerous training
seminars, including courses sponsored by Jerrold Electronics, Scientific
Atlanta, The Society of Cable Television Engineers and CATA.
The following table sets forth the executive officers and directors of
FNE:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Miles Z. Gordon...................... President and Director
John S. Simmers...................... Vice President, Secretary and Director
Harry M. Kitter...................... Treasurer
</TABLE>
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
44
<PAGE> 53
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.
45
<PAGE> 54
PLAN OF SOLICITATION
SPECIAL MEETING
The Special Meeting of Limited Partners of the Partnership will be held
on _____, 1998 at 3:00 p.m., local time, at the office of the Managing General
Partner, 1201 Third Avenue, Suite 3600, Seattle, Washington 98101. The purpose
of the meeting is to vote regarding the proposed sale of the Assets to Northland
and the dissolution of the Partnership. All Limited Partners are invited to
attend the Special Meeting and are urged to submit a proxy even if they will be
able to attend the Special Meeting.
FORM OF PROXY
A form of the proxy being solicited is set forth as Exhibit A to this
Proxy Statement. Actual, execution-ready proxy forms accompany this Proxy
Statement. By submitting a completed and executed proxy, a Limited Partner
appoints John S. Whetzell and Richard I. Clark, or either of them, with full
power of substitution, as 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 14,735 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, either a
proxy dated subsequent to the date of the proxy previously given or other
instrument revoking the prior proxy, 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.
Attendance at the Special Meeting, by itself, will not revoke a proxy.
Only persons who are Limited Partners of record of the Partnership at
the close of business on _____, 1998 will be permitted to vote or grant proxies.
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, 1996 and Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 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 Special Meeting, are incorporated herein
by this reference.
46
<PAGE> 55
FINANCIAL STATEMENTS
Included in this Proxy Statement are the Partnership's audited financial
statements for the years ended December 31, 1996 and 1995, and unaudited
financial statements for the nine months ended September 30, 1997 and 1996.
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 the Managing General Partner's audited financial statements
for the years ended December 31, 1996 and 1995, and unaudited financial
statements for the nine months ended September 30, 1997 and 1996, as well as an
audited balance sheet and associated materials for the Administrative General
Partner as of September 30 1997. Any Limited Partner seeking additional
information regarding financial statements should contact the Managing General
Partner.
47
<PAGE> 56
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
BALANCE SHEETS - (Unaudited)
(Prepared by the Managing General Partner)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash $ 604,944 $ 414,811
Accounts receivable 430,554 483,208
Insurance receivable -- 126,000
Prepaid expenses 148,920 61,985
Property and equipment, net of accumulated
depreciation of $14,109,895 and $13,074,555,
respectively 9,585,262 9,847,499
Intangible assets, net of accumulated
amortization of $3,038,571 and $2,417,270,
respectively 5,163,732 5,749,774
------------- -------------
Total assets $ 15,933,412 $ 16,683,277
============= =============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses $ 962,961 $ 816,707
Due to managing general partner and affiliates 361,523 276,161
Converter deposits 18,479 21,602
Subscriber prepayments 156,733 231,419
Notes payable 20,030,173 20,819,461
------------- -------------
Total liabilities 21,529,869 22,165,350
------------- -------------
Partners' equity:
General Partners:
Contributed capital, net (56,075) (56,075)
Accumulated deficit (101,797) (100,673)
------------- -------------
(157,872) (156,748)
------------- -------------
Limited Partners:
Contributed capital, net 591,327 593,327
Accumulated deficit (6,029,912) (5,918,652)
------------- -------------
(5,438,585) (5,325,325)
------------- -------------
Total partners' equity (5,596,457) (5,482,073)
------------- -------------
Total liabilities and partners' equity $ 15,933,412 $ 16,683,277
============= =============
</TABLE>
2
<PAGE> 57
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS - (Unaudited)
(Prepared by the Managing General Partner)
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Service revenues $ 7,073,105 $ 6,858,141
Expenses:
Operating 629,259 592,436
General and administrative (including
$1,070,675 and $936,818 to affiliates
in 1997 and 1996, respectively) 1,760,874 1,732,729
Programming 1,930,194 1,803,030
Depreciation and amortization 1,651,381 1,725,277
----------- -----------
5,971,708 5,853,472
----------- -----------
Income from operations 1,101,397 1,004,669
Other income (expense):
Interest expense (1,265,244) (1,302,565)
Interest income 23,196 1,284
Other income 28,268 2,095
----------- -----------
(1,213,780) (1,299,186)
----------- -----------
Net income (loss) $ (112,383) (294,517)
=========== ===========
Allocation of net income (loss):
General Partners $ (1,124) $ (2,945)
=========== ===========
Limited Partners $ (111,259) $ (291,572)
=========== ===========
Net income (loss) per limited partnership unit:
(14,735 units and 14,739 units, respectively) $ (8) $ (20)
=========== ===========
Net income (loss) per $1,000 investment $ (15) $ (40)
=========== ===========
</TABLE>
3
<PAGE> 58
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS - (Unaudited)
(Prepared by the Managing General Partner)
<TABLE>
<CAPTION>
For the nine months ended September 30,
-----------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (112,383) $ (294,517)
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,651,381 1,725,277
(Increase) decrease in operating assets:
Accounts receivable 52,654 (104,162)
Insurance receivable 126,000 --
Prepaid expenses (86,935) 5,688
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses 146,254 540,096
Due to managing general partner and affiliates 85,362 80,029
Converter deposits (3,123) (3,296)
Subscriber prepayments (74,686) (25,935)
--------------- ---------------
Net cash from operating activities 1,784,524 1,923,180
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (803,103) (813,489)
--------------- ---------------
Net cash used in investing activities (803,103) (813,489)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (789,288) (643,843)
Distributions to partners -- (74,439)
Loan fees and other costs incurred -- (26,353)
Repurchase of limited partner interest (2,000) --
--------------- ---------------
Net cash used in financing activities (791,288) (744,635)
--------------- ---------------
INCREASE IN CASH 190,133 365,056
CASH, beginning of period 414,811 241,713
--------------- ---------------
CASH, end of period $ 604,944 $ 606,769
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,020,241 $ 885,896
=============== ===============
The accompanying note to unaudited financial statements is an integral part of these statements
</TABLE>
5
<PAGE> 59
NORTHLAND CABLE PROPERTIES FIVE
LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 60
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
February 25, 1997
<PAGE> 61
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ ------------
<S> <C> <C>
CASH $ 414,811 $ 241,713
ACCOUNTS RECEIVABLE 483,208 411,862
INSURANCE RECEIVABLE 126,000 --
PREPAID EXPENSES 61,985 81,309
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 22,922,054 22,225,781
Less- Accumulated depreciation (13,074,555) (11,562,201)
------------ ------------
9,847,499 10,663,580
Franchise agreements (net of
accumulated amortization of
$1,426,830 in 1996 and $818,074
in 1995) 4,711,637 5,326,026
Organization costs and other
intangibles (net of accumulated
amortization of $990,440 in 1996
and $757,047 in 1995) 1,038,137 1,226,760
------------ ------------
Total investment in cable
television properties 15,597,273 17,216,366
------------ ------------
Total assets $ 16,683,277 $ 17,951,250
============ ============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Accounts payable and accrued expenses $ 816,707 $ 574,311
Due to General Partner and affiliates 276,161 190,853
Deposits 21,602 26,761
Subscriber prepayments 231,419 178,238
Notes payable 20,819,461 21,660,989
------------ ------------
Total liabilities 22,165,350 22,631,152
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' DEFICIT:
General partners-
Contributed capital, net (56,075) (55,331)
Accumulated deficit (100,673) (93,396)
------------ ------------
(156,748) (148,727)
------------ ------------
Limited partners-
Contributed capital, net -
14,739 units in 1996 and 1995 593,327 667,021
Accumulated deficit (5,918,652) (5,198,196)
------------ ------------
(5,325,325) (4,531,175)
------------ ------------
Total liabilities and partners'
deficit $ 16,683,277 $ 17,951,250
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE> 62
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE $ 9,244,966 $ 7,897,009 $ 5,598,494
----------- ----------- -----------
EXPENSES:
Operating (including $29,748, $34,057
and $34,442, net, paid to affiliates
in 1996, 1995 and 1994, respectively) 823,200 754,573 557,281
General and administrative (including
$910,206, $806,840 and $570,349, net,
paid to affiliates in 1996, 1995 and
1994, respectively) 2,437,295 2,028,131 1,464,107
Programming (including $299,319,
$203,025 and $80,905 paid to
affiliates in 1996, 1995 and 1994,
respectively) 2,426,483 2,044,429 1,188,052
Depreciation and amortization 2,387,543 2,544,097 1,675,502
----------- ----------- -----------
8,074,521 7,371,230 4,884,942
----------- ----------- -----------
Operating income 1,170,445 525,779 713,552
OTHER INCOME (EXPENSE):
Interest income and other 8,975 5,601 9,848
Interest expense (1,740,313) (1,505,965) (761,186)
Loss on disposal of assets (166,840) (14,795) --
----------- ----------- -----------
Net loss $ (727,733) $ (989,380) $ (37,786)
=========== =========== ===========
ALLOCATION OF NET LOSS:
General partners $ (7,277) $ (9,893) $ (378)
=========== =========== ===========
Limited partners $ (720,456) $ (979,487) $ (37,408)
=========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (49) $ (66) $ (3)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
<PAGE> 63
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------- ----------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1993 $(135,475) $(3,185,110) $(3,320,585)
Repurchase of limited partnership units -- (34,000) (34,000)
Cash distributions to partners ($10 per
limited partnership unit) (1,493) (147,780) (149,273)
Net loss (378) (37,408) (37,786)
--------- ----------- -----------
BALANCE, December 31, 1994 (137,346) (3,404,298) (3,541,644)
Cash distributions to partners ($10 per
limited partnership unit) (1,488) (147,390) (148,878)
Net loss (9,893) (979,487) (989,380)
--------- ----------- -----------
BALANCE, December 31, 1995 (148,727) (4,531,175) (4,679,902)
Cash distributions to partners ($5 per
limited partnership unit) (744) (73,694) (74,438)
Net loss (7,277) (720,456) (727,733)
--------- ----------- -----------
BALANCE, December 31, 1996 $(156,748) $(5,325,325) $(5,482,073)
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
<PAGE> 64
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (727,733) $ (989,380) $ (37,786)
Adjustments to reconcile loss to net cash provided by
operating activities-
Depreciation and amortization expense 2,387,543 2,544,097 1,675,502
Loss on disposal of assets 166,840 14,795 --
(Increase) decrease in operating assets:
Accounts receivable (71,346) (237,040) (75,753)
Prepaid expenses 19,324 (13,029) (10,450)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 242,396 (32,293) 219,383
Due to General Partner and affiliates 85,308 94,274 87,750
Deposits (5,159) (4,294) 6,460
Subscriber prepayments 53,181 (35,463) 73,691
----------- ------------ ------------
Net cash provided by operating activities 2,150,354 1,341,667 1,938,797
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems and related radio station -- (5,278,375) (8,499,270)
Purchase of property and equipment, net (1,016,520) (530,340) (747,056)
Hold-back note payable (91,528) 104,000 --
----------- ------------ ------------
Net cash used in investing activities (1,108,048) (5,704,715) (9,246,326)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 21,931,554 17,625,000
Principal payments on notes payable (750,000) (17,773,780) (9,309,396)
Distributions to partners (74,438) (148,878) (149,273)
Repurchase of limited partnership units -- -- (34,000)
Loan fees (44,770) (556,421) (133,078)
----------- ------------ ------------
Net cash (used in) provided by financing activities (869,208) 3,452,475 7,999,253
----------- ------------ ------------
INCREASE (DECREASE) IN CASH 173,098 (910,573) 691,724
CASH, beginning of year 241,713 1,152,286 460,562
----------- ------------ ------------
CASH, end of year $ 414,811 $ 241,713 $ 1,152,286
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,663,208 $ 1,663,654 $ 663,563
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 65
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Five Limited Partnership and subsidiary (the
Partnership), a Washington limited partnership, were formed on August 19, 1985.
The Partnership was formed to acquire, develop and operate cable television
systems. The Partnership began operations by acquiring a cable television system
serving several communities and contiguous areas surrounding Cedar Creek, Texas.
During 1986, the Partnership acquired three additional cable television systems,
which serve the Forest City, North Carolina and Lamesa and Star Harbor, Texas
areas. In September 1994, the Partnership acquired a cable television system
serving the Corsicana, Texas area. In December 1995, the Partnership acquired
cable television systems serving several communities in the Ellenboro, Bostic,
Gilkey and Harris, North Carolina areas. The Partnership has 25 nonexclusive
franchises to operate the cable television systems for periods which will expire
at various dates through the year 2014.
In August 1994, the Partnership formed Corsicana Media, Inc. (Corsicana Media),
a Washington corporation and a wholly owned subsidiary, for the purpose of
acquiring and operating an AM radio station serving the community of Corsicana,
Texas and surrounding areas. On January 16, 1995, Corsicana Media acquired the
operating assets of KAN-D Land, Inc. for a total price of $500,000. For purposes
of the Partnership's financial statement presentation, the activities of
Corsicana Media have been consolidated and all intercompany transactions have
been eliminated.
Northland Communications Corporation is the Managing General Partner (the
General Partner) of the Partnership. Certain affiliates of the Partnership also
own and operate other cable television systems. In addition, the General Partner
manages cable television systems for other limited partnerships for which it is
General Partner.
FN Equities Joint Venture, a California 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.
<PAGE> 66
-2-
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate of
the Administrative General Partner and other offering costs paid to the General
Partner of $787,500 and $139,651, respectively, were recorded as a reduction of
limited partners' capital.
Organization Costs
Organization costs include reimbursements of $25,823 to the General Partner for
costs incurred on the Partnership's behalf and fees of $487,500 as compensation
for selecting and arranging for the purchase of the cable television systems.
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 and leasehold improvements 5-20 years
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocated 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;
and then any excess would have been allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, organization costs and other intangibles
are being amortized using the straight-line method over the following estimated
useful lives:
Franchise agreements 10 years
Organization costs and other intangibles 1-8 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 and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE> 67
-3-
3. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner receives a fee for managing the Partnership 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 $533,011, $453,521 and $335,910 for 1996, 1995 and 1994,
respectively.
Income Allocation
As defined in the limited partnership agreement, the general partners are
allocated 1% and the limited partners are allocated 99% of partnership net
income, net losses, deductions and credits from operations until such time as
the limited partners receive aggregate cash distributions equal to their
aggregate capital contributions. Thereafter, the general partners will be
allocated 25% and the limited partners will be allocated 75% of partnership net
income, net losses, deductions and credits from operations. Cash distributions
from operations will be allocated in accordance with the net income and net loss
percentages then in effect. 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 50% of the limited partners' allocable
share of taxable net income for such year. 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 the Partnership Agreement.
The limited partners' total initial contributions to capital were $7,500,000
($500 per limited partnership unit). As of December 31, 1996, $5,650,553 ($377
per limited partnership unit) has been distributed to the limited partners and
the Partnership has repurchased $130,500 of limited partnership units ($500 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
$497,090, $406,603 and $281,914 for the years ended December 31, 1996, 1995 and
1994, respectively.
In 1996, 1995 and 1994, the Partnership was charged for billing services
provided by an affiliate, amounting to $66,672, $50,302 and $35,593,
respectively.
<PAGE> 68
-4-
In July 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 billed by NCN during 1996, 1995 and 1994 were $267,021, $165,281 and
$53,296, 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 staff. CAC billed the Partnership $37,097, $37,602 and $19,538 in 1996,
1995 and 1994, respectively, for these services.
In 1996, the Partnership entered into operating management agreements with
affiliates managed by the General Partner. Under the terms of these agreements,
the Partnership serves as the executive managing agent for certain cable
television systems and is reimbursed for certain operating, programming and
administrative expenses. The Partnership received $51,170, under the terms of
these agreements during 1996.
Due to General Partner and Affiliates
The liability to the General Partner and affiliates consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Management fees $137,394 $ 1,569
Reimbursable operating costs 123,975 42,431
Due to affiliates, net 14,792 146,853
-------- --------
$276,161 $190,853
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land and buildings $ 562,498 $ 561,199
Distribution plant 20,885,763 20,351,459
Other equipment 1,402,152 1,297,110
Leasehold improvements 16,013 16,013
Construction in progress 55,628 --
----------- -----------
22,922,054 22,225,781
Less- Accumulated depreciation 13,074,555 11,562,201
----------- -----------
$ 9,847,499 $10,663,580
=========== ===========
</TABLE>
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
<PAGE> 69
-5-
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Programmer license fees $226,009 $158,704
Accrued franchise fees 205,072 140,316
Other 385,626 275,291
-------- --------
$816,707 $574,311
======== ========
</TABLE>
6. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
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 8.00% (weighted average).
Graduated principal payments plus interest are
due quarterly until maturity on March 31,
2001. The Partnership has a revolving credit
facility with its creditor allowing for
borrowings not to exceed $2,500,000 until
maturity of the term loan agreement. At
December 31, 1996, the Partnership had
$1,431,553 outstanding on its revolving credit
facility. $20,806,554 $21,556,554
Unsecured, subordinated, noninterest-bearing
hold-back notes due to seller, payable in full
the first quarter of 1997, net of seller
receivable. 12,907 95,337
Other -- 9,098
----------- -----------
$20,819,461 $21,660,989
=========== ===========
</TABLE>
Annual maturities of notes payable after December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $ 1,133,391
1998 1,500,000
1999 2,000,000
2000 2,650,000
2001 13,536,070
-----------
$20,819,461
===========
</TABLE>
<PAGE> 70
-6-
Under the revolving credit and term loan agreement, the Partnership has agreed
to restrictive covenants which require the maintenance of certain ratios,
including a Fixed Charge Ratio of 1.15 to 1, an Interest Coverage Ratio of 1.75
to 1 and a Maximum Leverage Ratio of 5.50 to 1, among other restrictions. 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 underlying principal amounts. At December 31, 1996, the
Partnership had outstanding two interest rate swap agreements with its bank,
having a notional principal amount of $20,575,000. These agreements effectively
change the Partnership's interest rate exposure to a fixed rate of 5.36%
(weighted average), plus an applicable margin based on certain financial
covenants (the margin at December 31, 1996 was 2.625%). The maturity date, the
fixed interest rate and the notional amount of each swap are as follows:
<TABLE>
<CAPTION>
Maturity Date Fixed Rate Amount
------------- ---------- ------
<S> <C> <C>
January 13, 1997 5.32% $ 4,700,000
December 8, 1997 5.37% $15,875,000
</TABLE>
At December 31, 1996, the counterparty to the Partnership's interest rate swap
agreement would have been required to pay the Partnership approximately $51,000
to settle these agreements based on fair value estimates received from financial
institutions.
7. 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.
Taxable (loss) income to the limited partners was approximately $(1,064,000),
$(566,000) and $349,000 for each of the three years in the period ended December
31, 1996, and is different from that reported in the consolidated 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 (loss)
income and the net loss reported in the consolidated 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 returns 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.
<PAGE> 71
-7-
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 income
such as salary, active business income, dividends, interest, royalties and
capital gains. However, such losses can be used to offset income from other
passive activities. In addition, 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.
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $173,451, $165,872 and $116,151 in 1996, 1995
and 1994, respectively. Minimum lease payments through the end of the lease
terms are as follows:
<TABLE>
<S> <C>
1997 $ 36,181
1998 36,120
1999 33,420
2000 8,520
2001 8,520
Thereafter 52,675
--------
$175,436
========
</TABLE>
Effects of Regulation
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 industry. Many of the changes called for by the
1996 Act will not take effect until the Federal Communications Commission (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 the provisions
affecting the cable television industry, more specifically those affecting the
Partnership's operations, follows.
<PAGE> 72
-8-
Cable Programming Service Tier Regulation. FCC regulation of rates for cable
programming service tiers has been eliminated for small cable systems owned by
small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000). The Partnership qualifies as a small cable
company and all of the Partnership's cable systems qualify as small cable
systems. Basic tier rates remain subject to regulations 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 served
by a local telephone exchange carrier, its affiliates or any multichannel video
programming distributor which uses the facilities of the local exchange carrier.
The FCC has not yet determined the penetration criteria that will trigger the
presence of effective competition under these circumstances.
Telephone Companies. The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act, or a radio-based multichannel
programming distributor not subject to any provisions of the 1996 Act, or
through nonfranchised "open video systems" offering nondiscriminatory capacity
to unaffiliated programmers, subject to select provisions of the 1996 Act.
Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting 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 and leased
access channels.
9. CABLE TELEVISION SYSTEM ACQUISITION:
In September 1994, the Partnership completed its purchase of certain operating
assets and franchises of cable television systems owned by Corsicana Cable
Television (CCT). These systems currently serve the community of Corsicana,
Texas and surrounding areas. The total purchase price was $8,800,000. At the
time of closing, the Partnership paid $8,370,000 to CCT. The remaining purchase
price was in the form of an unsecured, subordinated, noninterest-bearing
hold-back note payable due June 30, 1995. During 1995, the Partnership paid
approximately $319,000 to CCT to satisfy the unsecured, subordinated,
noninterest-bearing hold-back note payable. The amount paid was net of certain
purchase price adjustments.
On December 20, 1995, the Partnership acquired substantially all operating
assets and franchise rights of the cable television systems in or around the
communities of Ellenboro, Bostic, Gilkey and Harris, in the state of North
Carolina (the Phoenix system) for a total purchase price of $4,233,000. At the
time of closing, the Partnership paid $4,129,000. The cable television systems
represent approximately 2,400 basic subscribers and were owned by Phoenix Cable
Income Fund and PCI One Incorporated. In 1996, the Partnership paid to the
seller $96,000, net of purchase price adjustments. The remainder will be settled
in 1997.
<PAGE> 73
-9-
Pro forma operating results of the Partnership for December 31, 1995, assuming
the acquisition of the Phoenix system had been made at the beginning of the
year, follow:
<TABLE>
<CAPTION>
For the year ended
December 31, 1995
------------------
(unaudited)
<S> <C>
Revenue $ 8,681,000
===========
Net loss $(1,841,617)
===========
Net loss per limited partnership unit $ (124)
===========
</TABLE>
<PAGE> 74
NORTHLAND COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
As of September 30, 1997
(Prepared by Management)
<TABLE>
<S> <C>
ASSETS
Cash $ 2,049,919
Accounts receivable 359,760
Receivables from managed limited partnerships 1,968,687
Unsecured net advance to parent and affiliates 14,292,415
Other 241,423
Investment in cable television properties:
Property and equipment, net of accumulated depreciation of $2,190,341 17,221,117
Intangible assets, net of accumulated amortization of $1,361,766 14,123,220
-----------
Total investment in CATV properties 31,344,337
-----------
Other property and equipment, net of accumulated depreciation of $947,423 720,271
-----------
Total assets $50,976,812
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,207,666
Converter deposits 54,610
Subscriber prepayments 248,502
Taxes payable 4,683,569
Notes payable 31,973,056
Accumulated deficit in managed limited partnerships 634,828
-----------
Total liabilities 38,802,231
-----------
Shareholders' equity:
Common stock, issued and outstanding 63
Additional paid in capital 995,101
Retained earnings 11,179,417
-----------
12,174,581
-----------
Total liabilities and shareholders' equity $50,976,812
===========
</TABLE>
<PAGE> 75
NORTHLAND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Management Operations:
Management fees $ 1,641,888 $ 1,835,826
General and administrative, net of reimbursed operating expenses (518,744) (132,377)
----------- -----------
Income from management operations 1,123,144 1,703,449
----------- -----------
Cable Television Operations:
Service revenues 7,177,806 1,106,176
Operating expenses (789,984) (114,539)
General and administrative expenses (1,065,150) (163,078)
Programming expenses (1,565,184) (283,922)
----------- -----------
Income from cable television operations 3,757,488 544,637
----------- -----------
Income from operations before depreciation and amortization 4,880,632 2,248,086
----------- -----------
Depreciation and amortization (2,959,946) (421,160)
----------- -----------
Income from operations 1,920,686 1,826,926
----------- -----------
Other income (expense):
Interest income 5,890 11,572
Interest expense (1,681,617) (192,237)
Equity in income of managed limited partnerships (37,086) 3,150
Other income (expense) 13,734 --
Gain on disposal of assets 1,496 --
----------- -----------
(1,697,583) (177,515)
----------- -----------
Income before income taxes 223,103 1,649,411
Income taxes (3,418) --
----------- -----------
Net income $ 219,685 $ 1,649,411
=========== ===========
</TABLE>
<PAGE> 76
NORTHLAND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Prepared by Management)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 219,685 $ 1,649,411
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation and amortization 2,959,946 421,160
Equity in income of managed limited partnership (98,192) (148,409)
(Increase) decrease in operating assets:
Receivables from managed limited partnerships (498,818) (689,430)
Accounts receivable (331,733) (9,410)
Other (114,069) 31,050
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 995,610 160,546
Converter deposits 49,045 (426)
Subscriber prepayments 204,356 (13,429)
------------ ------------
Net cash from operating activities 3,385,830 1,401,063
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable television system, less holdback of $3,936,925 in 1997 (25,388,434) (420,565)
Purchase of property and equipment, net (976,567) (192,293)
Cash distributions from managed limited partnerships 0 3,632
------------ ------------
Net cash used in investing activities (26,365,001) (609,226)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Unsecured net advances to parent and affiliates, including income taxes (189,255) (55,342)
Proceeds from borrowings under long term debt 28,591,188 0
Principal payments on borrowings (3,056,598) (156,845)
Loan fees and other costs incurred (735,505) 0
------------ ------------
Net cash from (used in) financing activities 24,609,830 (212,187)
------------ ------------
INCREASE IN CASH 1,630,659 579,650
CASH, beginning of period 419,260 424,243
------------ ------------
CASH, end of period $ 2,049,919 $ 1,003,893
============ ============
</TABLE>
<PAGE> 77
NORTHLAND COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 1997
(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, 1996 10,000 $ 63 $ 995,101 $10,959,731 $11,954,895
Net Income 219,685 219,685
----------- ----------- ----------- ----------- -----------
Balance, September 30, 1997 10,000 $ 63 $ 995,101 $11,179,416 $12,174,580
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 78
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of Northland
Telecommunications Corporation)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 79
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, 1996 and 1995, 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, 1996 and 1995, 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 14, 1997
<PAGE> 80
<TABLE>
<CAPTION>
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
------------ ------------
<S> <C> <C>
CASH $ 419,260 $ 424,243
ACCOUNTS RECEIVABLE 28,027 39,703
RECEIVABLES FROM MANAGED LIMITED PARTNERSHIPS 1,469,869 412,012
UNSECURED NET ADVANCES TO PARENT AND AFFILIATES 14,103,160 13,628,675
OTHER 127,354 130,825
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 3,067,107 2,859,228
Less- Accumulated depreciation (458,955) (162,221)
------------ ------------
2,608,152 2,697,007
Franchise agreements (net of accumulated
amortization of $151,346 and $70,735,
respectively) 998,036 1,078,647
Other intangibles (net of accumulated
amortization of $74,113 and $27,242,
respectively) 155,194 202,066
------------ ------------
Total investment in cable
television properties 3,761,382 3,977,720
------------ ------------
OTHER PROPERTY AND EQUIPMENT 1,386,276 1,248,204
Less- Accumulated depreciation (869,347) (765,080)
------------ ------------
516,929 483,124
------------ ------------
Total assets $ 20,425,981 $ 19,096,302
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 212,057 $ 235,127
Subscriber prepayments 44,146 46,240
Deposits 5,565 6,099
Due to managed limited partnership -- 581,037
Taxes payable to parent 388,037 388,037
Notes payable 2,792,729 2,963,692
Deferred tax liabilities, net 4,295,532 3,587,313
Accumulated deficit in managed limited
partnerships 733,020 668,697
------------ ------------
Total liabilities 8,471,086 8,476,242
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
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 10,959,731 9,624,896
------------ ------------
Total shareholder's equity 11,954,895 10,620,060
------------ ------------
Total liabilities and shareholder's
equity $ 20,425,981 $ 19,096,302
============ ============
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
<S> <C> <C>
MANAGEMENT OPERATIONS:
Management fee revenue $ 2,486,875 $ 2,061,528
General and administrative expenses, net of reimbursed operating
expenses (313,076) (193,863)
----------- -----------
Income from management operations 2,173,799 1,867,665
----------- -----------
CABLE TELEVISION OPERATIONS:
Service revenues 1,460,094 863,274
Expenses, including reimbursements to affiliates-
Operating (165,172) (75,735)
General and administrative (229,202) (148,005)
Programming (376,418) (204,337)
----------- -----------
Income from cable television operations 689,302 435,197
----------- -----------
Income from operations before depreciation and
amortization 2,863,101 2,302,862
DEPRECIATION AND AMORTIZATION EXPENSE (528,483) (354,088)
----------- -----------
Income from operations 2,334,618 1,948,774
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 16,217 16,252
Interest expense (254,539) (156,624)
Loss on sale of managed limited partnership interests -- (23,588)
Equity in net (loss) income of managed limited partnerships (46,981) 6,657
Other (6,261) --
----------- -----------
(291,564) (157,303)
----------- -----------
Income before income taxes 2,043,054 1,791,471
PROVISION IN LIEU OF INCOME TAXES 708,219 210,600
----------- -----------
NET INCOME $ 1,334,835 $ 1,580,871
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE> 82
<TABLE>
<CAPTION>
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, 1996 AND 1995
Common Stock
----------------- Additional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
Net income -- -- -- 1,334,835 1,334,835
----------- ----------- ----------- ----------- -----------
BALANCE, at December 31,
1996 10,000 $ 63 $ 995,101 $10,959,731 $11,954,895
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,334,835 $ 1,580,871
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 528,483 354,088
Loss on sale of managed limited
partnership interests -- 23,588
Equity in net loss (income) of managed
limited partnerships 46,981 (6,657)
(Increase) decrease in operating
assets:
Receivables from managed limited
partnerships (1,057,857) 72,672
Accounts receivable 11,676 (39,703)
Other 3,471 (15,634)
Increase (decrease) in operating liabilities:
Accounts payable and accrued
expenses (23,070) 152,642
Subscriber prepayments (2,094) 19,728
Deposits (534) 6,099
Deferred income taxes payable 708,219 --
----------- -----------
Net cash provided by operating
activities 1,550,110 2,147,694
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable television system (567,327) (3,434,566)
Purchases of property and equipment (316,913) (315,610)
Cash distributions from managed limited
partnerships 3,632 223,330
----------- -----------
Net cash used in investing
activities (880,608) (3,526,846)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Unsecured net advances to parent and
affiliates, including income taxes $ (474,485) $(1,138,395)
Proceeds from notes payable -- 3,050,000
Principal payments on notes payable (200,000) (113,259)
Loan fees -- (55,484)
----------- -----------
Net cash (used in) provided by
financing activities (674,485) 1,742,862
----------- -----------
(DECREASE) INCREASE IN CASH (4,983) 363,710
CASH, beginning of year 424,243 60,533
----------- -----------
CASH, end of year $ 419,260 $ 424,243
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 255,302 $ 155,197
=========== ===========
Cash paid during the year for state income
taxes $ 4,804 $ 1,500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 84
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Formation and Business
Northland Communications Corporation (NCC or the Company), 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 nonexclusive franchises to operate cable
television systems which expire at various dates through 2010. NCC and NCP, Inc.
are collectively referred to as the Company.
On January 31, 1997, NCP, Inc. acquired substantially all of the operating
assets and franchise rights of a partnership managed by NCC. The purchase price
of $31,419,500 was primarily based upon an independent appraisal performed
pursuant to the terms of the partnership agreement and financed through
borrowings under a newly established revolving credit and term-loan facility and
a capital contribution from NCC.
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 acted as the managing underwriter of affiliated limited partnership
offerings. NIC was dissolved during 1996. CAC assists in the development of
local advertising markets as well as billing for video commercial advertisements
to be cablecast on Northland affiliated cable systems. NMI was formed as a
holding company to own certain noncable-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.
<PAGE> 85
-2-
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.
Property and Equipment -- Property and equipment is stated at cost. Cable
television property and equipment principally consists of distribution plant.
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred. 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
Furniture and fixtures 10 years
Vehicles 5 years
</TABLE>
Intangible Assets -- Costs assigned to franchise agreements and other intangible
assets are amortized using the straight-line method over the following estimated
useful lives.
<TABLE>
<S> <C>
Franchise agreements 7-15 years
Other intangible assets 5 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 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. 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 allowed only upon a partnership's compliance
with certain covenants.
<PAGE> 86
-3-
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
$4,423,993 and $3,903,518 for 1996 and 1995, respectively.
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 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 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.
<PAGE> 87
-4-
Receivables from (Payables to) Managed Limited Partnerships
Receivables from (payables to) managed limited partnerships consist of the
following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- ---------
<S> <C> <C>
Northland Cable Properties Four $ 569,484 $ 79,601
Northland Cable Properties Five 263,049 91,259
Northland Cable Properties Six 138,238 92,041
Northland Cable Properties Seven 165,544 87,046
Northland Cable Properties Eight 248,993 34,402
Northland Premier Cable 84,561 22,615
Pend Oreille Cable TV - (581,037)
Others - 5,048
---------- ---------
$1,469,869 $(169,025)
========== =========
</TABLE>
3. NOTES PAYABLE:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- --------
<S> <C> <C>
Term loan agreement, collateralized by a first lien position on all
present and future assets of the Company; paid in full
January 31, 1997 $2,750,000 $2,950,000
Other 42,729 13,692
---------- ----------
$2,792,729 $2,963,692
========== ==========
</TABLE>
On January 31, 1997, NCP, Inc. entered into a credit agreement with the Bank of
Montreal. The Company borrowed $28,300,000 under the credit agreement, of which
$2,750,000 was used to pay the balance on the term loan, and the remainder to
finance the purchase of a partnership managed by NCC.
Annual maturities of notes payable including NCPI's newly established revolving
credit and term-loan facility, are as follows:
<TABLE>
<S> <C>
1997 $ 613,148
1998 1,213,148
1999 1,813,148
2000 2,553,285
2001 3,500,000
Thereafter 18,650,000
-----------
$28,342,729
===========
</TABLE>
<PAGE> 88
-5-
Under the new revolving credit and term-loan agreement, NCP, Inc. has agreed to
restrictive covenants which require the maintenance of certain ratios, including
Maximum Leverage Ratio of 5.75 to 1, among other restrictions. NCP, Inc. submits
quarterly debt compliance reports to its 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, 1996, NCP, Inc.
had one outstanding interest-rate swap agreement with its creditor, having a
notional principal amount of $2,750,000. 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, 1996 was
3.00%). The interest-rate swap agreement matures on June 30, 1997. At January
31, 1997 NCPI repaid amounts outstanding under its term loan and was required to
pay $1,359 to settle this agreement.
4. STOCK-BASED COMPENSATION:
In 1990, NTC established a nonqualified stock option plan for certain key
executives of the Company. Under the terms of this plan, 75,000 options were
granted which vest in incremental amounts over specified time periods and are
exercisable through December 31, 1999. The exercise price of each option is
$2.50. Since the establishment of the plan, 66,000 options have vested. At
December 31, 1996, no options were exercisable. During 1996 and 1995, options
for 5,000 and 19,000 shares, respectively, were exercised.
In 1995, NTC established a regional managers stock bonus plan. Under the terms
of this plan, up to 10,000 shares can be awarded at the discretion of the
president as bonus compensation to certain regional managers through January 31,
1998. During 1996, 500 shares were awarded.
In 1995, NTC established an executive/managers nonqualified stock option plan.
Under the terms of this plan, up to 40,000 options are available to certain
employees at the discretion of the president through January 1, 2005. The
exercise price of each option is $2.50. At December 31, 1996, no options were
exercisable. During 1996, 3,000 options were awarded and exercised.
In 1995, NTC established a senior executive nonqualified stock bonus plan. Under
the terms of this plan, up to 105,000 shares can be awarded through June 30,
1998. The shares are awarded annually at the discretion of the president based
on aggregate revenues of NTC and its affiliates. During 1996, 21,483 shares were
awarded.
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25. Total compensation cost recognized was $93,336
and $0 in 1996 and 1995, respectively. Had compensation cost for these plans
been determined consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, the Company's net income would not have been materially
different.
<PAGE> 89
-6-
5. 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 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.
The primary components of deferred tax liabilities, net, as of December 31, 1996
and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $ 245,569 $ 112,080
Accumulated deficit in managed limited partnerships 4,049,963 3,475,233
---------- ----------
$4,295,532 $3,587,313
========== ==========
</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.
6. 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 $491,000 and $462,000 in 1996 and 1995,
respectively, before reimbursements from managed limited partnerships and
affiliates. Future minimum lease payments for noncancelable leases are as
follows:
<TABLE>
<S> <C>
1997 $ 463,541
1998 457,313
1999 457,326
2000 468,778
2001 483,100
Thereafter 498,523
----------
$2,828,581
==========
</TABLE>
<PAGE> 90
-7-
Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted. The 1996 Act dramatically changed federal telecommunications laws and
the future competitiveness of the industry. Many of the changes called for by
the 1996 Act will not take effect until the Federal Communications Commission
(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 NCC's operations
cannot be determined at this time. A summary of the provisions affecting the
cable television industry, more specifically those affecting NCC's operations,
follows.
Cable Programming Service Tier Regulation -- FCC regulation of rates for cable
programming service tiers has been eliminated for small cable systems owned by
small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000). The Company qualifies as a small cable
company and all of the Company's cable systems qualify as small cable systems.
Basic tier rates remain subject to regulations 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 served
by a local telephone exchange carrier, its affiliates or any multichannel video
programming distributor which uses the facilities of the local exchange carrier.
The FCC has not yet determined the penetration criteria that will trigger the
presence of effective competition under these circumstances.
Telephone Companies -- The 1996 Act allows telephone companies to offer video
programming services directly to customers in their service areas immediately
upon enactment. They may provide video programming as a cable operator fully
subject to any provision of the 1996 Act; or as a radio-based multichannel
programming distributor not subject to any provisions of the 1996 Act; or
through nonfranchised "open video systems" offering nondiscriminatory capacity
to unaffiliated programmers, subject to select provisions of the 1996 Act.
Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of antitrafficking restrictions, cable-telephone cross ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public, Educational and Governmental and leased
access channels.
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 obligations of the limited partnerships, which were approximately
$106,606,000 as of December 31, 1996.
<PAGE> 91
-8-
7. UNSECURED NET ADVANCES TO PARENT AND AFFILIATES:
Unsecured net advances to parent and affiliates consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Northland Cable Services Corp. $ 10,906 $ 6,197
Northland Telecommunications Corporation 5,916,462 5,369,366
Northland Cable Television, Inc. 7,684,032 7,752,657
Cable Television Billing, Inc. 491,760 500,455
----------- -----------
$14,103,160 $13,628,675
=========== ===========
</TABLE>
The Company has advanced amounts to NCTV 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 90,000 basic
subscribers as of December 31, 1996. 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, 2002.
Following is a condensed consolidated balance sheet of NCTV at December 31,
1996:
<TABLE>
<S> <C>
Investment in cable television properties, net $ 86,510,354
Other assets 5,088,909
------------
Total assets $ 91,599,263
============
Bank notes payable $102,138,418
Unsecured advances payable to the Company 7,684,032
Other liabilities 7,785,803
Shareholder's deficit (26,008,990)
------------
Total liabilities and shareholder's deficit $ 91,599,263
============
</TABLE>
8. ACQUISITION OF CABLE TELEVISION SYSTEM:
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 and working capital provided by the
Company. Of the total purchase price, $3,434,566 was paid at the closing date.
In September 1996, the Company paid the seller the remainder of approximately
$581,000, net of purchase-price adjustments.
<PAGE> 92
-9-
Pro forma consolidated operating results (unaudited) of the Company for 1995,
assuming the acquisition of the assets described above had been made at the
beginning of 1995, follow:
<TABLE>
<CAPTION>
For the year
ended
December 31,
1995
-------------
<S> <C>
Revenue $3,473,000
==========
Net income $1,132,000
==========
</TABLE>
9. SUBSEQUENT TRANSACTION:
On January 31, 1997, NCP, Inc. acquired substantially all of the operating
assets and franchise rights of a partnership managed by NCC. The purchase price
was $31,419,500, of which approximately $24,807,000 was paid in cash on the
closing date and $2,012,500 contributed in kind. The balance of $4,600,000
represents an unsecured, subordinated promissory note whose obligation has been
assumed by NCC and will be payable, subject to adjustments for unknown
liabilities existing as of the closing date, in two equal annual installments
beginning on January 31, 1998, with interest at 6%. The acquisition was financed
by borrowings of $28,300,000 under a newly established revolving credit and
term-loan facility.
<PAGE> 93
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
FINANCIAL REPORT
SEPTEMBER 30, 1997
<PAGE> 94
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
CONTENTS
AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENT
Balance Sheet 2
Notes to Financial Statement 3 - 5
</TABLE>
<PAGE> 95
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FN Equities Joint Venture
(A California Limited Partnership)
Torrance, California
To the Partners:
We have compiled the accompanying balance sheet of FN Equities Joint Venture (a
California limited partnership) as of September 30, 1997 in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of a financial statement
information that is the representation of management. We have not audited or
reviewed the accompanying financial statement and, accordingly, do not express
an opinion or any other form of assurance on it.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
January 15, 1998
<PAGE> 96
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEET
AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 221
--------
Total current assets 221
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 3) 197,922
--------
TOTAL ASSETS $198,143
========
PARTNERS' CAPITAL
PARTNERS' CAPITAL $198,143
--------
TOTAL PARTNERS' CAPITAL $198,143
========
</TABLE>
See Accompanying Accountants' Compilation Report.
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 97
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND PARTNERS' INTERESTS
Formation and Business Activity
FN Equities Joint Venture (the "Joint Venture"), a California limited
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/her 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.
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.
See Accompanying Accountants' Compilation Report
3
<PAGE> 98
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS
At September 30, 1997, the Joint Venture was the Administrative General
Partner of the following partnerships (the "Northland 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")
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, after 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. As of September 30, 1997, the limited partners of NCP5,
NCP6, and NCP7 had not received aggregate cash distributions in an
amount equal to their aggregate capital contributions. Accordingly, the
Joint Venture had no investment interest in the underlying
partnerships.
Partnership in Liquidation
At September 30, 1997, the Joint Venture valued the investment in NCP4
at $197,922 based on its liquidation value plus interest at 6% per
annum. On January 31, 1997, substantially all the assets of NCP4 were
sold to the Managing General Partner of NCP4, Northland Communications
Corporation. The assets were purchased for cash and a note payable to
NCP4 for $3,331,576 with payments due on January 31, 1998 and January
31, 1999.
Installments on NCP4's note receivable are due in equal principal
installments, plus interest, on February 1, 1998 and February 1, 1999.
When the final payments on the notes to the Joint Venture and the
Limited Partners of NCP4 are made on February 1, 1999, NCP4 will be
terminated.
Active Partnerships
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:
See Accompanying Accountants' Compilation Report
4
<PAGE> 99
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENT
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
Active Partnerships (Continued)
<TABLE>
<CAPTION>
Number of Franchise Area -
Franchises Various Towns In: Expiration Date
---------- ----------------- ---------------
<S> <C> <C> <C>
NCP5 25 Texas and North Carolina Various through 2014
NCP6 24 Mississippi and North Carolina Various through 2017
NCP7 10 Texas and Washington Various through 2017
</TABLE>
Summarized financial information of the Northland Partnerships as of
September 30, 1997 internally prepared by the Managing General Partner
is as follows:
<TABLE>
<CAPTION>
Unaudited
-----------------------------------------------------------------
NCP4 NCP5 NCP6 NCP7
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Cash $ 398,564 $ 604,944 $ 129,963 $ 176,412
Notes receivable from
affiliate 3,331,576 - - -
Other assets - 579,474 262,552 585,699
Property and
equipment, net - 9,585,262 6,075,321 10,290,275
Intangible assets, net - 5,163,732 5,728,799 13,873,893
------------ ------------ ------------ ------------
TOTAL ASSETS $ 3,730,140 $ 15,933,412 $ 12,196,635 $ 24,926,279
============ ============ ============ ============
Liabilities
Notes payable $ - $ 20,030,173 $ 1,276,017 $ 29,480,000
Other liabilities 389,647 1,499,696 10,139,421 2,008,639
------------ ------------ ------------ ------------
Total liabilities 389,647 21,529,869 11,415,438 31,488,639
------------ ------------ ------------ ------------
Partners' equity (deficit)
General 229,055 (157,872) (119,343) (278,112)
Limited 3,111,438 (5,438,585) 900,540 (6,284,248)
------------ ------------ ------------ ------------
Total partners' equity
(deficit) 3,340,493 (5,596,457) 781,197 (6,562,360)
------------ ------------ ------------ ------------
TOTAL LIABILITIES
AND PARTNERS'
EQUITY (DEFICIT) $ 3,730,140 $ 15,933,412 $ 12,196,635 $ 24,926,279
============ ============ ============ ============
</TABLE>
See Accompanying Accountants' Compilation Report.
5
<PAGE> 100
EXHIBIT A
FORM OF PROXY
For delivery at the Special Meeting of Limited Partners to be held on _____,
1998, 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 FIVE LIMITED
PARTNERSHIP (the "Partnership") and accompanying Proxy Statement, each dated
________, 1998 ("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 _____, 1998,
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 _____, 1998 and at any
adjournments thereof; and directs the proxies to:
APPROVE [ ] DISAPPROVE [ ] ABSTAIN [ ]
the following:
The grant to the Managing General Partner of authority to sell
the cable systems and other assets owned by the Partnership (the
"Assets") 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 Five 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 Assets 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 Assets, as well as the stock of the Partnership
in Corsicana Media, Inc., which are 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: __________________________, 1998
Number of Limited Partnership PLEASE SIGN EXACTLY AS NAME
Units Held APPEARS BELOW
______________________________ X___________________________________
(Signature)
X___________________________________
(Signature, if held jointly)
PLEASE COMPLETE, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
A-1
<PAGE> 101
EXHIBIT B
AMENDMENT
TO
AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
OF
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
The Amended and Restated Certificate and Agreement of Limited
Partnership of Northland Cable Properties Five Limited Partnership (the
"Partnership"), dated December 30, 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 the Partnership, including the cable television franchises and cable
television systems of four system operating groups, including Cedar
Creek, Lamesa and Corsicana, Texas, and Forest City, North Carolina, as
well as control of Corsicana Media, Inc., a wholly owned subsidiary of
the Partnership and operator of an AM radio station serving the
community of Corsicana, Texas and surrounding contiguous areas
(collectively, the "Assets"), that are 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 Assets 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 ________, 1998 (the "Proxy
Statement"). This Article relates only to the acquisition of the Assets
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 Assets 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 Assets. The final appraisal, which is
dated as of December 1, 1997, 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 Assets. The Partnership will pay the fees and expenses of the
appraiser. The value of the Assets, as determined by the appraiser,
is $35,463,000.
(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 shall (i)
sell to Northland the undivided portion of the Assets 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 Assets 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
Assets were sold at their appraisal value 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 $945 for every $1,000 invested. The Note delivered by Northland to
the Partnership on the Closing Date shall be in
B-1
<PAGE> 102
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 Assets, 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 Assets 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 Assets 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 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: __________________, 1998.
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-2
<PAGE> 103
EXHIBIT C
================================================================================
CONFIDENTIAL
APPRAISAL OF THE ASSETS OF
NORTHLAND CABLE PROPERTIES FIVE
LIMITED PARTNERSHIP
AS OF DECEMBER 1, 1997
PREPARED BY
DANIELS & ASSOCIATES, L.P.
================================================================================
<PAGE> 104
CONFIDENTIAL
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
APPRAISAL ANALYSIS SUMMARY
INTRODUCTION
Northland Cable Properties Five Limited Partnership (the "Partnership") is a
Washington limited partnership consisting of two general partners and
approximately 995 limited partners. Northland Communications Corporation
("Northland"), a Washington corporation, is the managing general partner of the
Partnership. The Partnership was formed on August 19, 1985 and began operations
in 1985 with the acquisition of a cable television system serving several
communities surrounding the Cedar Creek Reservoir, Texas. As the result of
subsequent acquisitions made between February 1986 and December 1995, the
Partnership currently owns and operates nine cable television systems serving
numerous communities in Texas and North Carolina (referred to in the aggregate
as the "Systems"). As of September 30, 1997, the Systems passed 38,020 estimated
homes and served approximately 22,710 equivalent basic subscribers through four
profit centers ("System Operating Groups").
Based on the analysis performed by Daniels & Associates, L.P. ("Daniels"),
revenue and operating cash flow for the Systems for the year ending December 31,
1997 are estimated to be approximately $9,229,577 and $4,272,616, respectively.
This equates to an average monthly revenue per equivalent basic subscriber of
$33.89 and average annual cash flow per equivalent basic subscriber of $188.25.
Daniels' estimates of revenue and operating cash flow for the year ending
December 31, 1997 are based on actual data for the nine months ended September
30, 1997 plus actual data for the month ended September 30, 1997, multiplied by
a factor of three.
A summary of the Partnership's System Operating Groups is presented in the
following table.
AS OF SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SYSTEM OPERATING MILES OF PLANT/ EST. ESTIMATED ESTIMATED
GROUP NUMBER OF HOMES/MILE HOMES EBUS/ PAY UNITS/ CASH FLOW
HEADENDS PASSED PENETRATION PENETRATION FOR Y/E 12/31/97
- ---------------------- ----------------- ---------- --------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Forest City, NC 683 / 3 22 15,240 9,159 / 60.1% 3,271 / 35.7% $1,864,415
----------------- ---------- --------------- ----------------- ---------------- ------------------
Corsicana, TX 168 / 3 61 10,250 6,145 / 60.0 2,901 / 47.2 1,008,219
----------------- ---------- --------------- ----------------- ---------------- ------------------
Cedar Creek, TX 207 / 2 41 8,445 4,100 / 48.5 1,149 / 28.0 746,833
----------------- ---------- --------------- ----------------- ---------------- ------------------
Lamesa, TX 64 / 1 64 4,085 3,306 / 80.9 866 / 26.2 653,150
----------------- ---------- --------------- ----------------- ---------------- ------------------
Subtotal, TX 439 / 6 52 22,780 13,551 / 59.5 4,916 / 36.3 2,408,202
----------------- ---------- --------------- ----------------- ---------------- ------------------
TOTAL ALL SYSTEMS 1,122 / 9 34 38,020 22,710 / 59.7% 8,187 / 36.1% $4,272,616
----------------- ---------- --------------- ----------------- ---------------- ------------------
</TABLE>
1
<PAGE> 105
In addition to the Partnership's cable television operations, in August 1994,
the Partnership formed Corsicana Media, Inc. ("Corsicana Media"), a Washington
corporation and wholly-owned subsidiary, for the purpose of acquiring and
operating an AM radio station serving the community of Corsicana, Texas and
surrounding areas. On January 16, 1995, in conjunction with the acquisition of
the Corsicana, Texas System Operating Group, Corsicana Media acquired the
operating assets of KAN-D Land, Inc. For the year ending December 31, 1997,
Corsicana Media revenues and cash flow are estimated to be approximately
$263,031 and ($12,708), respectively.
Daniels was retained by Northland to appraise the fair market value of the
assets of the Partnership as of December 1, 1997 (the "Valuation Date"). The
appraisal was performed in conjunction with the anticipated dissolution and
liquidation of the Partnership. This report summarizes Daniels' conclusions and
provides an outline of the scope of the engagement, the process used, an
overview of the Systems by System Operating Group, an overview of Corsicana
Media, 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 operating 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 television
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"). Corsicana Media was
appraised on a basis consistent with that used to appraise the Systems.
The appraisal process included discussions with the Partnership's management,
due diligence visits to substantially all of the Systems and Corsicana Media by
Daniels' personnel, research of demographic information concerning the various
communities served by the Partnership and analyses of historical and forecasted
financial and operating information, as well as Daniels' general knowledge about
the cable television and AM radio industries. From such due diligence, summaries
of the relevant operating, technical, financial and demographic characteristics
were prepared for each of the four
2
<PAGE> 106
System Operating Groups and Corsicana Media. These characteristics were
instrumental in determining value.
In order to assess the fair market value of the Partnership's operating assets,
Daniels prepared detailed operating and financial forecasts for each of the four
System Operating Groups and Corsicana Media, 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 and for Corsicana Media, a
standard valuation methodology used within the cable television and AM radio
industries (the "DCF" valuation methodology). The combined values of the
Systems, by System Operating Group, and Corsicana Media, pursuant to the DCF,
provide a value of the operating assets of the Partnership. In addition, using
the private market transaction multiples methodology, an aggregate value for the
Partnership's cable television assets was derived by applying value per
subscriber and operating cash flow multiples obtained in private market sales of
comparable cable television systems to the respective statistics of the Systems.
The private market transaction multiples valuation methodology was also applied
to the Normalized Operating Cash Flow and Normalized Revenue statistics of
Corsicana Media to derive an aggregate value of Corsicana Media. The results of
the DCF and the private market transaction multiples valuation methodologies
were then analyzed to determine a final appraised value for the Partnership's
operating assets.
THE SYSTEMS
The Systems are clustered and managed as four separate profit centers, or System
Operating Groups - one of which is located in North Carolina, and three of which
are located in Texas. The largest System Operating Group is Forest City, North
Carolina with 9,159 equivalent basic subscribers as of September 30, 1997. The
smallest System Operating Group is Lamesa, Texas with 3,306 equivalent basic
subscribers. As of September 30, 1997, the System Operating Groups had
equivalent basic subscriber penetration rates ranging from 48.5% to 80.9%, and a
weighted average equivalent basic subscriber penetration level of 59.7%,
compared to the national average of approximately 68.3% (Source: Paul Kagan
Associates, Inc., Marketing New Media, January 20, 1997).
In the four System Operating Groups, there are a total of nine headends and
1,122 plant miles, of which approximately 89% is aerial and 11% is underground.
Approximately 18% of the plant miles are at 300 MHz; 29% are at 330 MHz; 39% are
at 400 MHz; and 14% are at 450 MHz. Approximately 22% of the homes passed are
passed by plant with a bandwidth of 300 MHz; 18% are passed by 330 MHz plant;
34% are passed by 400 MHz
3
<PAGE> 107
plant; and 26% are passed by 450 MHz plant. None of the Systems are currently
addressable, and pay-per-view service is offered on an event-only basis.
TECHNICAL SUMMARY
<TABLE>
<CAPTION>
MILES OF PLANT AND ESTIMATED HOMES PASSED AT VARIOUS BANDWIDTHS AS OF SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------------------------------------------
SYSTEM OPERATING 300 MHZ 330 MHZ 400 MHZ 450 MHZ TOTAL
GROUP MILES / HOMES MILES / HOMES MILES / HOMES MILES / HOMES MILES / HOMES
- --------------------- ------------------ ---------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C> <C>
Forest City, NC 329 / 6,820 354 / 8,418 683 / 15,240
- --------------------- ------------------ ---------------- ------------------ ------------------- -------------------
Corsicana, TX 17 / 460 151 / 9,790 168 / 10,250
- --------------------- ------------------ ---------------- ------------------ ------------------- -------------------
Cedar Creek, TX 207 / 8,445 207 / 8,445
- --------------------- ------------------ ---------------- ------------------ ------------------- -------------------
Lamesa, TX 64 / 4,085 64 / 4,085
- --------------------- ------------------ ---------------- ------------------ ------------------- -------------------
Subtotal, TX 207 / 8,445 0 / 0 81 / 4,545 151 / 9,790 439 / 22,780
- --------------------- ------------------ ---------------- ------------------ ------------------- -------------------
TOTAL ALL SYSTEMS 207 / 8,445 329 / 6,820 435 / 12,963 151 / 9,790 1,122 / 38,020
- --------------------- ------------------ ---------------- ------------------ ------------------- -------------------
PCT. OF TOTAL 18.5% / 22.2% 29.3% / 17.9% 38.8% / 34.1% 13.5% / 25.8% 100.0% / 100.0%
- --------------------- ------------------ ---------------- ------------------ ------------------- -------------------
</TABLE>
The reality of competition from DBS and MMDS and the lack of excess channel
capacity in certain of the Partnership's Systems 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 at least 400 MHz over the next three 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
that in order to remain competitive, the Systems will probably need to be
further upgraded or rebuilt to at least 450 MHz over the next five years, and
Daniels has built this assumption into its financial forecasts. The only
exception to this assumption pertains to the Lamesa, Texas System Operating
Group, which is currently operating at 400 MHz and has significant excess
channel capacity.
The quality of broadcast signals that can be received off-air varies among the
different System Operating Groups from 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 (Heartland Wireless) with service available to subscribers served
by the Corsicana and Lamesa System Operating Groups. The MMDS operator began
service in 1996. While the competitive impact on the Corsicana System Operating
Group has been negligible to date, the Lamesa System Operating Group lost
approximately 300 subscribers in 1996 to the MMDS operator. These losses were
concentrated during the initial start-up phase of the MMDS operator as the area
was heavily marketed. Through September 30, 1997, the Lamesa System Operating
Group has gained back approximately 200 equivalent
4
<PAGE> 108
basic subscribers previously lost to the MMDS operator. Management of the
Partnership does not believe that MMDS operators will have a further material
negative effect on the Systems in the future. Although competition from DBS
providers exists in areas served by the Systems, such competition has not had a
material effect on the Partnership's operations to date.
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 are 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 eliminated 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).
Under the 1996 Act, 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 September 30, 1997, none of the Partnership's Systems have received
notification that local franchising authorities 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.
FOREST CITY, NORTH CAROLINA
The Forest City, North Carolina System Operating Group is the largest of the
four System Operating Groups with subscribers located in Rutherford County,
North Carolina, which is approximately 75 miles west of Charlotte, North
Carolina. As of September 30, 1997, the Forest City System Operating Group
passed 15,240 estimated homes and served 9,159 equivalent basic subscribers, for
a penetration rate of 60.1%. This penetration rate is the second highest of the
four System Operating Groups. There are currently 10 franchises
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<PAGE> 109
covering this group, with franchise expiration dates ranging from December 5,
2001 to November 6, 2014. The Forest City System Operating Group accounts for
approximately 40% of the Partnership's equivalent basic subscribers and has lost
approximately 614 equivalent basic subscribers over the last 21 months. The loss
of subscribers is due primarily to increased efforts to collect past due
accounts resulting from operating practices implemented by an employee, which
significantly differed from Northland policy. The former manager of the Forest
City System Operating Group allowed subscriber receivables to exceed 90 days,
substantially higher than the Partnership's 45-day policy. Since the hiring of a
new manager in 1997, subscriber receivables have decreased significantly, and,
consequently, "bad debt" customers are no longer subscribers.
The Forest City System Operating Group includes three headends, located in
Forest City, Harris and Gilkey, North Carolina. The Forest City system was
acquired in 1986, and the Gilkey, Harris and Ellenboro systems were acquired in
December 1995. Since the acquisition, the Ellenboro headend has been
consolidated with the Forest City headend. The Forest City System Operating
Group includes 683 miles of plant, 86% of which is aerial. Approximately 52% of
the plant is capable of passing 400 MHz, while approximately 48% of the plant is
capable of passing 330 MHz. The channel capacity is 54 channels from the 400 MHz
plant and 41 channels from the 330 MHz plant. The Forest City headend, which
accounts for approximately 92% of the subscribers in this System Operating
Group, ranges between zero and ten channels of excess capacity, depending on the
status of the plant upgrade. The other two headends have seven and eight
channels of excess capacity. Over the next three to five years, the Partnership
is planning the following significant capital projects for the Forest City
System Operating Group: a tap audit, an upgrade of all of the remaining Forest
City plant to at least 400 MHz, planning for a future rebuild of plant to 750
MHz and the interconnection of each of the Gilkey and Harris systems with fiber.
The financial forecasts prepared by Daniels take into account such capital
projects, among others.
The Forest City system offers three levels of non-premium service: Economy Basic
service, consisting of 14 primarily broadcast and local origination channels,
for $15.00; Standard Basic service, consisting of the 14 Economy Basic channels
plus an additional 16 satellite channels, for $24.25; and Specialty Tier
service, consisting of the 30 Standard Basic channels plus an additional 10
satellite channels, for $32.20. The Harris and Gilkey systems offer 31 and 30
channels of Standard Basic service, respectively, for $24.95. All three systems
offer HBO, The Disney Channel and Showtime, while the Forest City system also
offers Cinemax and Encore. The last rate increase was effective August 1, 1997,
and the date of the next planned rate increase is August 1, 1998.
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<PAGE> 110
CORSICANA, TEXAS
Corsicana is the second largest System Operating Group, passing 10,250 estimated
homes in the communities of Corsicana, Kerens and Rice, Texas and serving 6,145
equivalent basic subscribers as of September 30, 1997. The areas served by the
Corsicana System Operating Group are located in North Central Texas on I-45,
approximately 50 miles South and Southeast of Dallas, Texas. The overall
penetration rate in this System Operating Group is 60.0%. The Corsicana System
Operating Group is covered by three franchises which expire between February 19,
2004 and June 1, 2010. The Corsicana System Operating Group accounts for
approximately 27% of the Partnership's equivalent basic subscribers, and has
lost approximately 105 equivalent basic subscribers over the last 21 months. The
loss of subscribers is due primarily to the increase in the Standard Basic rate
in 1996 which, at the time, was significantly below comparable rates offered by
neighboring cable television operators.
The Corsicana System Operating Group includes three headends, located in
Corsicana, Kerens and Rice, Texas. The Corsicana System Operating Group includes
168 miles of plant, of which approximately 92% is aerial. Approximately 90% of
the plant is capable of passing 450 MHz, and approximately 10% can pass 400 MHz.
The channel capacity is 54 channels from the 400 MHz plant and 60 from the 450
MHz plant. The Corsicana system, which accounts for approximately 94% of the
subscribers in this System Operating Group, has four channels of excess
capacity. The other two systems have 28 and 35 channels of excess capacity. Over
the next three to five years, the Partnership is planning a tap audit and
headend equipment replacement for the Corsicana System Operating Group. The
financial forecasts prepared by Daniels take into account such capital projects,
among others.
The Corsicana system offers three levels of non-premium service: Economy Basic
service, consisting of 18 primarily broadcast and local origination channels,
for $15.00; Standard Basic service, consisting of the 18 Economy Basic channels
plus an additional 26 satellite channels, for $25.25; and Specialty Tier
service, consisting of the 44 Standard Basic channels plus an additional seven
satellite channels, for $33.20. The Kerens and Rice systems each offer 23
channels of Standard Basic service for $25.25. The Corsicana system offers HBO,
Cinemax, The Disney Channel, Showtime and Encore; the Kerens system offers HBO,
The Disney Channel and The Movie Channel; and the Rice system offers HBO and
Showtime. The last rate increase was effective August 1, 1997, and the date of
the next planned rate increase is August 1, 1998.
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<PAGE> 111
CEDAR CREEK, TEXAS
The Cedar Creek System Operating Group was acquired by the Partnership in 1985
as its first acquisition. The Cedar Creek System Operating Group serves eight
communities around Cedar Creek Reservoir, a man-made lake created in 1967 to
provide water to Fort Worth, Texas. Cedar Creek Reservoir is approximately 40
miles southeast of Dallas, Texas. As of September 30, 1997, the Cedar Creek
System Operating Group passed 8,445 estimated homes and served 4,100 equivalent
basic subscribers, for a penetration rate of 48.5%. This penetration rate is the
lowest of the four System Operating Groups. The Cedar Creek System Operating
Group includes two systems and 11 franchised areas. The 11 franchises covering
this System Operating Group expire between November 13, 2000 and March 5, 2010.
The Cedar Creek System Operating Group accounts for approximately 18% of the
Partnership's equivalent basic subscribers and has added approximately 286
equivalent basic subscribers over the last 21 months, for a compound annual
growth rate of 4.2%.
The Cedar Creek System Operating Group is comprised of two headends, located in
Gun Barrel City and Malakoff, Texas. The Gun Barrel City headend serves
approximately 76% of the Cedar Creek subscriber base and has no excess channel
capacity. The Malakoff headend has approximately three channels of excess
capacity. There are a total of 207 miles of 300 MHz plant in the Cedar Creek
System Operating Group, 96% of which is aerial. Over the next three to five
years, the Partnership is planning the following significant capital projects
for the Cedar Creek System Operating Group: a tap audit, the addition of a
standby power generator, an upgrade to 450 MHz and the design and buildout of
the Key Ranch Estates area. The financial forecasts prepared by Daniels take
into account such capital projects, among others.
The Gun Barrel City system offers three levels of non-premium service: Economy
Basic service, consisting of 11 primarily broadcast and local origination
channels, for $14.50; Standard Basic service, consisting of the 11 Economy Basic
channels plus an additional 17 satellite channels, for $24.95; and Specialty
Tier service, consisting of the 28 Standard Basic channels plus an additional
six satellite channels, for $32.45. The Malakoff system offers 31 channels of
Standard Basic service for $25.50. Both systems offer HBO, The Disney Channel
and The Movie Channel. The last rate increase was effective August 1, 1997, and
the date of the next planned rate increase is August 1, 1998.
8
<PAGE> 112
LAMESA, TEXAS
Lamesa is the smallest System Operating Group, consisting of a single headend
located in Lamesa, the county seat of Dawson County, Texas. Dawson County is
located approximately 60 miles south of Lubbock, Texas and approximately 55
miles north of Midland, Texas, approximately 275 miles west of the Dallas / Fort
Worth area. The Lamesa system passes 4,085 estimated homes and serves 3,306
equivalent basic subscribers as of September 30, 1997, for a penetration rate of
80.9%. This penetration rate is the highest of the four System Operating Groups.
There is one franchise agreement covering the Lamesa system, expiring on
December 19, 2000. The Lamesa System Operating Group accounts for approximately
15% of the Partnership's equivalent basic subscribers and has lost approximately
99 equivalent basic subscribers over the last 21 months. The loss of equivalent
basic subscribers is due primarily to an MMDS operator which began service in
1996. The Lamesa System Operating Group lost approximately 300 subscribers in
1996 during the initial start-up phase of the MMDS operator as the area was
heavily marketed. Through September 30, 1997, the Lamesa System Operating Group
has gained back approximately 200 equivalent basic subscribers previously lost
to the MMDS operator.
The Lamesa system consists of 64 miles of plant, of which approximately 98% is
aerial. The Lamesa plant is capable of passing 400 MHz for a channel capacity of
approximately 54 channels. The Lamesa system has 12 channels of excess capacity.
Over the next three to five years, the Partnership is planning a tap audit and
headend equipment replacement for the Lamesa System Operating Group. The
financial forecasts prepared by Daniels take into account such capital projects,
among others.
The Lamesa system offers three levels of non-premium service: Economy Basic
service, consisting of 14 primarily broadcast and local origination channels,
for $15.50; Standard Basic service, consisting of the 14 Economy Basic channels
plus an additional 17 satellite channels, for $24.95; and Specialty Tier
service, consisting of the 31 Standard Basic channels plus an additional eight
satellite channels, for $33.90. The Lamesa system offers HBO, Cinemax and The
Disney Channel. The last rate increase was effective August 1, 1997, and the
date of the next planned rate increase is August 1, 1998.
CORSICANA MEDIA
In August 1994, the Partnership formed Corsicana Media, Inc., a Washington
corporation and a wholly-owned subsidiary, for the purpose of acquiring and
operating an AM radio station serving the community of Corsicana, Texas and
surrounding areas. On January
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<PAGE> 113
16, 1995, Corsicana Media acquired the radio station operating assets of KAN-D
Land, Inc. for a total price of $500,000. This purchase price was determined by
the seller of the Corsicana, Texas System Operating Group, and the purchase of
the Corsicana, Texas System Operating group was conditioned upon the purchase of
Corsicana Media. KAN-D Land's operating assets consist of a low-power (i.e.,
1,000 watt), unrated (i.e., broadcasts in a non-existent radio market) AM radio
station. Since August 1994, the Partnership has invested approximately $45,000
on capital projects related to Corsicana Media, including the replacement of the
station's tower, ground plane and radio transmitter. Over the next three to five
years, the Partnership is planning to replace two vehicles and various station
equipment. The financial forecasts prepared by Daniels take into account such
capital projects, among others.
For the year ending December 31, 1997, Corsicana Media revenues and cash flow
are estimated to be approximately $263,031 and ($12,708), respectively. These
statistics are materially different from the Company's budget for the year
ending December 31, 1997, primarily due to the fact that two of Corsicana
Media's three advertising sales personnel resigned in the middle of 1997. The
search for qualified replacement sales personnel has been difficult, and, as a
result, actual results have not met budgeted goals. The financial forecasts
prepared by Daniels assume that these positions will be filled by January 1,
1998 based on guidance provided by management of the Partnership. Daniels
estimates that Corsicana Media will achieve the revenue and operating cash flow
levels originally budgeted for 1997 in 1999. For the purpose of implying
meaningful valuation multiples based on the fair market value derived from the
DCF, Daniels has assumed normalized operating cash flow and revenue statistics
for the estimated year ending December 31, 1997 (the "Normalized Operating Cash
Flow" and "Normalized Revenue"), which are equivalent to the projected
statistics for the year ending December 31, 1999 per Daniels' 10-year financial
forecast for Corsicana Media. Consequently, Normalized Operating Cash Flow for
the year ending December 31, 1997 is $72,597, based on Normalized Revenue of
$362,983.
VALUATION METHODOLOGY
In order to appraise the fair market value of the assets of the Partnership,
Daniels applied two valuation methodologies to each of the four System Operating
Groups and Corsicana Media: (i) discounted cash flow valuation and (ii)
comparable private market transaction multiples analysis. The respective
aggregate fair market values of the Partnership's operating assets derived from
each valuation methodology were then compared, and a final value was derived.
10
<PAGE> 114
Discounted Cash Flow
The discounted cash flow valuation methodology ("DCF") measures the present
value of an entity's forecasted free cash flow from operations, defined as
pre-tax earnings before interest, taxes, depreciation and amortization
("EBITDA"), less capital expenditures ("Free Cash Flow"). The forecasted Free
Cash Flow was determined through a 10-year financial forecast prepared by
Daniels for each of the four System Operating Groups and Corsicana Media, which
provides for detailed forecasts of revenue and operating expense components. In
addition to Free Cash Flow, and based upon the 10-year financial forecasts
discussed above, a terminal enterprise value was estimated for each of the four
System Operating Groups and Corsicana Media assuming a sale at the end of year
10 (the "Terminal Enterprise Value"). This Terminal Enterprise Value was based
on a multiple of terminal EBITDA which Daniels determined to be reasonable in
light of comparable private market transaction multiples of EBITDA.
The revenue forecasts for each of the four System Operating Groups were based
upon Daniels' forecasts of homes passed, subscriber penetration levels and rates
and non-subscriber based revenue sources. 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 System Operating Groups.
Capital expenditure forecasts were based upon costs associated with the
construction of new miles of plant, plant maintenance and rebuild/upgrade
requirements. 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.
The revenue forecasts for Corsicana Media were based primarily upon Daniels'
forecast of national, regional and local advertising sales. Expense forecasts
for Corsicana Media were based primarily upon an assumed rate of inflation over
the forecast period, adjusted for the particular growth characteristics of
Corsicana Media. Capital expenditure forecasts for Corsicana Media represent
primarily maintenance capital requirements.
The Forecasted Free Cash Flow and the Terminal Enterprise Value (together, the
"Forecasted Net Cash Flows") resulting from the 10-year financial forecasts
prepared by Daniels were discounted back to the present at a discount rate
representing the weighted average cost of capital for an array of entities
within each of the cable television and AM radio industries that are capable of
consummating an acquisition similar in size to the acquisition of the Systems
and Corsicana Media. The weighted average cost of
11
<PAGE> 115
capital is a company's required rate of return necessary to satisfy the
expectations of both the debt and equity investors of a company. Theoretically,
an entity will be willing to pay a price for an investment as high as the value
that will allow it to equal or exceed its weighted average cost of capital
requirements.
Borrowing costs are different for every entity, depending primarily upon the
overall credit quality of the borrower and the quality of the collateral, if
any. In the cable television and AM radio industries, 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
borrow at more favorable rates below the prime rate. Daniels, therefore, has
assumed 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 an acquisition of the Systems and Corsicana Media. The cost
of equity was determined by sampling the current estimated private market cost
of equity for cable television and AM radio investments and blending that with
equity return objectives of large publicly traded companies in these industries.
Such equity returns are those which would be required by experienced private
equity investors and publicly traded companies in cable television and AM radio
investments with characteristics similar to those of the Systems and Corsicana
Media. The weighted average cost of capital Daniels derived for each of the
discounted cash flow analyses was 15.00%. 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% 8.50%
--------------------------------------------------- -------------------------- -----------------------------
Equity 40.0 25.00
--------------------------------------------------- -------------------------- -----------------------------
Estimated Weighted Average Cost of Capital 100.0% 15.00%
--------------------------------------------------- -------------------------- -----------------------------
</TABLE>
The combined aggregate fair market value of the Systems and Corsicana Media
derived from this analysis is $35,461,841. This combined value is comprised of
(i) the aggregate fair market value of the Systems of $34,998,744, which is
equal to 8.2x estimated cash flow for the year ending December 31, 1997 and
$1,541 per equivalent basic subscriber; and (ii) the aggregate fair market value
of Corsicana Media of $463,097, which is equal to 6.4x Normalized Operating Cash
Flow and 1.3x Normalized Revenue for the year ending December 31, 1997.
12
<PAGE> 116
<TABLE>
<CAPTION>
DCF-BASED AGGREGATE FAIR FAIR MARKET VALUE / FAIR MARKET VALUE /
PARTNERSHIP ASSET MARKET VALUE CASH FLOW EBU, REVENUE
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Systems $34,998,744 8.2x $1,541
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Corsicana Media 463,097 6.4 1.3x
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
Total Partnership Assets $35,461,841 8.2x N/A
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
</TABLE>
Comparable Private Market Transaction Multiples
In addition to the DCF valuation methodology, Daniels also utilized the
comparable private market transaction multiples methodology, which is another
generally accepted valuation methodology used to correlate and validate the
findings of the DCF with the realities of the private market. Under this
methodology, Daniels has compared selected market multiples reported in sales of
cable television systems and AM radio stations of similar size, markets and
technical condition as the Systems and Corsicana Media to selected operating
statistics of the Systems and Corsicana Media, respectively. In the case of
cable television system transactions, the most commonly used market multiples
are (i) a multiple of trailing three or six months annualized operating cash
flow and (ii) the price per subscriber. The Systems' operating cash flow for the
year ending December 31, 1997 will be used as a comparable statistic to the
annualized statistics reported in the comparable group of transactions. In the
case of AM radio stations, the most commonly used market multiples are (i) a
multiple of trailing three or six months annualized operating cash flow and (ii)
a multiple of trailing three or six months annualized revenue. Corsicana Media's
Normalized Operating Cash Flow and Normalized Revenue for the year ending
December 31, 1997 will be used as comparable statistics to the annualized
statistics reported in the comparable group of transactions.
COMPARABLE PRIVATE MARKET CABLE TELEVISION SYSTEM TRANSACTIONS
<TABLE>
<CAPTION>
AGGREGATE VALUE/ VALUE/ CLOSE
SYSTEM ACQUIROR SELLER SUBS. VALUE ($M) SUB. CF DATE
------ -------- ------ ----- ---------- ---- -- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Various IN, MI Triax Midwest Triax Assoc. I 32,975 $52.0 $1,577 8.0x 6/97
Assoc.
Various OH, MI FrontierVision Triax Assoc. I 20,830 34.5 1,656 8.1 5/97
Various NC Charter Cencom 15,172 27.5 1,813 9.6 4/97
Various NC Charter Cencom 12,813 20.8 1,619 8.8 4/97
Various SC Charter Cencom 21,337 36.7 1,720 9.3 4/97
Various TX ETAN Industries Cencom 6,860 10.0 1,458 8.0 3/97
Various TX Northland Cencom 3,631 5.3 1,446 8.0 3/97
Various TX, OK Fanch Mission Cable 27,000 36.5 1,350 7.5 10/96
Various SC, GA, FL Galaxy Telecom Friendship Cable 18,000 21.0 1,167 7.0 10/96
Various OK, TX Classic Cable Mission Cable 42,550 57.5 1,351 7.5 9/96
Various GA, TN Helicon Partners Clear-Vu Cable 12,300 18.2 1,480 8.1 9/96
------ ------ ------ ----
TOTAL / AVERAGE 25,069 $320.0 $1,499 8.2x
====== ====== ====== ====
</TABLE>
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<PAGE> 117
The comparable private market transactions analysis yields a cash flow multiple
range of 7.0x to 9.6x cash flow, with a weighted average of 8.2x cash flow.
Value per subscriber ranges from $1,167 to $1,813, with a weighted average of
$1,499 per subscriber.
COMPARABLE PRIVATE MARKET AM RADIO STATION TRANSACTIONS
Detailed valuation and financial data pertaining to private market sales of AM
radio stations comparable to Corsicana Media are not publicly available. As a
result, Daniels has relied on data obtained during the course of its advisory
activities within the broadcast industry, which data are proprietary and
confidential. Based on such data, an AM radio station demonstrating comparable
size, market and technical characteristics to Corsicana Media would be valued at
between 7.0x - 8.0x operating cash flow and 1.0x - 2.0x revenue.
MATERIAL RELATIONSHIPS
Daniels has no ownership position in Northland or the Partnership; however,
Daniels has at various times sold cable television systems to Northland while
representing other cable television operators and has sold cable television
systems on behalf of Northland. Daniels does not believe that these prior
relationships in any way affect its ability to fairly and impartially render the
opinion of value expressed herein.
VALUATION SUMMARY
Based on the analysis using the valuation methodologies described above, the
estimated fair market value of the Systems as of the Valuation Date is
$35,000,000, representing 8.2x estimated operating cash flow for the year ending
December 31, 1997 and a value per equivalent basic subscriber of $1,541.
The cash flow multiple is equal to the weighted average multiple from the
comparable private market transactions analysis and equal to the multiple
derived from the DCF. The value per equivalent basic subscriber is slightly
above the weighted average value per subscriber derived from the comparable
private market transactions analysis and equal to the value per subscriber
derived from the DCF.
Based on the analysis using the valuation methodologies described above, the
estimated fair market value of Corsicana Media, as of December 31, 1997, is
$463,000, representing 6.4x Normalized Operating Cash Flow and 1.3x Normalized
Revenue for the year ending December 31, 1997.
14
<PAGE> 118
The Normalized Operating Cash Flow multiple is below the range of comparable
private market transactions and equal to the multiple derived from the DCF. The
Normalized Revenue multiple is below the mid-point of the range of comparable
private market transactions and equal to the multiple derived from the DCF.
The combination of the fair market values derived for the Systems and Corsicana
Media results in an estimated fair market value of the Partnership, as of the
Valuation Date, of $35,463,000, or 8.2x estimated operating cash flow for the
year ending December 31, 1997.
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 pertaining to the Partnership's 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 latest practicable date. Daniels
undertakes no responsibility for updating this opinion to reflect changes in the
value of the assets subsequent to the date of this appraisal, such as market,
economic, technological, operational, governmental and other changes.
15
